AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 2000
REGISTRATION NO. ___________
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_______________
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.)
TRACY T. RUDOLPH
CHAIRMAN OF THE BOARD
3040 POST OAK BLVD. 3040 POST OAK BLVD.
HOUSTON, TEXAS 77056 HOUSTON, TEXAS 77056
(713) 993-0002 (713) 993-0002
(Address, including zip code, and telephone number, including (Name, address, including zip code, and telephone
area code, of registrant's principal executive offices) number, including area code, of agent for service)
_______________
Copies to:
WILLIAM T. LUEDKE IV, ESQ. DONALD E. WOOD, ESQ.
BRACEWELL & PATTERSON, L.L.P. LOCKE LIDDELL & SAPP LLP
2900 SOUTH TOWER PENNZOIL PLACE 3400 CHASE TOWER
711 LOUISIANA 600 TRAVIS
HOUSTON, TEXAS 77002-2781 HOUSTON, TEXAS 77002
_______________
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 being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
==================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED (1) PER SHARE OFFERING PRICE (3) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $1.00 par value........................ 2,808,135 (2) $27,501,606 $7,261
==================================================================================================================================
(1) Based upon an estimate of the maximum number of shares of common stock of
Prosperity Bancshares, Inc. to be issued pursuant to the Agreement and Plan
of Reorganization dated as of November 8, 2000 by and between Prosperity
Bancshares, Inc. and Commercial Bancshares, Inc.
(2) Not applicable
(3) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(f)(2) under the Securities Act, based upon the book
value of the common stock of Commercial Bancshares, Inc. on October 31, 2000
of the maximum number of shares of Commercial to be acquired by Prosperity
in the merger.
_____________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
Proxy Statement for the Special Proxy Statement for the Special
Meeting Meeting
of Shareholders of of Shareholders of
Commercial Bancshares, Inc. Prosperity Bancshares, Inc.
Prospectus of
Prosperity Bancshares, Inc.
In Connection with an Offering of up
to 2,808,135 Shares of its Common Stock
The boards of directors of Commercial Bancshares, Inc. and Prosperity
Bancshares, Inc. have approved a merger agreement that would result in the tax-
free merger of Commercial with and into Prosperity. As a result of the merger,
Commercial shareholders will receive 155 shares of Prosperity common stock for
each share of Commercial common stock they own. If the merger were completed as
of the date of this joint proxy statement-prospectus, a total of
shares of Prosperity common stock would be issued to Commercial shareholders.
In order to complete this merger, we must obtain the necessary government
approvals and the approvals of the shareholders of both of our companies. Each
of us will hold a special meeting of our shareholders to vote on this merger
proposal. Your vote is very important. Whether or not you plan to attend your
shareholder meeting, please take the time to vote by completing and mailing the
enclosed proxy card to us. If you date and mail your proxy card without
indicating how you want to vote, your proxy will be counted as a vote FOR the
merger. If you do not return your proxy card, or if you do not instruct your
bank or broker how to vote any shares held for you in your bank's or broker's
name, the effect will be a vote against the merger.
The dates, times and places of the meeting are as follows:
For Commercial shareholders: For Prosperity shareholders:
Commercial Bancshares, Inc. First Prosperity Bank
4295 San Felipe 1301 N. Mechanic Street
Houston, Texas 77027 El Campo, Texas 77443
, 2001 .m., local , 2001, .m., local
time time
This joint proxy statement-prospectus gives you detailed information about
the merger and it includes our merger agreement as an appendix. It also
includes information about Commercial, including financial information. You can
obtain information about Prosperity from publicly available documents that
Prosperity has filed with the Securities and Exchange Commission. We encourage
you to read this entire document carefully.
We support this merger and join with the other members of our boards of
directors in recommending that you vote in favor of the merger.
Ned S. Holmes Tracy T. Rudolph
Chairman of the Board Chairman of the Board
Commercial Bancshares, Inc. Prosperity Bancshares, Inc.
An investment in the Prosperity common stock in connection with the merger
involves risks. See "Risk Factors" beginning on page 18.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under
this joint proxy statement-prospectus or determined if this joint proxy
statement-prospectus is accurate or adequate. Any representation to the
contrary is a criminal offense. The securities we are offering through this
document are not savings or deposit accounts or other obligations of any bank
subsidiary of either of our companies, and they are not insured by the
Federal Deposit Insurance Corporation, the Bank Insurance Fund or any other
governmental agency.
Joint proxy statement-prospectus dated , 2001
and first mailed to shareholders on , 2001
[LOGO]
----------------
COMMERCIAL BANCSHARES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2001
----------------
Notice is hereby given that a special meeting of shareholders of Commercial
Bancshares, Inc., a Texas corporation, will be held on , 2001, at
.m., local time, at 4295 San Felipe, Houston, Texas for the following
purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Reorganization dated November 8, 2000 between Commercial and
Prosperity Bancshares, Inc., a Texas corporation. The merger agreement
provides that Commercial will merge with and into Prosperity, and
shareholders of Commercial will receive 155 shares of Prosperity common
stock in exchange for each share of Commercial common stock they own. A
copy of the merger agreement is attached as an appendix to the accompanying
joint proxy statement-prospectus.
2. To transact such other business as may properly come before the
special meeting or any adjournments or postponements of the special
meeting.
Any action may be taken on the foregoing proposals at the special meeting on
the date specified above, or on any date or dates to which the special meeting
may be adjourned or postponed. The close of business on , 2001 has
been fixed as the record date for determining those shareholders entitled to
vote at the special meeting or any adjournments or postponements of the special
meeting. A complete list of shareholders entitled to vote at the special
meeting will be available at the main office of Commercial during the ten days
prior to the special meeting, as well as at the special meeting.
By Order of the Board of Directors,
Ned S. Holmes
Chairman of the Board
Houston, Texas
, 2001
Your Vote is Very Important
Whether or not you plan to attend the special meeting, please complete, sign
and date the enclosed proxy card and promptly mail it in the enclosed envelope.
You may revoke your proxy card in the manner described in the joint proxy
statement-prospectus at any time before it is exercised. If you attend the
special meeting, you may vote in person if you wish, even if you have
previously returned your proxy card.
The Board of Directors of Commercial recommends that you vote FOR adoption
of the merger agreement.
[LOGO]
----------------
PROSPERITY BANCSHARES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2001
----------------
Notice is hereby given that a special meeting of shareholders of Prosperity
Bancshares, Inc., a Texas corporation, will be held on , 2001, at
.m., local time, at 1301 N. Mechanic, El Campo, Texas for the following
purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Reorganization dated November 8, 2000 between Commercial
Bancshares, Inc., a Texas corporation, and Prosperity pursuant to which
Commercial will merge with and into Prosperity, and the issuance of up to
2,808,135 shares of Prosperity's common stock in connection with the
merger. A copy of the merger agreement is attached as an appendix to the
accompanying joint proxy statement-prospectus.
2. To transact such other business as may properly come before the
special meeting or any adjournments or postponements of the special
meeting.
Any action may be taken on the foregoing proposals at the special meeting on
the date specified above, or on any date or dates to which the special meeting
may be adjourned or postponed. The close of business on , 200 has
been fixed as the record date for determining those shareholders entitled to
vote at the special meeting or any adjournments or postponements of the special
meeting. A complete list of shareholders entitled to vote at the special
meeting will be available at the main office of Prosperity during the ten days
prior to the special meeting, as well as at the special meeting.
By Order of the Board of Directors,
Tracy T. Rudolph
Chairman of the Board
Houston, Texas
, 2001
Your Vote is Very Important
Whether or not you plan to attend the special meeting, please complete, sign
and date the enclosed proxy card and promptly mail it in the enclosed envelope.
You may revoke your proxy card in the manner described in the joint proxy
statement-prospectus at any time before it is exercised. If you attend the
special meeting, you may vote in person if you wish, even if you have
previously returned your proxy card.
The Board of Directors of Prosperity recommends that you vote FOR adoption
of the merger agreement and approval of the issuance of shares of Prosperity
common stock.
ii
TABLE OF CONTENTS
Page
----
How to Obtain Additional Information...................................... 1
A Warning About Forward-Looking Statements................................ 1
SUMMARY................................................................... 3
The Companies........................................................... 3
The Merger.............................................................. 3
What You Will Receive in the Merger..................................... 3
Effect of the Merger on Commercial Stock Options........................ 4
Ownership of Prosperity After the Merger................................ 4
Dissenters' Appraisal Rights............................................ 4
Material Federal Income Tax Consequences................................ 4
Comparative Market Prices of Common Stock............................... 5
Our Reasons for the Merger.............................................. 5
Opinions of Financial Advisors.......................................... 5
Special Meetings of Shareholders........................................ 6
Record Date; Vote Required.............................................. 6
Our Recommendations to Shareholders..................................... 7
Share Ownership of Management and Significant Shareholders.............. 7
Effective Time of the Merger............................................ 7
Exchange of Stock Certificates.......................................... 7
Conditions to Completion of the Merger.................................. 7
Regulatory Approvals.................................................... 8
Waiver, Amendment and Termination....................................... 8
Expenses and Termination Fees........................................... 9
Management and Operations After the Merger.............................. 10
Interests of Certain Persons in the Merger that Differ from Your
Interests.............................................................. 10
Accounting Treatment.................................................... 11
Material Differences in the Rights of Shareholders...................... 11
Treatment of Commercial's Subsidiary.................................... 11
Selected Historical Consolidated Financial Data of Prosperity........... 12
Selected Historical Consolidated Financial Data of Commercial........... 14
Summary of Historical and Pro Forma Per Share Selected Financial Data... 16
Comparative Stock Prices................................................ 17
RISK FACTORS.............................................................. 18
Page
----
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS..................... 20
COMMERCIAL SPECIAL MEETING................................................ 27
Purpose................................................................. 27
Date, Place and Time of Special Meeting................................. 27
Shares Entitled to Vote, Quorum and Vote Required....................... 27
Voting and Revocation of Proxies........................................ 27
Solicitation of Proxies; Expenses....................................... 28
PROSPERITY SPECIAL MEETING................................................ 28
Purpose................................................................. 28
Date, Place and Time of Special Meeting................................. 28
Shares Entitled to Vote, Quorum and Vote Required....................... 28
Voting and Revocation of Proxies........................................ 29
Solicitation of Proxies; Expenses....................................... 29
DESCRIPTION OF THE TRANSACTION............................................ 30
Terms of the Merger..................................................... 30
Effect of the Merger on Commercial Stock Options........................ 30
Background of the Merger................................................ 30
Recommendation of the Commercial Board and Commercial's Reasons for the
Merger................................................................. 31
Recommendation of the Prosperity Board and Prosperity's Reasons for the
Merger................................................................. 32
Opinion of Commercial's Financial Advisor............................... 33
Opinion of Prosperity's Financial Advisor............................... 37
Exchange of Commercial Stock Certificates............................... 45
Effective Time of the Merger............................................ 45
Conduct of Business Pending Effective Time.............................. 45
Conditions to Completion of the Merger.................................. 47
Additional Agreements................................................... 48
Interests of Certain Persons in the Merger.............................. 49
Employee Matters........................................................ 49
Amendment and Termination............................................... 49
Nasdaq Stock Market Listing............................................. 51
Amendment of Prosperity's Bylaws........................................
iii
Page
----
Expenses............................................................... 51
Material Federal Income Tax Consequences............................... 51
Dissenters' Rights of Appraisal and Related Issues..................... 53
Accounting Treatment................................................... 54
Restrictions on Resales of Prosperity Common Stock..................... 55
Regulatory Approvals................................................... 55
MANAGEMENT AND OPERATIONS AFTER THE MERGER............................... 57
Prosperity Board of Directors.......................................... 57
Executive Officers..................................................... 57
Executive Compensation................................................. 58
COMPARISON OF RIGHTS OF SHAREHOLDERS OF PROSPERITY AND COMMERCIAL........ 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF COMMERCIAL............................................. 64
Overview............................................................... 64
Results of Operations.................................................. 64
Financial Condition.................................................... 70
BUSINESS OF COMMERCIAL................................................... 84
General................................................................ 84
Facilities............................................................. 84
Competition............................................................ 85
Employees.............................................................. 85
Legal Proceedings...................................................... 85
Supervision and Regulation............................................. 85
BENEFICIAL OWNERSHIP OF COMMERCIAL STOCK BY MANAGEMENT OF COMMERCIAL AND
PRINCIPAL SHAREHOLDERS.................................................. 88
PRINCIPAL HOLDERS OF PROSPERITY COMMON STOCK............................. 89
Page
----
COMPARATIVE MARKET PRICES AND DIVIDEND DATA............................... 89
DESCRIPTION OF PROSPERITY CAPITAL STOCK................................... 91
General................................................................. 91
Prosperity Common Stock................................................. 91
Preferred Stock......................................................... 91
BUSINESS OF PROSPERITY.................................................... 93
Incorporation of Certain Documents by Reference......................... 93
Interests of Certain Persons............................................ 93
EXPERTS................................................................... 93
LEGAL MATTERS............................................................. 93
OTHER MATTERS............................................................. 94
WHERE YOU CAN FIND MORE INFORMATION....................................... 94
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF COMMERCIAL BANCSHARES,
INC...................................................................... F-1
Appendix A
Agreement and Plan of Reorganization.................................... A-1
Appendix B
Opinion of Hoefer & Arnett, Incorporated................................ B-1
Appendix C
Opinion of First Capital Group, LLC..................................... C-1
Appendix D
Provisions of the Texas Business Corporation Act Related to Dissenters
Rights of Appraisal.................................................... D-1
iv
PLEASE NOTE
We have not authorized anyone to provide you with any information other than
the information included in this document and the documents to which we refer
you. If someone provides you with other information, please do not rely on it
as being authorized by us.
This joint proxy statement-prospectus has been prepared as of ,
200 . There may be changes in the affairs of Commercial or Prosperity since
that date which are not reflected in this document.
As used in this joint proxy statement-prospectus, the term "Commercial"
refers to Commercial Bancshares, Inc., and, where the context requires, to
Commercial and its subsidiaries, and the term "Prosperity" refers to Prosperity
Bancshares, Inc., and, where the context requires, to Prosperity and its
subsidiaries. Unless the context clearly suggests otherwise, general references
to "us," "we," and "our" include both Commercial and Prosperity. However, when
we discuss a specific organization such as Commercial or Prosperity, "us,"
"we," and "our" refers only to the specific organization being discussed.
HOW TO OBTAIN ADDITIONAL INFORMATION
This joint proxy statement-prospectus incorporates important business and
financial information about Prosperity that is not included in or delivered
with this document. This information is described on page 94 under "Where You
Can Find More Information." You can obtain free copies of this information by
writing or calling:
David Hollaway
Chief Financial Officer
Prosperity Bancshares, Inc.
1301 N. Mechanic
El Campo, Texas
Telephone (979) 543-2200
Facsimile (979) 543-1906
To obtain timely delivery of the documents, you must request the information
by , 2001 [5 business days prior to the meeting].
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We have each made forward-looking statements in this document (and in
documents to which we refer you in this document) that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of our operations or the performance of
Prosperity after the merger is completed. When we use any of the words
"believes," "expects," "anticipates," "estimates" or similar expressions, we
are making forward-looking statements. Many possible events or factors could
affect the future financial results and performance of each of our companies
before the merger or Prosperity after the merger and could cause those results
or performance to differ materially from those expressed in our forward-looking
statements. These possible events or factors include the following:
1. our actual cost savings resulting from the merger are less than we
expected, we are unable to realize those cost savings as soon as we
expected or we incur additional or unexpected costs;
2. our revenues after the merger are less than we expected;
3. competition among financial services companies increases;
4. we have more trouble integrating our businesses than we expected;
5. changes in the interest rate environment reduce our interest margins;
6. general economic conditions change or are worse than we expected;
7. legislative or regulatory changes adversely affect our business;
8. changes occur in business conditions and inflation;
9. personal or commercial customers' bankruptcies increase;
10. changes occur in the securities markets; and
11. technology-related changes are harder to make or more expensive than we
expected.
The forward-looking earnings estimates included in the joint proxy
statement-prospectus have not been examined or compiled by our independent
public accountants, nor have our independent accountants applied any procedures
to our estimates. Accordingly, such accountants do not express an opinion or
any other form of assurance on them.
2
SUMMARY
This brief summary highlights selected information from this joint proxy
statement-prospectus and may not contain all of the information that is
important to you. We urge you to carefully read this entire document and the
other documents we refer to in this document. These documents will give you a
more complete description of the transaction we are proposing. For more
information about Prosperity, see "Where You Can Find More Information." We
have included page references in this summary to direct you to other places in
this joint proxy statement-prospectus where you can find a more complete
description of the topics we have summarized.
The Companies (pages 84 and 93)
Commercial Bancshares, Inc.
4295 San Felipe
Houston, Texas 77027
(713) 693-9300
www.heritagebanktx.com
Commercial is a bank holding company organized under the laws of Texas in
1979 and registered under the Bank Holding Company Act. Through Heritage Bank,
our wholly owned subsidiary bank, we conduct a complete range of commercial and
personal banking activities at 11 full service banking locations in and around
the Houston metropolitan area. In addition to the main office of Heritage Bank
in Wharton, Texas, our bank operates ten branches located in the Houston
metropolitan area and in three adjacent counties. At September 30, 2000, our
assets were $428.1 million, our deposits were $385.0 million and our
shareholders' equity was $27.0 million.
Prosperity Bancshares, Inc.
3040 Post Oak Boulevard
Houston, Texas 77056
(713) 993-0002
www.firstprosperity.com
Prosperity is a bank holding company organized under the laws of Texas in
1983 and registered under the Bank Holding Company Act. Through First
Prosperity Bank, our wholly owned subsidiary bank, we conduct a complete range
of commercial and personal banking activities and offer trust services in the
greater Houston metropolitan area and the nine contiguous counties extending to
the south and southwest of Houston. In addition to the main office of First
Prosperity Bank in El Campo, Texas, our bank operates a total of 17 full-
service banking centers. At September 30, 2000, our assets were $693.1 million,
our deposits were $628.5 million and our shareholders' equity was $48.3
million.
The Merger (page 30)
We have attached the merger agreement to this document as Appendix A. Please
read the merger agreement. It is the legal document that governs the merger.
We propose a merger in which Commercial will merge with and into Prosperity.
Prosperity's main office will be located in Houston at the main office of
Commercial. We expect to complete the merger in the first quarter of 2001.
What You Will Receive in the Merger (page 30)
Commercial shareholders. Each of your shares of Commercial common stock will
automatically become the right to receive 155 shares of Prosperity common
stock. The total number of shares you will have the right
3
to receive will therefore be equal to the number of shares of Commercial common
stock you own multiplied by 155.
You will have to surrender your Commercial common stock certificates in
order to receive new certificates representing shares of common stock of
Prosperity. Do not send in your certificates until you receive written
instructions on or after the completion of the merger.
Prosperity shareholders. Each of your shares of Prosperity common stock will
remain outstanding as one share of Prosperity common stock. You do not need to
surrender your shares or exchange them for new ones.
Effect of the Merger on Commercial Stock Options (page 30)
In the merger, each stock option to buy Commercial common stock that is
outstanding immediately before completion of the merger will become an option
to buy Prosperity common stock and will continue to be governed by the terms of
the original plans under which they were issued. The number of shares of
Prosperity common stock subject to each of these converted stock options, as
well as the exercise price of these stock options, will be adjusted to reflect
the exchange ratio in the merger.
Ownership of Prosperity After the Merger
Based on the exchange ratio contained in the merger agreement, upon
completion of the merger, Prosperity will issue a total of approximately
2,800,385 shares of its common stock to former Commercial shareholders. Based
on these numbers, after the merger on a fully diluted basis, former Commercial
shareholders would own approximately 34.78% of the outstanding shares of
Prosperity.
In addition, as of the date of this joint proxy statement-prospectus,
options to acquire 50 shares of Commercial common stock are exercisable. If
these options are exercised prior to completion of the merger, Prosperity must
issue 155 additional shares of Prosperity common stock for each additional
share of Commercial common stock issued pursuant to the exercise of such
options. If the options to acquire all 50 shares are exercised, Prosperity
would be required to issue an additional 7,750 shares of Prosperity common
stock upon completion of the merger.
Dissenters' Appraisal Rights (page 53)
If you are a shareholder of Commercial, under Texas law you have the right
to dissent from the merger and have the appraised fair value of your shares of
Commercial common stock paid to you in cash. To dissent and receive the
appraised fair value of your shares, you must:
. make a proper demand for appraisal in accordance with the Texas law as
more fully described on pages 53 to 54 and in Appendix D;
. hold your shares of Commercial common stock until the merger is
completed;
. not vote in favor of the merger (including by appointing a proxy to vote
your shares); and
. otherwise comply with Texas law.
Material Federal Income Tax Consequences (page 51)
Commercial shareholders. We expect that for United States federal income tax
purposes, your exchange of shares of Commercial common stock for shares of
Prosperity common stock will not cause you to recognize any gain or loss.
4
This tax treatment may not apply to every Commercial shareholder.
Determining the actual tax consequences of the merger to you may be complicated
and will depend on your specific situation and on variables not within our
control. You should consult your own tax advisor for a full understanding of
the merger's tax consequences.
Prosperity shareholders. Because the number of shares of Prosperity common
stock that you own will remain unchanged, the merger will not cause you to
recognize any gain or loss for United States federal income tax purposes.
Comparative Market Prices of Common Stock (page 89)
Shares of Prosperity are quoted on The Nasdaq Stock Market National Market
System. On November 7, 2000, the last trading day before we announced the
merger, Prosperity common stock closed at $18.9375 per share. On December ,
2000, Prosperity common stock closed at $ per share. Shares of Commercial
common stock are privately held and are not listed on any exchange or traded in
the over-the-counter market. Although it is traded infrequently in private
transactions, there is no active public trading market for Commercial common
stock.
Based on the 155-for-one exchange ratio, the market value of the
consideration that Commercial shareholders would receive in the merger for each
share of Commercial common stock they own would be $ based on
Prosperity closing stock price of $ on , 200 . Of course,
the market price of Prosperity common stock will fluctuate prior to the merger,
while the exchange ratio is fixed. You should obtain the current stock
quotation for Prosperity common stock.
Our Reasons for the Merger (pages 31 and 32)
Our companies are proposing to merge because we believe that by combining
them we can create a stronger and more diversified company that will provide
significant benefits to our shareholders and customers alike. For instance, we
estimate that the combination of our businesses should help us to reduce
duplicate costs by about $1.2 million annually after taxes, within one year
from operational integration. We also believe that the merger of our companies
may create certain revenue enhancement opportunities. However, due to the
contingent nature and timing of these potential revenue enhancements, we have
not taken them into account in arriving at our estimates of the impact of the
merger on future earnings per share.
We expect the merger to strengthen our position as a competitor in the
financial services business in the greater Houston metropolitan area and
surrounding counties, which is rapidly changing and becoming more competitive.
We also expect to incur merger related costs of approximately $1.8 million
after tax, as a result of combining our companies.
The discussion of our reasons for the merger includes forward-looking
statements about possible or assumed future results of our operations and the
performance of the combined company after the merger. For a discussion of
factors that could affect these future results, see "A Warning About Forward-
Looking Statements" on page 1.
Opinions of Financial Advisors (pages 33 and 37)
Commercial shareholders. Hoefer & Arnett, Incorporated has delivered a
written opinion to the Commercial board of directors that, as of the date of
this document, the exchange ratio is fair to the holders of Commercial common
stock from a financial point of view. We have attached this opinion to this
document as
5
Appendix B. You should read this opinion completely to understand the
procedures followed, matters considered and limitations on the reviews
undertaken by Hoefer & Arnett in providing its opinion.
Prosperity shareholders. First Capital Group, L.L.C. has delivered a written
opinion to the Prosperity board of directors that, as of the date of this
document, the exchange ratio is fair to Prosperity from a financial point of
view. We have attached this opinion to this document as Appendix C. You should
read this opinion completely to understand the procedures followed, matters
considered and limitations on the reviews undertaken by First Capital Group in
providing its opinion.
Special Meetings of Shareholders (pages 27 and 28)
Commercial shareholders. The Commercial special meeting will be held on
, 2001, at a.m., local time, at the principal offices of
Commercial, 4295 San Felipe, Houston, Texas. At the Commercial meeting, you
will be asked:
. to adopt the merger agreement that provides for the merger of Commercial
with and into Prosperity; and
. to act on other matters that may be submitted to a vote at the meeting.
Prosperity shareholders. The Prosperity special meeting will be held on
, 2001, at p.m., local time, at the main office of First
Prosperity Bank, 1301 N. Mechanic, El Campo, Texas. At the Prosperity meeting,
you will be asked:
. to adopt the merger agreement that provides for the merger of Commercial
with and into Prosperity and to approve the issuance of shares of
Prosperity common stock to Commercial shareholders in connection with the
merger; and
. to act on other matters that may be submitted to a vote at the meeting.
A vote in favor of the merger agreement by Prosperity shareholders is also a
vote to elect four directors of Commercial to serve as members of Prosperity's
board of directors.
Record Date; Vote Required (pages 27 and 28)
Commercial shareholders. You can vote at the meeting of Commercial
shareholders if you owned Commercial common stock at the close of business on
, 200 . You can cast one vote for each share of Commercial common
stock that you owned at that time. To adopt the merger agreement, the holders
of two-thirds of the shares of Commercial common stock allowed to vote at the
meeting must vote in favor of doing so.
You may vote your shares by attending the meeting or by mailing us your
proxy if you are unable to or do not wish to attend the meeting. You can revoke
your proxy at any time before we take a vote at the meeting by sending a
written notice revoking the proxy or a later-dated proxy to the secretary of
Commercial, or by attending the meeting and voting in person.
Prosperity shareholders. You can vote at the meeting of Prosperity
shareholders if you owned Prosperity common stock at the close of business on
, 200 . You can cast one vote for each share of Prosperity common
stock that you owned at that time. To adopt the merger agreement and approve
the issuance of shares of Prosperity's common stock, the holders of a majority
of the shares of common stock allowed to vote at the meeting must vote in favor
of doing so.
You may vote your shares by attending the meeting or by mailing us your
proxy if you are unable to or do not wish to attend the meeting. You can revoke
your proxy at any time before we take a vote at the meeting by
6
sending a written notice revoking the proxy or a later-dated proxy to the
secretary of Prosperity, or by attending the meeting and voting in person.
Our Recommendations to Shareholders (pages 31 and 32)
Commercial shareholders. The board of directors of Commercial believes that
the merger is fair to you and in your best interests, and unanimously
recommends that you vote FOR the proposal to adopt the merger agreement.
Prosperity shareholders. The board of directors of Prosperity believes that
the merger and the issuance of Prosperity common stock in connection with the
merger is fair to you and in your best interests, and unanimously recommends
that you vote FOR the proposal to adopt the merger agreement and approve the
issuance of shares of Prosperity common stock.
Share Ownership of Management and Significant Shareholders (pages 88 and 89)
Commercial. On Commercial's record date, its directors and executive
officers, their immediate family members and entities they control owned 9,244
shares, or approximately 51.17% of the outstanding shares of Commercial common
stock.
Prosperity. On Prosperity's record date, its directors and executive
officers, their immediate family members and entities they control owned
1,141,466 shares, or approximately 21.74% of the outstanding shares of
Prosperity common stock.
Effective Time of the Merger (page 45)
The merger will become final when articles of merger are filed with the
Secretary of State of the State of Texas. If our shareholders approve the
merger at their special meetings, and if we obtain all required regulatory
approvals, we anticipate that the merger will be completed in the first quarter
of 2001, although delays could occur.
We cannot assure you that we can obtain the necessary shareholder and
regulatory approvals or that the other conditions to completion of the merger
can or will be satisfied.
Exchange of Stock Certificates (page 45)
On or after the time of the merger, if you are a Commercial shareholder you
will receive a letter and instructions on how to surrender your stock
certificates representing shares of Commercial common stock in exchange for
stock certificates representing shares of Prosperity common stock. You must
carefully review and complete these materials and return them as instructed
along with your stock certificates for Commercial common stock. Please do not
send Commercial any stock certificates until you receive these instructions.
Conditions to Completion of the Merger (page 47)
The completion of the merger depends on a number of conditions being met.
These include, among others,
. approval of the merger agreement by the Commercial shareholders and
approval of the merger agreement and issuance of Prosperity common stock
by the Prosperity shareholders;
. approval of the merger by certain federal and state regulatory
authorities;
. receipt by each of us of opinions that, for United States federal income
tax purposes, Prosperity, Commercial and the Commercial shareholders who
exchange their shares for shares of Prosperity
7
common stock will not recognize any gain or loss as a result of the
merger. These opinions will be subject to various limitations and we
recommend that you read the fuller description of tax consequences
provided in this document beginning on page 51.
. receipt by each of us of a letter from our accountants that the merger
will qualify for "pooling of interests" accounting treatment;
. authorization by the Nasdaq National Market for the listing of the shares
of Prosperity common stock to be issued in the merger;
. material accuracy of the representations and warranties made by each of
us as of the date of completion of the merger;
. performance or compliance with all covenants and conditions required by
the merger agreement; and
. absence of a material adverse change in the financial condition, results
of operation or business of each or us or our respective subsidiaries.
A party to the merger agreement could choose to complete the merger even
though a condition has not been satisfied, as long as the law allows it to do
so. We cannot be certain when or if the conditions to the merger will be
satisfied or waived, or that the merger will be completed.
Regulatory Approvals (page 55)
We cannot complete the merger unless it is approved by the Board of
Governors of the Federal Reserve System. Once the Federal Reserve approves the
merger, we have to wait anywhere from 15 to 30 days before we can complete the
merger, during which time the Department of Justice can challenge the merger
for antitrust reasons. In addition, the merger is subject to the approval of,
or notice to, state and other regulatory authorities.
We have filed all of the required applications or notices with the Federal
Reserve and other regulatory authorities.
As of the date of this document, we have not received all of the required
approvals. While we do not know of any reason that we would not be able to
obtain the necessary approvals in a timely manner, we cannot be certain when or
if we will obtain them.
Waiver, Amendment and Termination (page 49)
We may jointly amend the merger agreement and each of us may waive our right
to require the other party to adhere to any term or condition of the merger
agreement. However, we may not amend the merger agreement or waive any term or
condition in the merger agreement without approval of our shareholders if the
amendment or waiver reduces or changes the consideration that will be received
by the Commercial shareholders.
We can mutually agree at any time to terminate the merger agreement without
completing the merger. Also, either of us can decide, without the consent of
the other, to terminate the merger agreement if:
. any government agency denies an approval we need to complete the merger;
. any governmental entity issues a final non-appealable order blocking the
merger;
. any approval of shareholders required to consummate the merger is not
obtained by reason of the failure to obtain the required vote at the
meeting;
8
. the merger has not been completed by June 30, 2001, unless the failure to
complete the merger by that time is due to a violation of the merger
agreement by the party that seeks to terminate the merger agreement;
. the other company fails to comply in any material respect with any of its
covenants or agreements or any of its representations or warranties shall
be defective in any material respect, and the breaching party does not
correct the breach within 15 days following receipt of notice of the
breach; or
. there is a material adverse change in the assets, business or financial
condition of the other company and such company does not remedy the
change within 15 days following receipt of notice of the change.
Commercial may terminate the merger agreement, without the consent of
Prosperity, if:
. the average of the daily closing sales prices for Prosperity common stock
for the ten successive trading days ending on the day immediately prior
to receipt of approval of the transaction from the Federal Reserve is
less than $16.00 per share. Prosperity has the right to nullify
Commercial's termination right by increasing the number of shares to be
issued in the merger so that based on the ten-day closing price average,
the aggregate value of the merger consideration is equal to $45,000,000;
. the board of directors of Commercial receives an acquisition proposal
that, based on opinions of independent legal counsel and financial
advisors, they determine to be a superior proposal and that failure to
accept such superior proposal would be a breach of the board's fiduciary
duties;
. the board of directors of Prosperity resolves to accept a superior
proposal, recommends to shareholders of Prosperity that they tender their
shares in a tender or exchange offer or withdraws or modifies its
approval of the merger; or
. Prosperity executes a definitive agreement to acquire another entity
pursuant to which Prosperity will issue shares of its common stock as
consideration and Commercial does not consent to such acquisition.
Prosperity may terminate the merger agreement, without the consent of
Commercial, if:
. the board of directors of Prosperity receives an acquisition proposal
which specifically excludes Commercial and that, based on opinions of
independent legal counsel and financial advisors, they determine to be
superior proposal and that failure to accept such superior proposal would
be a breach of the board's fiduciary duties;
. the board of directors of Commercial resolves to accept a superior
proposal, recommends to shareholders of Commercial that they tender their
shares in a tender or exchange offer or withdraws or modifies its
approval of the merger; or
. based on environmental investigations that Prosperity has the option to
conduct, the estimated remedial or cleanup costs of any environmental
condition or circumstance discovered affecting Commercial exceeds
$1,000,000 or results in a material adverse change in Commercial's
financial condition, results of operation or business.
Expenses and Termination Fees (page 51)
If we mutually agree to terminate the merger agreement, or if either of us
terminates the merger agreement because the merger has not been completed by
June 30, 2001, then we will each pay our own fees and expenses.
9
If either of us terminates the merger agreement for a reason not specified
in the merger agreement or because we receive or accept a superior proposal,
the terminating party will pay to the other party a termination fee of
$2,500,000.
We have agreed to pay these termination fees to each other to increase the
likelihood that we will complete the merger. These fees could discourage other
companies from attempting to combine with either of us before we complete the
merger.
Management and Operations After the Merger (page 57)
The present managements of our companies will share the responsibility of
managing Prosperity after the completion of the merger. The board of directors
of Prosperity will initially be comprised of twelve members, eight of whom will
be Prosperity's current directors, and four of whom will be current directors
of Commercial.
These initial directors will be Harry Bayne, James A. Bouligny, J. T. Herin,
Tracy T. Rudolph, Charles M. Slavik, Harrison Stafford II, Robert Steelhammer,
and David Zalman, who are directors of Prosperity, and Charles A. Davis, Ned S.
Holmes, Virgil A. Pace, Jr. and H. E. Timanus, Jr., who are directors of
Commercial.
A vote in favor of the merger agreement by Prosperity shareholders will be a
vote to elect Messrs. Davis, Holmes, Pace and Timanus to serve as directors of
Prosperity.
Following the merger, Mr. Holmes will be Chairman of the Board of
Prosperity, Mr. Zalman will be President and Chief Executive Officer, Mr.
Timanus will be Executive Vice President and Chief Operating Officer and Mr.
David Hollaway will be Chief Financial Officer.
Following the merger, the board of directors of First Prosperity Bank will
consist of the nine current directors of First Prosperity Bank, seven current
non-employee directors of Heritage Bank and Mr. Timanus. The executive officers
of First Prosperity Bank will include Mr. Zalman as Chairman of the Board and
Chief Executive Officer and Mr. Timanus as President and Chief Operating
Officer.
Interests of Certain Persons in the Merger that Differ from Your Interests
(page 49)
Some of the directors and officers of Commercial have interests in the
merger that differ from, or are in addition to, their interests as shareholders
in Commercial. These interests include:
. certain of Commercial's directors and executive officers serving as
directors and executive officers of Prosperity following completion of
the merger;
. the right of Commercial's directors and officers to continued
indemnification and insurance coverage by Prosperity for acts or
omissions occurring prior to the merger;
. the right of Mr. Holmes, Commercial's Chairman of the Board, to require
Prosperity after the merger to register for resale the shares of
Prosperity common stock he beneficially owns; and
. the employment of Mr. Timanus as an executive officer of Prosperity and
First Prosperity Bank. Mr. Timanus will enter into an employment
agreement with First Prosperity Bank upon completion of the merger that
will provide Mr. Timanus with severance benefits if his employment with
the bank is terminated.
These interests of Commercial's directors and executive officers are
described further under "Management and Operations After the Merger."
The members of Commercial's board of directors knew about these additional
interests and considered them in approving the merger agreement and the merger.
10
Accounting Treatment (page 54)
We expect the merger to qualify as a "pooling of interests." This means
that, for accounting and financial reporting purposes, we will treat our
companies as if they had always been combined. It is a condition to our
obligation to consummate the merger that we each receive a letter from our
respective accountants that the merger will qualify for pooling of interests
accounting treatment.
Material Differences in the Rights of Shareholders (page 59)
The rights of Commercial shareholders are governed by Texas law and
Commercial's articles of incorporation and bylaws. The rights of Prosperity
shareholders are governed by Texas law and Prosperity's articles of
incorporation and bylaws. Upon our completion of the merger, Commercial
shareholders will become shareholders of Prosperity and your rights will be
governed by Prosperity's articles of incorporation and bylaws. Prosperity's
articles of incorporation and bylaws will remain the same except for the
amendments to be made to the bylaws as further described on page 51.
Treatment of Commercial's Subsidiary
Heritage Bank will be merged into First Prosperity Bank in a separate merger
that will occur simultaneously with the merger of the two parent companies. All
offices of Heritage will become branch offices of First Prosperity Bank and
will have access to all services provided by First Prosperity Bank to its
customers.
11
Selected Historical Consolidated Financial Data of Prosperity
The following table shows financial results actually achieved by Prosperity.
The annual historical financial amounts are derived from Prosperity's
consolidated financial statements audited by Deloitte & Touche LLP, independent
auditors, and contained in reports that Prosperity has previously filed with
the Securities and Exchange Commission. Historical financial information for
Prosperity can be found in its Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 and its Annual Report on Form 10-K for the year ended
December 31, 1999. Financial amounts as of and for the nine months ended
September 30, 2000 and 1999 are unaudited, but Prosperity believes that such
amounts reflect all normal recurring adjustments necessary for a fair
presentation of the results of operations and financial position for those
periods. You should not assume the results of operations for past periods and
for the nine months ended September 30, 2000 and 1999 indicate results for any
future period. The information below should be read in conjunction with
Prosperity's consolidated financial statements and the notes to the financial
statements described above which are incorporated by reference in this joint
proxy statement-prospectus.
As of and for the
Nine Months Ended
September 30, As of and for the Years Ended December 31,
------------------ ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
Income Statement Data:
Interest income......... $ 29,963 $ 21,862 $ 31,412 $ 23,422 $ 19,970 $ 16,841 $ 14,738
Interest expense........ 13,446 9,089 13,033 10,128 9,060 7,923 6,904
-------- -------- -------- -------- -------- -------- --------
Net interest income... 16,517 12,773 18,379 13,294 10,910 8,918 7,834
Provision for credit
losses................. 225 205 280 239 190 230 175
-------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
credit losses........ 16,292 12,568 18,099 13,055 10,720 8,688 7,659
Noninterest income...... 3,946 2,237 3,521 2,492 2,264 1,897 1,489
Noninterest expense..... 11,855 8,168 12,138 9,058 7,836 6,634 6,046
-------- -------- -------- -------- -------- -------- --------
Income before taxes... 8,383 6,637 9,482 6,489 5,148 3,951 3,102
Provision for income
taxes.................. 2,417 2,115 3,008 2,029 1,586 1,240 781
-------- -------- -------- -------- -------- -------- --------
Net income............ $ 5,966 $ 4,522 $ 6,474 $ 4,460 $ 3,562 $ 2,711 $ 2,321
======== ======== ======== ======== ======== ======== ========
Common Share Data(1):
Basic earnings per
share.................. $ 1.14 $ 0.87 $ 1.25 $ 1.08 $ 0.94 $ 0.77 $ 0.66
Diluted earnings per
share.................. 1.10 0.84 1.20 1.04 0.92 0.76 0.66
Book value per share.... 9.20 8.25 8.33 8.01 6.22 5.36 4.68
Tangible book value per
share(2)............... 4.66 6.48 4.63 6.14 4.81 4.21 3.95
Cash dividends declared
per share.............. 0.27 0.15 0.20 0.20 0.15 0.10 0.10
Dividend payout ratio... 23.68% 17.22% 16.02% 23.70% 16.11% 12.95% 15.12%
Weighted average shares
outstanding (basic) (in
thousands)............. 5,222 5,183 5,186 4,116 3,778 3,513 3,514
Weighted average shares
outstanding (diluted)
(in thousands)......... 5,411 5,385 5,392 4,309 3,864 3,560 3,523
Shares outstanding at
end of period (in
thousands)............. 5,252 5,195 5,195 5,173 3,990 3,510 3,514
Balance Sheet Data (at
period end):
Total assets............ $693,079 $444,362 $608,673 $436,312 $320,143 $293,988 $233,492
Securities.............. 331,242 222,246 312,671 227,744 167,868 147,564 117,505
Loans................... 241,069 197,500 223,505 170,478 120,578 113,382 88,797
Allowance for credit
losses................. 3,003 2,072 2,753 1,850 1,016 923 753
Total deposits.......... 628,490 399,745 534,756 390,659 291,516 270,866 214,534
Borrowings and notes
payable................ -- -- 15,700 2,437 2,800 3,267 1,517
Total shareholders'
equity................. 48,304 42,885 43,266 41,435 24,818 18,833 16,458
12
As of and for
the Nine
Months Ended As of and for the Years Ended
September 30, December 31,
-------------- ---------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ----- ----- ----- ----- -----
(Dollars in thousands, except per share
data)
Selected Financial Ratios
and Other Data:
Performance Ratios and
Other Data:
Return on average assets... 1.33% 1.34% 1.33% 1.26% 1.17% 1.05% 1.03%
Return on average equity... 17.84 14.30 15.15 15.97 16.32 15.36 15.56
Net interest margin(3)..... 4.23 4.14 4.18 4.13 4.02 3.91 3.96
Efficiency ratio(4)........ 56.08 54.42 55.13 57.38 59.48 61.34 64.85
Number of full-service
banking centers........... 18 12 15 12 11 10 9
Asset Quality Ratios(5):
Nonperforming assets to
total loans and other real
estate.................... 0.00% 0.00% 0.00% 0.08% 0.00% 0.00% 0.00%
Net loan (recoveries)
charge-offs to average
loans..................... (0.01) (0.01) (0.03) 0.05 0.08 0.06 0.01
Allowance for credit losses
to total loans............ 1.25 1.05 1.23 1.09 0.84 0.81 0.85
Allowance for credit losses
to nonperforming
loans(6).................. -- -- -- -- -- -- --
Capital Ratios(7):
Leverage ratio............. 6.64% 8.21% 6.28% 7.58% 6.30% 5.45% 6.05%
Average shareholders'
equity to average total
assets.................... 7.46 9.35 8.80 7.87 7.18 6.86 6.64
Tier 1 risk-based capital
ratio..................... 13.94 18.32 14.35 18.02 14.94 13.11 14.99
Total risk-based capital
ratio..................... 15.02 19.38 16.71 19.08 15.73 13.89 15.79
- --------
(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) Calculated on a tax-equivalent basis using a 34% federal income tax rate.
(4) Calculated by dividing total noninterest expense, excluding securities
losses and credit loss provisions, by net interest income plus noninterest
income. The interest expense related to debentures issued by Prosperity in
connection with the issuance by a subsidiary trust of trust preferred
securities, is treated as interest expense for this calculation.
Additionally, taxes are not part of this calculation.
(5) At period end, except for net loan charge-offs to average loans, which is
for periods ended at such dates.
(6) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans. We had no significant
nonperforming loans at any of the dates indicated.
(7) At period end, except for average shareholders' equity to average total
assets, which is for periods ended at such dates.
13
Selected Historical Consolidated Financial Data of Commercial
The following table shows financial results actually achieved by Commercial.
The annual historical financial amounts are derived from Commercial's
consolidated financial statements audited by Deloitte & Touche LLP, independent
auditors. Financial amounts as of and for the nine months ended September 30,
2000 and 1999 are unaudited, but management of Commercial believes such amounts
reflect all normal recurring adjustments necessary for a fair presentation of
the results of operations and financial position for those periods. You should
not assume the results of operations for past periods and for the nine months
ended September 30, 2000 and 1999 indicate results for any future period. The
information below should be read in conjunction with Commercial's consolidated
financial statements and the notes to the financial statements included
elsewhere in this joint proxy statement-prospectus.
As of and for the
Nine Months Ended
September 30, As of and for the Years Ended December 31,
-------------------- -----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
Income Statement Data:
Interest income......... $ 21,123 $ 18,316 $ 25,046 $ 22,604 $ 19,227 $ 17,054 $ 15,611
Interest expense........ 11,941 9,351 13,156 11,795 9,374 7,967 6,608
--------- --------- --------- --------- --------- --------- ---------
Net interest income... 9,182 8,965 11,890 10,809 9,853 9,087 9,003
Provision for credit
losses................. -- 115 140 25 530 (100) (123)
--------- --------- --------- --------- --------- --------- ---------
Net interest income
after provision for
credit losses........ 9,182 8,850 11,750 10,784 9,323 9,187 9,126
Noninterest income...... 1,777 2,020 2,630 2,316 2,494 2,357 2,352
Noninterest expense..... 7,904 7,239 9,684 8,931 8,201 7,841 7,608
--------- --------- --------- --------- --------- --------- ---------
Income before taxes... 3,055 3,631 4,696 4,169 3,616 3,703 3,870
Provision for income
taxes.................. 1,039 1,348 1,739 1,548 1,225 1,372 1,460
--------- --------- --------- --------- --------- --------- ---------
Net income............ $ 2,016 $ 2,283 $ 2,957 $ 2,621 $ 2,391 $ 2,331 $ 2,410
========= ========= ========= ========= ========= ========= =========
Common Share Data:
Basic earnings per
share.................. $ 112.00 $ 142.69 $ 184.81 $ 163.81 $ 149.44 $ 145.69 $ 150.63
Diluted earnings per
share.................. 112.00 142.69 184.81 163.81 149.44 145.69 150.63
Book value per share.... 1,500.44 1,378.88 1,431.06 1,271.63 1,194.36 1,149.53 1,089.25
Tangible book value per
share(1)............... 1,470.56 1,342.94 1,399.61 1,233.94 1,150.16 1,098.87 1,032.75
Cash dividends declared
per share.............. 36.00 36.00 48.00 84.00 96.00 96.00 64.00
Dividend payout ratio... 31.00% 25.10% 25.84% 58.26% 63.78% 59.63% 36.43%
Weighted average shares
outstanding (basic) (in
thousands)............. 18 16 16 16 16 16 16
Weighted average shares
outstanding (diluted)
(in thousands)......... 18 16 16 16 16 16 16
Shares outstanding at
end of period (in
thousands)............. 18 16 18 16 16 16 16
Balance Sheet Data (at
period end):
Total assets............ $ 428,100 $ 413,988 $ 418,958 $ 363,846 $ 333,319 $ 270,089 $ 247,333
Securities.............. 212,150 218,159 202,312 227,460 192,628 154,973 130,947
Loans................... 154,698 138,317 143,298 105,628 88,435 73,526 77,170
Allowance for credit
losses................. 2,412 2,252 2,278 1,832 1,551 1,045 1,147
Total deposits.......... 384,987 338,988 343,833 323,706 301,570 246,401 225,074
Borrowings and notes
payable................ 14,081 47,560 47,419 15,071 8,023 451 396
Total shareholders'
equity................. 27,008 22,062 25,759 20,346 19,050 18,266 17,428
14
As of and for
the Nine
Months Ended As of and for the Years Ended
September 30, December 31,
-------------- -------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ----- ------ ------
(Dollars in thousands, except per share data)
Selected Financial
Ratios and Other Data:
Performance Ratios and
Other Data:
Return on average
assets................. 0.64% 0.80% 0.76% 0.76% 0.82% 0.90% 1.07%
Return on average
equity................. 10.19 14.31 13.34 13.34 10.27 13.09 14.38
Net interest margin..... 3.12 3.34 3.25 3.37 3.72 3.03 3.37
Efficiency ratio(2)..... 72.12 65.90 66.69 68.05 66.42 68.52 67.00
Number of banking
locations.............. 11 10 10 8 8 7 7
Asset Quality Ratios(3):
Nonperforming assets to
total loans and other
real estate............ 0.63% 1.26% 0.88% 0.37% 2.19% 1.14% 0.82%
Net loan (recoveries)
charge-offs to average
loans.................. (0.09) (0.25) (0.24) (0.27) 0.03 -- (0.20)
Allowance for credit
losses to total loans.. 1.56 1.63 1.59 1.73 1.75 1.42 1.49
Allowance for credit
losses to nonperforming
loans(4)............... 554.48 129.43 297.78 474.61 79.99 129.98 232.66
Capital Ratios(5):
Leverage ratio.......... 6.4% 5.5% 6.5% 5.7% 6.3% 5.8% 7.4%
Average shareholders'
equity to average total
assets................. 6.3 5.6 5.7 5.7 8.0 6.9 7.5
Tier 1 risk-based
capital ratio.......... 13.8 11.5 13.3 12.0 13.4 17.0 16.9
Total risk-based capital
ratio.................. 15.0 12.7 14.5 13.1 14.5 18.0 18.1
- --------
(1) Calculated by dividing total assets, less total liabilities and goodwill,
by shares outstanding at end of period.
(2) Calculated by dividing total noninterest expense, excluding securities
losses, by net interest income plus noninterest income.
(3) At period end, except for net loan charge-offs to average loans, which is
for periods ended at such dates.
(4) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.
(5) At period end, except for average shareholders' equity to average total
assets, which is for periods ended at such dates.
15
Summary of Historical and Pro Forma Per Share Selected Financial Data
Set forth below are the net earnings, diluted earnings, cash dividends and
book value per common share data for Prosperity and Commercial on a historical
basis, on a pro forma combined basis and on a pro forma combined basis per
Commercial equivalent share. Also included are weighted average shares
outstanding and shares outstanding at end of period for Prosperity and
Commercial and on a pro forma basis.
The pro forma data was derived by combining the historical consolidated
financial information of Prosperity and Commercial using the pooling of
interests method of accounting for business combinations. Under this method, it
is assumed that Prosperity and Commercial had always been combined for
accounting and financial reporting purposes. The Commercial pro forma
equivalent share information shows the effect of the merger from the
perspective of an owner of Commercial common stock. The information was
computed by multiplying the pro forma information by the exchange ratio of 155.
You should read the information below together with the historical financial
statements and related notes and other information of Commercial included in
this joint proxy statement-prospectus and the historical financial statements
and related notes that Prosperity has presented in its prior Securities and
Exchange Commission filings. We have incorporated the information related to
Prosperity into this document by reference. We expect that Commercial and
Prosperity will incur merger and integration charges as a result of combining
their companies of approximately $1.8 million after taxes. We also anticipate
that the merger will provide the combined company with financial benefits that
include reduced operating expenses and opportunity to earn more revenue. The
pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does not
reflect these expenses or benefits. The unaudited pro forma combined data below
is for illustrative purposes only. The companies may have performed differently
had they always been combined. You should not rely on this information as being
indicative of the historical results that would have been achieved had the
companies always been combined or the future results that the combined company
will experience after the merger.
As of or for
the Nine
Months Ended As of or for the
September 30, Years Ended
------------- --------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
Basic earnings per share
Prosperity................................ $ 1.14 $ 0.87 $ 1.25 $ 1.08 $ 0.94
Commercial................................ 112.00 142.69 184.81 163.81 149.44
Pro Forma................................. 1.11 0.97 1.33 1.20 1.09
Equivalent pro forma per share of
Commercial stock......................... 172.05 150.35 206.15 186.00 168.95
Diluted earnings per share
Prosperity................................ 1.10 0.84 1.20 1.04 0.92
Commercial................................ 112.00 142.69 184.81 163.81 149.44
Pro Forma................................. 1.08 0.94 1.30 1.16 1.07
Equivalent pro forma per share of
Commercial stock......................... 167.40 145.70 201.50 179.80 165.85
Cash dividends per share
Prosperity................................ 0.27 0.15 0.20 0.20 0.15
Commercial................................ 36.00 36.00 48.00 84.00 96.00
Pro Forma................................. 0.27 0.15 0.20 0.20 0.15
Equivalent pro forma per share of
Commercial stock......................... 41.85 23.25 31.00 31.00 23.25
16
As of or for the
Nine Months Ended As of or for the Years
September 30, Ended
----------------- --------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
Book value per share
Prosperity..................... 9.20 8.25 8.33 8.01 6.22
Commercial..................... 1,500.44 1,378.88 1,431.06 1,271.63 1,194.36
Pro Forma...................... 9.13 7.90 8.41 7.52 6.20
Equivalent pro forma per share
of Commercial stock........... 1,415.10 1,224.24 1,303.30 1,166.07 960.32
Weighted average common and
potential dilutive common shares
outstanding (in thousands)
Prosperity..................... 5,411 5,385 5,392 4,309 3,864
Commercial..................... 18 16 16 16 16
Pro Forma...................... 8,225 8,199 8,206 7,123 6,678
Number of shares of common
outstanding at end of period (in
thousands)
Prosperity..................... 5,252 5,195 5,195 5,173 3,990
Commercial..................... 18 16 18 16 16
Pro Forma...................... 8,052 7,995 7,995 7,973 6,790
Comparative Stock Prices
The following table summarizes the market values of Commercial common stock
and Prosperity common stock on November 7, 2000, the business day prior to the
announcement of the merger. Because the market price of Prosperity stock is
subject to fluctuation, the market value of the shares of Prosperity common
stock that holders of Commercial common stock would receive upon consummation
of the merger may increase or decrease prior to the receipt of such shares
following the effectiveness of the merger. You should obtain current market
quotations for the Prosperity common stock.
Equivalent
Pro Forma Per
Historical Share
--------------------------- of Commercial
Prosperity(1) Commercial(2) Stock(3)
------------- ------------- -------------
Market value per share............... $19.22 $-- $2,979.10
- --------
(1) Represents the average of the high and low prices on the Nasdaq National
Market.
(2) Although there are occasional transactions in the Commercial common stock,
there is no established trading market for Commercial common stock.
(3) Equivalent pro forma market value per share of Commercial common stock
represents the historical market value per share of Prosperity common stock
multiplied by 155, the exchange ratio under the merger agreement at which
each share of Commercial common stock would have been converted into shares
of Prosperity common stock if the merger had closed on November 7, 2000.
17
RISK FACTORS
In addition to the other information contained in this joint proxy
statement-prospectus, you should carefully consider the following risk factors
in deciding whether to vote for the merger.
Fluctuations in market prices may cause the value of the shares of
Prosperity common stock that Commercial shareholders receive to be less than
the value of their shares of Commercial common stock
Upon completion of the merger, unless you dissent, your shares of Commercial
common stock will be converted into shares of Prosperity common stock. The
ratio at which the shares will be converted is fixed and, except as set forth
below, there will be no adjustment for changes in the market price of
Prosperity common stock. Any change in the price of Prosperity common stock
will affect the value that Commercial shareholders will receive in the merger.
The value of the shares of Prosperity common stock received by Commercial
shareholders in the merger will go up or down as the market price of Prosperity
common stock goes up or down. Stock price changes may result from a variety of
factors that are beyond the control of Prosperity, including, among other
things, changes in Prosperity's businesses, operations and prospects,
regulatory considerations and general market and economic conditions.
Therefore, Commercial shareholders cannot be assured of receiving any specific
market value of Prosperity common stock on the closing of the merger.
Although the exchange ratio is fixed, Commercial will have the right to
terminate the merger agreement and abandon the merger before the closing if:
. the average of the daily closing sales prices for Prosperity common stock
for the ten successive trading days ending on the day immediately prior
to receipt of approval of the transaction from the Federal Reserve is
less than $16.00 per share; and
. Prosperity has not given notice of its intent to increase the number of
shares to be issued in connection with the merger so that, based on such
ten-day closing price average, the aggregate value of the merger
consideration is equal to $45,000,000.
Although the Prosperity board of directors has the ability to increase the
merger consideration and the Commercial board of directors has the power to
terminate the merger agreement and abandon the merger if both of the above
conditions occur, there is no obligation of either board to exercise such
power.
In addition, you must be aware that the price of Prosperity common stock may
vary from its price on the date of this joint proxy statement-prospectus, the
date for determining the ten-day closing price average discussed above and on
the dates of the Commercial and Prosperity special meetings. Because the date
the merger is completed will be later than the dates of the special meetings,
the price of the Prosperity common stock on the dates of the respective
meetings may not be indicative of its price on the date the merger is
completed.
Prosperity may fail to realize the anticipated benefits of the merger
Prosperity and Commercial may not be able to integrate their operations
without encountering difficulties including, without limitation, the loss of
key employees and customers, the disruption of their respective ongoing
businesses or possible inconsistencies in standards, controls, procedures and
policies. Additionally, in determining that the merger is in the best interests
of Prosperity and Commercial, as the case may be, the board of directors of
each of Prosperity and Commercial considered that enhanced earnings may result
from the consummation of the merger, including from reduction of duplicate
costs, improved efficiency and cross-marketing opportunities. However, there
can be no assurance that any enhanced earnings will result from the merger.
18
You will have less influence as a shareholder of Prosperity than as a
shareholder of Commercial
As a Commercial shareholder, you currently have the right to vote in the
election of the board of directors of Commercial and on other matters affecting
Commercial. The merger will transfer control of Commercial to Prosperity. When
the merger occurs, you will become a shareholder of Prosperity with a
percentage ownership much smaller than your percentage ownership of Commercial.
Because of this, you will no longer be able to influence the management
policies of Commercial's operations, and as a shareholder of Prosperity with a
smaller ownership percentage you will not be able to influence the management
policies of Prosperity.
19
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial information and footnotes
thereto are presented to show the impact on the historical financial position
and results of operations of Prosperity pursuant to the merger. As a result of
the merger, Commercial shareholders will receive shares of Prosperity common
stock pursuant to the exchange ratio of 155 shares of Prosperity common stock
for each share of Commercial common stock outstanding.
The unaudited Pro Forma Consolidated Balance Sheet reflects the historical
position of Commercial and Prosperity at September 30, 2000 with pro forma
adjustments based on the assumption that the merger was effective September 30,
2000. The pro forma adjustments are based on the pooling of interests method of
accounting. The unaudited Pro Forma Consolidated Statements of Income assume
that the merger was consummated on January 1 of the earliest indicated period.
The unaudited pro forma consolidated financial statements reflect estimated
nonrecurring charges consisting of management's estimates of legal, accounting
and investment banking fees that will be incurred in connection with the
merger. The adjustments are based on information available and certain
assumptions that we believe are reasonable. Management has not identified,
quantified or evaluated any material restructuring costs at this time.
The unaudited pro forma income amounts do not reflect any potential income
enhancements but do reflect potential cost reductions that are expected to
result from the consolidation of Commercial's and Prosperity's operations and
are not necessarily indicative of the results expected of the future combined
operations. No assurances can be given with respect to the ultimate level of
income enhancements or cost reductions to be realized.
The following information should be read in conjunction with and is
qualified in its entirety by the consolidated financial statements and
accompanying notes of Commercial included with this document and the
consolidated financial statements and accompanying notes of Prosperity
incorporated by reference into this document. Interim results of Commercial and
Prosperity as of and for the nine months ended September 30, 2000 are not
necessarily indicative of results of operations or the combined financial
position that would have resulted had the merger been consummated at the
beginning of the period indicated.
The unaudited pro forma financial information is intended for information
purposes and is not necessarily indicative of the future financial position or
future operating results of the combined company or of the financial position
or operating results of the combined company that would have actually occurred
had the merger been in effect as of the date or for the period presented.
20
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
September 30, 2000
Prosperity Commercial Pro Forma Pro Forma
Bancshares Bancshares Adjustments Combined
---------- ---------- ----------- ----------
(Dollars in thousands)
Assets
Cash and due from banks........ $ 16,583 $ 15,507 $ 32,090
Federal funds sold............. 63,703 35,200 $(1,800)(a) 97,103
-------- -------- ------- ----------
Total cash and cash
equivalents................. 80,286 50,707 (1,800) 129,193
Interest-bearing deposits in
financial institutions........ -- 1,283 1,283
Securities:
Available for sale securities
at fair value............... 255,983 25,808 281,791
Held to maturity at cost..... 75,259 186,342 261,601
-------- -------- ----------
Total securities........... 331,242 212,150 543,392
Loans:
Total loans, net of unearned
discount.................... 241,069 154,698 395,767
Allowance for credit losses.. (3,003) (2,412) (5,415)
-------- -------- ----------
Net loans.................. 238,066 152,286 390,352
Accrued interest receivable.... 5,847 3,902 9,749
Goodwill....................... 23,822 538 24,360
Bank premises and equipment,
net........................... 9,642 4,589 14,231
Other real estate owned........ -- 544 544
Other assets................... 4,174 2,101 6,275
-------- -------- ------- ----------
Total assets............... $693,079 $428,100 $(1,800) $1,119,379
======== ======== ======= ==========
Liabilities and Shareholders'
Equity
Liabilities:
Deposits
Noninterest-bearing.......... $122,735 $ 67,691 $ 190,426
Interest bearing............. 505,755 317,296 823,051
-------- -------- ----------
Total deposits............. 628,490 384,987 1,013,477
Other borrowings............. -- 14,081 14,081
Accrued interest payable..... 2,461 782 3,243
Other liabilities............ 1,824 1,242 3,066
-------- -------- ----------
Total liabilities.......... 632,775 401,092 1,033,867
Company obligated mandatorily
redeemable trust preferred
securities of subsidiary
trust......................... 12,000 -- 12,000
Shareholders' equity:
Common stock................. 5,255 2 5,257
Additional paid-in capital... 15,981 12,850 28,831
Retained earnings............ 29,442 14,195 (1,800)(a) 41,837
Accumulated other
comprehensive income--net
unrealized (losses) gains on
available for sale
securities, net of tax...... (2,356) 56 (2,300)
Treasury stock............... (18) (95) (113)
-------- -------- ------- ----------
Total shareholders'
equity.................... 48,304 27,008 (1,800) 73,512
-------- -------- ------- ----------
Total liabilities and
shareholders' equity...... $693,079 $428,100 $(1,800) $1,119,379
======== ======== ======= ==========
- --------
(a) Represents a one time charge which includes estimated closing costs, legal
fees, accounting fees, broker fees, employee related costs, and contract
terminations (after tax).
21
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Nine Months Ended September 30, 2000
Prosperity Commercial Pro Forma Pro Forma
Bancshares Bancshares Adjustments Combined
---------- ---------- ----------- ---------
(Dollars in thousands, except per share
data)
Interest income:
Loans, including fees......... $15,095 $ 9,682 $24,777
Securities.................... 14,588 10,329 24,917
Federal funds sold............ 280 1,051 1,331
Deposits in financial
institutions................. -- 61 61
------- ------- -------
Total interest income....... 29,963 21,123 51,086
------- ------- -------
Interest expense:
Deposits...................... 12,976 10,615 23,591
Other......................... 470 1,326 1,796
------- ------- -------
Total interest expense...... 13,446 11,941 25,387
------- ------- -------
Net interest income............. 16,517 9,182 25,699
Provision for credit losses... 225 -- 225
------- ------- -------
Net interest income after
provision for credit losses.... 16,292 9,182 25,474
------- ------- -------
Noninterest income:
Customer service fees......... 3,275 1,424 4,699
Other noninterest income...... 671 353 1,024
------- ------- -------
Total noninterest income.... 3,946 1,777 5,723
------- ------- -------
Noninterest expense:
Salaries and employee
benefits..................... 5,340 4,254 $(1,110) 8,484
Net occupancy expense......... 639 921 1,560
Other noninterest expense..... 5,876 2,729 (262) 8,343
------- ------- ------- -------
Total noninterest expense... 11,855 7,904 (1,372) 18,387
------- ------- ------- -------
Income before federal income
taxes.......................... 8,383 3,055 1,372 (a) 12,810
Provision for federal income
taxes........................ 2,417 1,039 464 3,920
------- ------- ------- -------
Net income.................. $ 5,966 $ 2,016 $ 908 $ 8,890
======= ======= ======= =======
Basic earnings per share:
Net income per share.......... $ 1.14 $112.00 $ 1.11
Average shares outstanding (in
thousands)................... 5,222 18 2,800 8,022
Diluted earnings per share:
Net income per share.......... $ 1.10 $112.00 $ 1.08
Average shares outstanding (in
thousands)................... 5,411 18 2,814 8,225
- --------
(a) This adjustment represents the anticipated operational cost savings of the
combined company over a nine month period.
22
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Nine Months Ended September 30, 1999
Prosperity Commercial Pro Forma Pro Forma
Bancshares Bancshares Adjustments Combined
---------- ---------- ----------- ---------
(Dollars in thousands, except per share
data)
Interest income:
Loans, including fees......... $11,519 $ 7,412 $18,931
Securities.................... 9,883 10,525 20,408
Federal funds sold............ 460 306 766
Deposits in financial
institutions................. -- 73 73
------- ------- -------
Total interest income....... 21,862 18,316 40,178
------- ------- -------
Interest expense:
Deposits...................... 9,032 8,038 17,070
Other......................... 57 1,313 1,370
------- ------- -------
Total interest expense...... 9,089 9,351 18,440
------- ------- -------
Net interest income............. 12,773 8,965 21,738
Provision for credit losses... 205 115 320
------- ------- -------
Net interest income after
provision for credit losses.... 12,568 8,850 21,418
------- ------- -------
Noninterest income:
Customer service fees......... 1,919 1,421 3,340
Other noninterest income...... 318 599 917
------- ------- -------
Total noninterest income.... 2,237 2,020 4,257
------- ------- -------
Noninterest expense:
Salaries and employee
benefits..................... 4,213 3,764 $(1,110) 6,867
Net occupancy expense......... 473 730 1,203
Other noninterest expense..... 3,482 2,745 (262) 5,965
------- ------- ------- -------
Total noninterest expense... 8,168 7,239 (1,372) 14,035
------- ------- ------- -------
Income before federal income
taxes.......................... 6,637 3,631 1,372 (a) 11,640
Provision for federal income
taxes........................ 2,115 1,348 464 3,927
------- ------- ------- -------
Net income.................. $ 4,522 $ 2,283 $ 908 $ 7,713
======= ======= ======= =======
Basic earnings per share:
Net income per share.......... $ 0.87 $142.69 $ 0.97
Average shares outstanding (in
thousands)................... 5,183 16 2,800 7,983
Diluted earnings per share:
Net income per share.......... $ 0.84 $142.69 $ 0.94
Average shares outstanding (in
thousands)................... 5,385 16 2,814 8,199
- --------
(a) This adjustment represents the anticipated operational cost savings of the
combined company over a nine month period.
23
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Year Ended December 31, 1999
Prosperity Commercial Pro Forma Pro Forma
Bancshares Bancshares Adjustments Combined
---------- ---------- ----------- ---------
(Dollars in thousands, except per share
data)
Interest income:
Loans, including fees......... $16,386 $10,324 $26,710
Securities.................... 14,292 13,792 28,084
Federal funds sold............ 734 844 1,578
Deposits in financial
institutions................. -- 86 86
------- ------- -------
Total interest income....... 31,412 25,046 56,458
------- ------- -------
Interest expense:
Deposits...................... 12,971 11,116 24,087
Other......................... 62 2,040 2,102
------- ------- -------
Total interest expense...... 13,033 13,156 26,189
------- ------- -------
Net interest income............. 18,379 11,890 30,269
Provision for credit losses... 280 140 420
------- ------- -------
Net interest income after
provision for credit losses.... 18,099 11,750 29,849
------- ------- -------
Noninterest income:
Customer service fees......... 3,010 1,915 4,925
Other noninterest income...... 511 715 1,226
------- ------- -------
Total noninterest income.... 3,521 2,630 6,151
------- ------- -------
Noninterest expense:
Salaries and employee
benefits..................... 6,198 4,951 $(1,480) 9,669
Net occupancy expense......... 666 914 1,580
Other noninterest expense..... 5,274 3,819 (350) 8,743
------- ------- ------- -------
Total noninterest expense... 12,138 9,684 (1,830) 19,992
------- ------- ------- -------
Income before federal income
taxes.......................... 9,482 4,696 1,830 (a) 16,008
Provision for federal income
taxes........................ 3,008 1,739 620 5,367
------- ------- ------- -------
Net income.................. $ 6,474 $ 2,957 $ 1,210 $10,641
======= ======= ======= =======
Basic earnings per share:
Net income per share.......... $ 1.25 $184.81 $ 1.33
Average shares outstanding (in
thousands)................... 5,186 16 2,800 7,986
Diluted earnings per share:
Net income per share.......... $ 1.20 $184.81 $ 1.30
Average shares outstanding (in
thousands)................... 5,392 16 2,814 8,206
- --------
(a) This adjustment represents the anticipated operational cost savings of the
combined company.
24
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Year Ended December 31, 1998
Prosperity Commercial Pro Forma Pro Forma
Bancshares Bancshares Adjustments Combined
---------- ---------- ----------- ---------
(Dollars in thousands, except per share
data)
Interest income:
Loans, including fees......... $12,282 $ 8,532 $20,814
Securities.................... 10,834 13,300 24,134
Federal funds sold............ 299 644 943
Deposits in financial
institutions................. 7 128 135
------- ------- -------
Total interest income....... 23,422 22,604 46,026
------- ------- -------
Interest expense:
Deposits...................... 9,993 11,057 21,050
Other......................... 135 738 873
------- ------- -------
Total interest expense...... 10,128 11,795 21,923
------- ------- -------
Net interest income............. 13,294 10,809 24,103
Provision for credit losses... 239 25 264
------- ------- -------
Net interest income after
provision for credit losses.... 13,055 10,784 23,839
------- ------- -------
Noninterest income:
Customer service fees......... 2,173 1,992 4,165
Other noninterest income...... 319 324 643
------- ------- -------
Total noninterest income.... 2,492 2,316 4,808
------- ------- -------
Noninterest expense:
Salaries and employee
benefits..................... 4,541 4,549 $(1,480) 7,610
Net occupancy expense......... 535 854 1,389
Other noninterest expense..... 3,982 3,528 (350) 7,160
------- ------- ------- -------
Total noninterest expense... 9,058 8,931 (1,830) 16,159
------- ------- ------- -------
Income before federal income
taxes.......................... 6,489 4,169 1,830 (a) 12,488
Provision for federal income
taxes........................ 2,029 1,548 620 4,197
------- ------- ------- -------
Net income.................. $ 4,460 $ 2,621 $ 1,210 $ 8,291
======= ======= ======= =======
Basic earnings per share:
Net income per share.......... $ 1.08 $163.81 $ 1.20
Average shares outstanding (in
thousands)................... 4,116 16 2,800 6,916
Diluted earnings per share:
Net income per share.......... $ 1.04 $163.81 $ 1.16
Average shares outstanding (in
thousands)................... 4,309 16 2,814 7,123
- --------
(a) This adjustment represents the anticipated operational cost savings of the
combined company.
25
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Year Ended December 31, 1997
Prosperity Commercial Pro Forma Pro Forma
Bancshares Bancshares Adjustments Combined
---------- ---------- ----------- ---------
(Dollars in thousands, except per share
data)
Interest income:
Loans, including fees......... $10,206 $ 7,504 $17,710
Securities.................... 9,555 10,819 20,374
Federal funds sold............ 193 744 937
Deposits in financial
institutions................. 16 160 176
------- ------- -------
Total interest income....... 19,970 19,227 39,197
------- ------- -------
Interest expense:
Deposits...................... 8,858 9,218 18,076
Other......................... 202 156 358
------- ------- -------
Total interest expense...... 9,060 9,374 18,434
------- ------- -------
Net interest income............. 10,910 9,853 20,763
Provision for credit losses... 190 530 720
------- ------- -------
Net interest income after
provision for credit losses.... 10,720 9,323 20,043
------- ------- -------
Noninterest income:
Customer service fees......... 2,062 2,341 4,403
Other noninterest income...... 202 153 355
------- ------- -------
Total noninterest income.... 2,264 2,494 4,758
------- ------- -------
Noninterest expense:
Salaries and employee
benefits..................... 3,968 4,173 $(1,480) 6,661
Net occupancy expense......... 488 754 1,242
Other noninterest expense..... 3,380 3,274 (350) 6,304
------- ------- ------- -------
Total noninterest expense... 7,836 8,201 (1,830) 14,207
------- ------- ------- -------
Income before federal income
taxes.......................... 5,148 3,616 1,830 (a) 10,594
Provision for federal income
taxes........................ 1,586 1,225 620 3,431
------- ------- ------- -------
Net income.................. $ 3,562 $ 2,391 $ 1,210 $ 7,163
======= ======= ======= =======
Basic earnings per share:
Net income per share.......... $ 0.94 $149.44 $ 1.09
Average shares outstanding (in
thousands)................... 3,778 16 2,800 6,578
Diluted earnings per share:
Net income per share.......... $ 0.92 $149.44 $ 1.07
Average shares outstanding (in
thousands)................... 3,864 16 2,814 6,678
- --------
(a) This adjustment represents the anticipated operational cost savings of the
combined company.
26
COMMERCIAL SPECIAL MEETING
Purpose
This joint proxy statement-prospectus is furnished in connection with the
solicitation of proxies by the board of directors of Commercial from the
shareholders of Commercial for use at the special meeting. The special meeting
is a meeting of the shareholders of Commercial at which the shareholders will
consider the merger. A complete copy of the merger agreement is attached to
this joint proxy statement-prospectus as Appendix A.
Date, Place and Time of Special Meeting
The special meeting of Commercial's shareholders will be held at , .m.
local time on , , 2001 at the principal executive office of
Commercial, 4295 San Felipe, Houston, Texas.
Shares Entitled to Vote, Quorum and Vote Required
The holders of record of the outstanding Commercial common stock at the
close of business on , 200 will be entitled to notice of and to vote
at the meeting and any adjournment. At the close of business on such date,
Commercial had issued and outstanding and entitled to vote at the meeting
18,067 shares of Commercial common stock.
At the special meeting, Commercial shareholders will be entitled to one vote
for each share of Commercial common stock owned of record on the record date.
The holders of a majority of the Commercial common stock must be present,
either in person or by proxy, to constitute a quorum at the meeting. The
affirmative vote of two-thirds of the issued and outstanding Commercial common
stock is required to approve the merger. A majority of the Commercial common
stock present at the meeting, either in person or by proxy, is required to
approve any other matters that may be properly presented at the meeting.
Because adoption of the merger agreement requires the affirmative vote of
the holders of two-thirds of the outstanding shares of Commercial common stock
entitled to vote at the special meeting, abstentions will have the same effect
as votes against adoption of the merger agreement. Accordingly, the Commercial
board encourages you to complete, date and sign the accompanying proxy card and
return it promptly in the enclosed postage-paid envelope.
Brokers and banks who hold shares in an account for customers who are the
beneficial owners of such shares may not give a proxy to vote those shares
without specific instructions from their customers. Any abstentions and broker
non-votes will have the same effect as votes against adoption of the merger
agreement. Accordingly, the Commercial board of directors encourages you to
complete, date and sign the accompanying proxy card and return it promptly in
the enclosed postage-paid envelope.
On the record date, the directors and executive officers of Commercial,
including their immediate family members and affiliates, owned or otherwise
controlled the right to vote 9,244 shares of Commercial common stock,
comprising approximately 51.17% of the outstanding shares of Commercial common
stock. The Commercial board of directors unanimously recommends that you vote
in favor of the merger.
Voting and Revocation of Proxies
Proxies, in the form enclosed, which are properly executed by the
shareholders and returned to Commercial and not subsequently revoked, will be
voted in accordance with the instructions indicated on the proxies. Any
properly executed proxy on which voting instructions are not specified will be
voted FOR the proposal to adopt the merger agreement. The proxy also grants
authority to the persons designated in the proxy to vote in accordance with
their own judgment if an unscheduled matter is properly brought before the
meeting.
27
A proxy solicited by the Commercial board of directors may be revoked at any
time before it is voted at the special meeting by:
. giving written notice to the Secretary of Commercial;
. execution of a proxy bearing a later date filed with the Secretary of
Commercial at or before the meeting; or
. attending the special meeting and voting in person at the meeting.
All written notices of revocation and other communications with respect to
revocation or proxies should be sent to: Commercial Bancshares, Inc., 4295 San
Felipe, Houston, Texas 77027, Attention: James H. Pouns, Secretary.
Solicitation of Proxies; Expenses
This proxy solicitation is made by the Commercial board of directors.
Prosperity and Commercial are each responsible for their own expenses incurred
in preparing, assembling, printing, and mailing this joint proxy statement-
prospectus. Proxies will be solicited through the mail. Additionally,
directors, officers and regular employees of Commercial and its subsidiaries
intend to solicit proxies personally or by telephone or other means of
communication. These directors, officers and employees will not be additionally
compensated. Commercial will reimburse banks, brokers and other custodians,
nominees and fiduciaries for their reasonable expenses in forwarding the proxy
materials to beneficial owners.
PROSPERITY SPECIAL MEETING
Purpose
This joint proxy statement-prospectus is furnished in connection with the
solicitation of proxies by the board of directors of Prosperity from the
shareholders of Prosperity for use at the special meeting. The special meeting
is a meeting of the shareholders of Prosperity at which the shareholders will
consider the merger and the issuance of shares of Prosperity common stock in
connection with the merger. A complete copy of the merger agreement is attached
to this joint proxy statement-prospectus as Appendix A.
Date, Place and Time of Special Meeting
The special meeting of Prosperity's shareholders will be held at , .m.
local time on , , 2001 at the principal executive office of
First Prosperity Bank, 1301 N. Mechanic, El Campo, Texas.
Shares Entitled to Vote, Quorum and Vote Required
The holders of record of the outstanding Prosperity common stock at the
close of business on , 2001 will be entitled to notice of and to vote
at the meeting and any adjournment. At the close of business on such date,
Prosperity had issued and outstanding and entitled to vote at the meeting
shares of Prosperity common stock.
At the special meeting, Prosperity shareholders will be entitled to one vote
for each share of Prosperity common stock owned of record on the record date.
The holders of a majority of the Prosperity common stock must be present,
either in person or by proxy, to constitute a quorum at the meeting. The
affirmative vote of a majority of the issued and outstanding Prosperity common
stock is required to approve the merger and the issuance of shares of
Prosperity common stock in connection with the merger. A vote in favor of the
merger is also a vote to elect four directors of Commercial to serve as
directors of Prosperity. A majority of the Prosperity common stock present at
the meeting, either in person or by proxy, is required to approve any other
matters that may be properly presented at the meeting.
28
Brokers and banks who hold shares in an account for customers who are the
beneficial owners of such shares may not give a proxy to vote those shares
without specific instructions from their customers. Any abstentions and broker
non-votes will have the same effect as votes against adoption of the merger
agreement and approval of the issuance of shares. Accordingly, the Prosperity
board encourages you to complete, date and sign the accompanying proxy card and
return it promptly in the enclosed postage-paid envelope.
On the record date, the directors and executive officers of Prosperity,
including their immediate family members and affiliates, owned or otherwise
controlled the right to vote 1,141,466 shares of Prosperity common stock,
comprising approximately 21.74% of the outstanding shares of Prosperity common
stock. The Prosperity board of directors unanimously recommends that you vote
in favor of the merger.
Voting and Revocation of Proxies
Proxies, in the form enclosed, which are properly executed by the
shareholders and returned to Prosperity and not subsequently revoked, will be
voted in accordance with the instructions indicated on the proxies. Any
properly executed proxy on which voting instructions are not specified will be
voted FOR the proposal to adopt the merger agreement and approve the issuance
of shares of Prosperity common stock in connection with the merger. The proxy
also grants authority to the persons designated in the proxy to vote in
accordance with their own judgment if an unscheduled matter is properly brought
before the meeting.
A proxy solicited by the Prosperity board of directors may be revoked at any
time before it is voted at the special meeting by:
. giving written notice to the Secretary of Prosperity;
. execution of a proxy bearing a later date filed with the Secretary of
Prosperity at or before the meeting; or
. attending the special meeting and voting in person at the meeting.
All written notices of revocation and other communications with respect to
revocation of proxies should be sent to: Prosperity Bancshares, Inc., 1301 N.
Mechanic, El Campo, Texas 77437, Attention: David Zalman, Secretary.
Solicitation of Proxies; Expenses
This proxy solicitation is made by the Prosperity board of directors.
Prosperity and Commercial are each responsible for their own expenses incurred
in preparing, assembling, printing, and mailing this joint proxy statement-
prospectus. Proxies will be solicited through the mail. Additionally,
directors, officers and regular employees of Prosperity and its subsidiaries
intend to solicit proxies personally or by telephone or other means of
communication. These directors, officers and employees will not be additionally
compensated. Prosperity will reimburse banks, brokers and other custodians,
nominees and fiduciaries for their reasonable expenses in forwarding the proxy
materials to beneficial owners.
29
DESCRIPTION OF THE TRANSACTION
The following information describes material aspects of the merger. It is
not intended to be a complete description of all information relating to the
merger and is qualified in its entirety by reference to more detailed
information contained in the Appendices to this document, including the merger
agreement. A copy of the merger agreement is included as Appendix A and is
incorporated herein by reference. You are urged to read the merger agreement
and other Appendices in their entirety.
Terms of the Merger
The merger agreement provides for the merger of Commercial with and into
Prosperity. The merger will be effective as soon as practicable following the
receipt of all necessary regulatory and shareholder approvals and the
satisfaction of all conditions to the consummation of the merger. As a result
of the merger, holders of Commercial common stock (other than those
shareholders who perfect their dissenters' rights of appraisal) will be
entitled to receive whole shares of Prosperity common stock and will no longer
be owners of Commercial common stock. As a result of the merger, certificates
for Commercial common stock will only represent the right to receive the merger
consideration pursuant to the merger agreement, and otherwise will be null and
void after completion of the merger. Based on the number of shares of
Commercial common stock outstanding as of the record date, Prosperity will
issue 2,800,385 shares of its common stock in connection with the merger. The
number of shares of Prosperity common stock that will be issued in connection
with the merger is based on an exchange ratio of 155 shares of Prosperity
common stock for each share of Commercial common stock outstanding.
In addition, as of the date of this joint proxy statement-prospectus,
options to acquire 50 shares of Commercial common stock are exercisable. If
these options are exercised prior to completion of the merger, Prosperity must
issue 155 additional shares of Prosperity common stock for each additional
share of Commercial common stock issued pursuant to the exercise of such
options. If the options to acquire all 50 shares are exercised, Prosperity
would be required to issue an additional 7,750 shares of Prosperity common
stock upon completion of the merger.
Prosperity will not issue any certificates for fractional shares of
Prosperity common stock in connection with the merger. Further, because the
exchange ratio is fixed at 155 and because there are no fractional shares of
Commercial common stock outstanding, Prosperity will not be required to issue
any cash in lieu of fractional shares.
Effect of the Merger on Commercial Stock Options
Pursuant to the merger agreement, any options to purchase shares of
Commercial common stock that are outstanding immediately prior to the
completion of the merger will be converted into options to purchase shares of
Prosperity common stock. The number of shares of Commercial common stock
covered by outstanding options will be converted into a number of shares of
Prosperity common stock on the same basis that shares of Commercial common
stock will be converted into shares of Prosperity common stock. The exercise
price of the outstanding options will also be adjusted based on the exchange
ratio.
As of the record date, there were options outstanding to purchase 90 shares
of Commercial common stock at exercise prices ranging from $225.00 per share to
$1,600.00 per share. If the same number of options is outstanding upon
completion of the merger, the Commercial stock options would be converted into
options to acquire 13,950 shares of Prosperity common stock at exercise prices
ranging from $1.45 per share to $10.32 per share. The converted options will be
governed by the original plans under which they were granted.
Background of the Merger
The board of directors of Commercial has approved the merger agreement as
being in the best interests of Commercial and its shareholders, and the board
of directors of Prosperity has also approved the merger agreement as being in
the best interests of Prosperity and its shareholders. If the transactions
contemplated by
30
the merger agreement are consummated, Commercial will be merged with and into
Prosperity, its separate existence will cease, and present Commercial
shareholders will become shareholders of Prosperity.
During the normal course of its business, Commercial has received inquiries
regarding its willingness to consider an acquisition by, or affiliation with,
other financial institutions. Consistent with its fiduciary obligations to its
shareholders, Commercial considered such inquiries and evaluated them for the
level and form of consideration proposed, the seriousness and specificity of
the consideration proposed, the expected future operation of Commercial, and
other considerations and factors deemed relevant by Commercial. Commercial
formulated its business plan with the intent to provide maximum value to its
shareholders by enhancing its franchise and expanding its business operations.
The board of directors of Commercial has continuously evaluated the cost of
providing the increasingly broad array of financial products and alternative
delivery channels necessary to remain competitive in the marketplace, while
implementing Commercial's growth strategy and continuing to deliver a wide
array of services to its customers and provide competitive returns to its
shareholders.
In October 2000, Prosperity approached Commercial about a possible
combination, the goal of which was to create a stronger institution that could
compete more efficiently in the market. As a result of this initial contact,
Commercial and Prosperity commenced preliminary due diligence and extensive
negotiations later in October 2000.
Commercial's board of directors met on November 6, 2000 to review the
proposed merger agreement and consider the transaction with Prosperity. Based
primarily on an extensive discussion of the terms of the merger agreement and
of the financial condition and valuation for both Commercial and Prosperity,
Commercial's board of directors determined that the transaction with Prosperity
was in the best interests of both Commercial and its shareholders. As a result,
Commercial's board of directors authorized the execution and delivery of the
merger agreement.
Prosperity's board of directors met on November 3, 2000 to review the
proposed merger agreement and consider the transaction with Commercial. Based
primarily on an extensive discussion of the terms of the merger agreement and
of the financial condition and valuation for both Commercial and Prosperity,
Prosperity's board of directors determined that the transaction with Commercial
was in the best interests of both Prosperity and its shareholders. As a result,
Prosperity's board of directors authorized the execution and delivery of the
merger agreement.
Recommendation of the Commercial Board and Commercial's Reasons for the Merger
The Commercial board of directors believes that the merger is in the best
interests of Commercial and the Commercial shareholders. Accordingly, the
Commercial board of directors has unanimously approved the merger agreement and
unanimously recommends that the Commercial shareholders vote FOR adoption of
the merger agreement.
In evaluating whether to affiliate with Prosperity, Commercial considered a
number of factors, including, without limitation, the following:
. the value of Prosperity common stock;
. competitive conditions in the market areas served by Commercial;
. the additional capital and resources needed for Commercial's operations
to continue to grow;
. Commercial's ability to provide, on a cost-effective basis, the ever-
increasing and broadening array of financial services and products
demanded by customers;
. the fact that Prosperity common stock is publicly traded, thereby
representing a more liquid investment than Commercial's common stock;
31
. the appreciation in the price of Prosperity common stock since
Prosperity's initial public offering in 1998;
. the tax free nature of the exchange of Commercial common stock for
Prosperity common stock;
. Prosperity's dividend history; and
. expansion opportunities and financial products and services not otherwise
available to Commercial and its customers which would better enable
Commercial to compete.
Commercial's board of directors determined that Commercial's competitive
position and the value of its stock could best be enhanced through affiliation
with Prosperity. Following arm's length negotiations between representatives of
Prosperity and Commercial, Prosperity and Commercial entered into the merger
agreement. The aggregate price to be paid to holders of Commercial common stock
resulted from negotiations which considered the historical earnings and
dividends of Prosperity and Commercial; the potential growth in Commercial's
market and earnings, both as an independent entity and as a part of a larger
organization such as Prosperity; Commercial's asset quality; and the effect of
the merger on the shareholders, customers, and employees of Commercial and the
communities that Commercial serves.
The foregoing discussion of the information and factors considered by the
Commercial board is not intended to be exhaustive, but includes all material
factors considered by the Commercial board. In reaching its determination to
approve and recommend the merger, the Commercial board did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given differing weights to different factors.
Recommendation of the Prosperity Board and Prosperity's Reasons for the Merger
The Prosperity board of directors believes that the merger is in the best
interests of Prosperity and the Prosperity shareholders. Accordingly, the
Prosperity board of directors has unanimously approved the merger agreement and
unanimously recommends that the Prosperity shareholders vote FOR adoption of
the merger agreement and approval of the issuance of shares of Prosperity
common stock in connection with the merger.
In making its decision to approve the merger, the Prosperity board of
directors considered a number of factors including, without limitation, the
following:
. information concerning the business, operations, management, financial
condition, earnings, asset quality and future prospects for Prosperity
and Commercial, both individually and combined, based on the board of
directors' inquiry into Prosperity's and Commercial's past performance,
current financial condition and future prospects;
. the consistency of the merger with Prosperity's long-term business
strategy;
. the advantages of a combination with an institution such as Commercial,
which already has a significant presence in the Houston market and the
opportunities for increased efficiencies and significant cost savings
from a combination with Prosperity's current market, resulting in
increased profitability of the combined entity over time as opposed to a
possible combination with an institution without a similar market
presence;
. the financial terms of the transaction, including how the price to be
received related to prices received by other comparable banking
organizations in other financial institutions mergers;
. the opinion of First Capital Group, LLC, Prosperity's financial advisor,
that the merger consideration to be paid to Commercial shareholders was
fair to Prosperity from a financial point of view;
. the potential ability to reduce combined operating expenses through the
elimination of redundant services and personnel;
32
. the potential business development capability of Commercial's directors
and executive officers who will become board members or executive
officers of Prosperity or First Prosperity Bank;
. the ability of the combined company to compete in its market areas;
. the belief that, following the merger, the combined company would be well
positioned to continue to grow through possible future acquisitions or
expansions;
. the Prosperity board's and management's belief that, while no assurances
could be given, the business and financial advantages contemplated in
connection with the merger were likely to be achieved within a reasonable
time frame;
. the tax free nature of the exchange of Commercial common stock for
Prosperity common stock; and
. the accounting treatment of the transaction under the pooling of
interests method for accounting and financial reporting purposes.
The foregoing discussion of the information and factors considered by the
Prosperity board is not intended to be exhaustive, but includes all material
factors considered by the Prosperity board. In reaching its determination to
approve and recommend the merger, the Prosperity board did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given differing weights to different factors.
Opinion of Commercial's Financial Advisor
The fairness opinion of Commercial's financial advisor, Hoefer & Arnett,
Incorporated is described below. The description contains projections,
estimates and/or other forward-looking statements about the future earnings or
other measures of the future performance of Prosperity and Commercial. You
should not rely on any of these statements as having been made or adopted by
Prosperity or Commercial.
Commercial's board of directors retained Hoefer & Arnett to render a written
opinion as investment bankers as to the fairness, from a financial point of
view, to the board of directors and shareholders of Commercial of the terms of
the proposed merger of Commercial with and into Prosperity. On December 8,
2000, Hoefer & Arnett rendered its written opinion to the Commercial board of
directors, to the effect that, based upon and subject to the considerations set
forth in the opinion, Hoefer & Arnett's experience, its analysis described
below and other factors it deemed relevant, as of December 8, 2000, the
exchange ratio set forth in the merger agreement was fair from a financial
point of view to Commercial's shareholders.
The full text of the Hoefer & Arnett opinion as of the date of this joint
proxy statement-prospectus, which sets forth certain assumptions made, matters
considered and limits on the review undertaken, is attached as Appendix B to
this joint proxy statement-prospectus. Commercial's shareholders are urged to
read the Hoefer & Arnett opinion in its entirety.
Hoefer & Arnett is a full service investment bank serving community banks.
The firm is a member of the National Association of Securities Dealers ("NASD")
with direct access to inter-dealer markets in NASD Automated Quotation
("Nasdaq") and Over-the-Counter securities, and makes markets in securities
under its symbol HOFR. As part of its investment banking activities, Hoefer &
Arnett is regularly engaged in the independent valuation of financial
institutions and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
No limitations were imposed by Commercial's board of directors upon Hoefer &
Arnett with respect to the investigations made or procedures followed in
rendering its opinion. Hoefer & Arnett was not requested to and did not make
any recommendation to Commercial's board of directors as to the form or amount
of the consideration to be paid to Commercial, which was determined through
arm's length negotiations between the
33
parties. Hoefer & Arnett's opinion is based on the financial analysis described
below and is for the use and benefit of Commercial's board of directors in
connection with its consideration of the merger. Hoefer & Arnett's opinion is
not intended to be and does not constitute a recommendation to any Commercial
shareholder as to how such shareholder should vote with respect to the merger.
Hoefer & Arnett's opinion does not address Commercial's underlying business
decision to proceed with the proposed transaction.
In arriving at its opinion, Hoefer & Arnett reviewed and analyzed, among
other things, the following:
. the merger agreement;
. audited financial statements for Commercial as of December 31, 1998 and
December 31, 1999, quarterly reports filed with the Federal Reserve on
Form FR Y-9C for the periods ended September 30, 2000, June 30, 2000,
March 31, 2000 and December 31, 1999, and internal financial statements
for the nine months ended September 30, 2000;
. financial statements for Prosperity included in its Annual Reports on
Form 10-K for the years ended December 31, 1999 and 1998, Quarterly
Reports on Form 10-Q for the quarters ended September 30, 2000, June 30,
2000, March 31, 2000 and internal financial statements for the nine
months ended September 30, 2000;
. financial analyses and forecasts for Commercial and Prosperity prepared
by their respective managements;
. the information obtained from discussions Hoefer & Arnett held with
senior management of Commercial and Prosperity concerning their past and
current operations, financial condition and prospects, as well as the
results of regulatory examinations;
. publicly available information concerning other banks and holding
companies whose securities are traded in public markets;
. the historical stock prices and trading volumes of the common stock of
Prosperity;
. the nature and financial terms of certain other merger transactions
involving banks and bank holding companies; and
. the information obtained from other financial studies, analyses and
investigations that Hoefer & Arnett deemed appropriate to conduct for
purposes of its opinion.
In conducting its review and in arriving at its opinion, Hoefer & Arnett
relied upon and assumed the accuracy and completeness of the financial and
other information provided to it or publicly available, and did not attempt to
independently verify the same. Hoefer & Arnett relied upon the management of
Commercial and Prosperity as to the reasonableness of the financial and
operating forecasts and projections (and the assumptions and bases therefor)
provided to it, and Hoefer & Arnett assumed that such forecasts and projections
reflect the best currently available estimates and judgments of Commercial and
Prosperity management. Hoefer & Arnett also assumed, without independent
verification, that the aggregate allowances for credit losses set forth in the
financial statements of Commercial and Prosperity are adequate to cover such
losses. Hoefer & Arnett did not make or obtain any evaluations or appraisals of
the properties of Commercial or Prosperity, nor did it examine any individual
loan credit files. For purposes of its opinion, Hoefer & Arnett assumed that
the reorganization will have the tax, accounting and legal effects described in
the merger agreement and relied, as to legal matters, exclusively on counsel to
Commercial and Prosperity as to the accuracy of the disclosures set forth in
the merger agreement. Hoefer & Arnett's opinion as expressed herein is limited
to the fairness, from a financial point of view, to all of the holders of the
common shares of Commercial with respect to the terms of the proposed merger of
Commercial with and into Prosperity.
As a matter of policy, Commercial and Prosperity do not publicly disclose
internal management forecasts, projections or estimates of the type furnished
to Hoefer & Arnett in connection with its analysis of the financial terms of
the merger, and such forecasts and estimates were not prepared with a view
towards public disclosure.
34
These forecasts and estimates were based on numerous variables and assumptions
which are inherently uncertain and which may not be within the control of the
management of either Commercial or Prosperity, including without limitation,
factors related to the integration of Commercial and Prosperity and general
economic, regulatory and competitive conditions. Accordingly, actual results
could vary materially from those set forth in such forecasts and estimates.
As more fully discussed below, Hoefer & Arnett considered such financial and
other factors as Hoefer & Arnett deemed appropriate under the circumstances,
including among others, the following:
. the historical and current financial position and results of operations
of Commercial and Prosperity, including interest income, interest
expense, net interest income, net interest margin, provision for credit
losses, noninterest income, noninterest expense, earnings, dividends,
internal capital generation, book value, intangible assets, return on
assets, return on shareholders' equity, capitalization, the amount and
type of nonperforming assets, credit losses and the reserve for credit
losses, all as set forth in the financial statements for Commercial and
Prosperity;
. the assets and liabilities of Commercial and Prosperity, including the
loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and
. Hoefer & Arnett's assessment of general economic, market and financial
conditions and its experience in other transactions, as well as its
experience in securities valuation and its knowledge of the banking
industry generally.
Hoefer & Arnett's opinion is necessarily based upon conditions as they
existed and can be evaluated on the date of its opinion and the information
made available to it through that date.
In connection with rendering its opinion to Commercial's board of directors,
Hoefer & Arnett performed a variety financial analyses that are summarized
below. Hoefer & Arnett believes that its analyses must be considered as a whole
and that selecting portions of such analyses and the factors considered
therein, without considering all factors and analyses, could create an
incomplete view of the analyses and the processes underlying its opinion. The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis or summary
description. In its analyses, Hoefer & Arnett made numerous assumptions with
respect to industry performance, business and economic conditions, and other
matters, many of which are beyond the control of Commercial or Prosperity. Any
estimates contained in Hoefer & Arnett's analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates. Estimates of values of companies do not purport
to be appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold. Except as described below, none of the
financial analyses performed by Hoefer & Arnett was assigned a greater
significance by Hoefer & Arnett than any other.
The following is a summary of the financial analyses performed by Hoefer &
Arnett in connection with providing its opinion:
Summary of Proposal. Hoefer & Arnett reviewed the terms of the proposed
transaction as described in the merger agreement. Based on an exchange ratio of
155 to one, 18,067 common shares outstanding at Commercial and a market price
of $18.125 per share for Prosperity common stock (based on the closing price on
December 7, 2000), Prosperity would issue 2,800,385 shares for a total purchase
price of $50.8 million or $2,809.37 per share. A purchase price of $2,809.37
per share represents a price to stated book value at September 30, 2000 of
1.88, price to estimated 2000 earnings of 18.81 and a price to total assets of
11.85%.
Analysis of Bank Merger Transactions. Hoefer & Arnett reviewed certain
information relating to selected bank mergers announced between January 1, 2000
and November 30, 2000 in which the acquired banking organization was located in
the state of Texas (the "Guideline Transactions"). This data was obtained from
SNL Securities, LC.
35
On the basis of the pricing multiples for the Guideline Transactions, Hoefer
& Arnett calculated a range of purchase prices as a multiple of stated book
value, earnings and assets. The chart below shows the low, high and median for
the Guideline Transactions and the resulting price range for Commercial.
Pricing Multiples
for Guideline Per Share Value for
Transactions Commercial
------------------- -----------------------------
Low High Median Low High Median
---- ----- ------ --------- --------- ---------
Price/Book Value.............. 1.44x 3.67x 2.65x $1,249.60 $5,478.50 $3,955.87
Price/Earnings................ 8.25x 47.26x 18.02x $1,231.97 $7,057.34 $2,690.93
Price/Assets.................. 8.31% 31.42% 18.11% $1,970.33 $7,449.79 $4,293.95
Based on the median multiples, this analysis resulted in a range of imputed
values for Commercial's common stock of between $2,690.93 and $4,293.95.
Additionally, Hoefer & Arnett reviewed pricing information on previous
acquisitions announced by Prosperity, based on data obtained from SNL
Securities, LC. For the two transactions reviewed, the median price to book
value multiple equaled 1.54, the median price to earnings multiple equaled
15.35 and the median price as a percentage of total assets equaled 19.35%.
Based on the median multiples, this analysis resulted in a range of imputed
values for Commercial's common stock of between $2,292.22 and $4,587.95.
Present Value Analysis. Hoefer & Arnett calculated the present value of
theoretical future earnings of Commercial and compared the transaction value of
$2,809.37 per share to the calculated present value of one share of
Commercial's common stock on a stand-alone basis. Based on projected earnings
for Commercial for 2001 through 2005, a discount rate of 14%, and including a
residual value, the stand-alone present value of Commercial's common stock
equaled $2,470.30 per share.
Contribution Analysis. Hoefer & Arnett reviewed the relative contributions
in terms of various balance sheet items, net income and market capitalization
to be made by Commercial and Prosperity to the combined institution based on
(i) balance sheet at September 30, 2000, and (ii) estimated 2000 earnings. The
income statement and balance sheet components analyzed included total assets,
total loans (net), total deposits, shareholders' equity and net income. This
analysis showed that, while Commercial shareholders would own approximately 35%
of the aggregate outstanding shares of the combined institution based on the
exchange ratio, Commercial was contributing 38% of total assets, 39% of total
loans, 38% of total deposits, 36% of shareholders' equity, and 26% of estimated
2000 earnings.
Pro Forma Analysis. Hoefer & Arnett compared the changes in the amount of
earnings, book value and dividends attributable to one share of Commercial
common stock before the proposed merger with the amounts attributable to the
shares of Prosperity common stock for which such shares of Commercial would be
exchanged under the terms of the merger agreement.
Hoefer & Arnett's analysis utilized an exchange ratio of 155 to 1, a market
price of $18.125 per share for Prosperity (based upon the closing share price
on December 7, 2000) and included pre-tax merger savings of $1.5 million in
2001 and $1.8 million annually thereafter. On an earnings per share basis,
Commercial shareholders are projected to experience appreciation ranging from
17.25% to 31.85% in the years 2001 through 2005. On a book value per share
basis, Commercial shareholders are projected to experience dilution of 0.52% in
2001 and appreciation ranging from 2.51% to 6.66% in subsequent years. Finally,
on a dividend per share basis, Commercial shareholders are projected to
experience appreciation ranging from 16.25% to 64.20%.
Stock Trading History. Hoefer & Arnett reviewed and analyzed the historical
trading prices and volumes for Prosperity common stock for the previous twelve
months. Prosperity common stock price has ranged from a low of $12.875 to a
high of $19.50. A current market price of $18.125 results in a price to book
value of 1.97 and a price to trailing 12 months earnings multiple of 12.41. The
average volume of shares traded on a daily basis is 13,818.
36
Other Analysis. Hoefer & Arnett also reviewed selected investment research
reports on and earnings estimates for Prosperity. In addition, Hoefer & Arnett
prepared an overview of historical financial performance of both Commercial and
Prosperity.
The opinion expressed by Hoefer & Arnett was based upon market, economic and
other relevant considerations as they existed and have been evaluated as of the
date of the opinion. Events occurring after the date of issuance of the
opinion, including but not limited to, changes affecting the securities
markets, the results of operations or material changes in the assets or
liabilities of Commercial or Prosperity could materially affect the assumptions
used in preparing the opinion.
Financial Advisory Fees. Commercial engaged Hoefer & Arnett to review the
terms of the transaction and to render a fairness opinion in connection with
the proposed merger of Commercial with and into Prosperity for $20,000,
including out-of-pocket expenses.
Opinion of Prosperity's Financial Advisor
The fairness opinion of Prosperity's financial advisor, First Capital Group
L.L.C. is described below. The description contains projections, estimates
and/or other forward-looking statements about the future earnings or other
measures of the future performance of Prosperity and Commercial. You should not
rely on any of these statements as having been made or adopted by Prosperity or
Commercial.
Prosperity retained First Capital Group to act as its financial advisor in
connection with the merger and related matters. On November 3, 2000, First
Capital rendered its verbal opinion to the Prosperity board of directors to the
effect that, based upon and subject to certain considerations, the exchange
ratio set forth in the proposed merger agreement was fair from a financial
point of view to Prosperity. On December 4, 2000, First Capital rendered its
written opinion to the Prosperity board of directors, to the effect that, based
upon and subject to the considerations set forth in the opinion, First
Capital's experience, its analysis described below and other factors it deemed
relevant, as of December 4, 2000, the exchange ratio set forth in the merger
agreement was fair from a financial point of view to Prosperity.
The full text of the opinion, which sets forth, among other things, the
assumptions made, general procedures followed, matters considered and
limitations on the review undertaken, is attached as Appendix C to this joint
proxy statement-prospectus. The summary of the opinion set forth below is
qualified in its entirety by reference to the full text of the opinion. The
opinion is addressed to Prosperity's board of directors, and does not
constitute a recommendation to any Prosperity shareholder as to how that
shareholder should vote at the Prosperity special meeting of shareholders.
Prosperity's shareholders are urged to read the opinion carefully and in its
entirety.
In connection with rendering its opinion, First Capital, among other things:
. analyzed certain internal financial statements and other financial and
operating data concerning Commercial prepared by the management of
Commercial and certain internal financial statements and other financial
and operating data concerning Prosperity prepared by the management of
Prosperity;
. analyzed certain publicly available financial statements, both audited
and unaudited, and other information of Commercial and Prosperity,
including Prosperity's Annual Reports for the three years ended December
31, 1999, Prosperity's Quarterly Reports for the periods ended September
30, 2000, June 30, 2000 and March 31, 2000, Commercial's year-end
financial statements for the three years ended December 31, 1999, and
Commercial's financial statements for the quarters ended September 30,
2000, June 30, 2000 and March 31, 2000;
. analyzed certain pre-merger financial projections of Prosperity prepared
by the management of Prosperity and certain pre-merger financial
projections of Commercial prepared by the management of Commercial;
37
. discussed the past and current operations and financial condition and
prospects of Prosperity with senior executives of Prosperity and the past
and current operations and financial condition and prospects of
Commercial with senior executives of Commercial;
. examined financial forecasts and other information and data for
Prosperity and Commercial which were provided to, or otherwise discussed
with, First Capital by Prosperity's management and Commercial's
management, including information relating to strategic implications and
operational benefits anticipated to result from the merger and an
evaluation of the pro forma financial impact of the merger on Prosperity;
. evaluated the pre-merger and post-merger market shares of Prosperity and
Commercial within their respective market areas;
. reviewed and compared the financial performance of Commercial with that
of certain other comparable banks and bank holding companies;
. reviewed and compared the financial performance of Prosperity and
reported stock prices and trading activity of Prosperity common stock
with that of certain stock market indices and certain other comparable
publicly traded companies and their securities;
. reviewed and compared certain security analysis reports of Prosperity
common stock prepared by various investment banking firms;
. reviewed the financial terms, to the extent publicly available, of
certain comparable precedent transactions or other similar transactions
that First Capital considered relevant in evaluating the exchange ratio;
. reviewed the merger agreement; and
. performed such other analyses and examinations and considered such other
information and financial, economic and market data as it deemed
appropriate.
In rendering its opinion, First Capital relied upon and assumed, without
independent verification, the accuracy and completeness of all of the foregoing
information provided to it or made publicly available or otherwise reviewed,
and First Capital has not assumed any responsibility for independent
verification of such information. First Capital further relied on the
assurances of Prosperity's management and Commercial's management that they
were not aware of any facts that would make any of that information inaccurate
or misleading.
With respect to financial forecasts and projections and other information
and data provided to or otherwise reviewed by or discussed with it, including
forecasts of cost savings and operating synergies forecasted by Prosperity's
management to result from the merger, First Capital was advised by Prosperity's
management and Commercial's management, and therefore assumed, that the
forecasts and other information and data had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of Prosperity's
management and Commercial's management as to the future financial performance
of Prosperity and Commercial, respectively, and the strategic implications and
operational benefits anticipated to result from the merger. First Capital
expressed no view with respect to the forecasts and other information and data
or the assumptions on which they were based.
First Capital assumed, with the consent of the Prosperity board of
directors, that the merger will be treated as a tax-free reorganization for
federal income tax purposes and that it qualifies, and will be accounted for,
as a pooling of interests in accordance with generally accepted accounting
principles ("GAAP").
First Capital has not conducted or made or been provided with any
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise or business prospects of Prosperity or Commercial, nor has First
Capital been furnished with any such appraisal, made any physical inspection of
the properties or assets of
38
Prosperity or Commercial. First Capital is not an expert in the evaluation of
loan or lease portfolios for purposes of assessing the adequacy of the
allowances for losses with respect to the loan or lease portfolios and First
Capital has neither made an independent evaluation of the adequacy of these
allowances of Prosperity or Commercial nor reviewed any individual credit or
lease files. As a result, First Capital has assumed that the aggregate
allowances for these losses for each of Prosperity and Commercial are in the
aggregate adequate to cover such losses. First Capital assumed that the merger
would be completed in a timely fashion and in accordance with the terms of the
merger agreement, without waiver of any of the conditions to the merger
contained in the merger agreement.
In connection with rendering its opinion, First Capital performed a variety
of financial analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. Moreover, the evaluation of the fairness, from a
financial point of view, of the exchange ratio to Prosperity was to some extent
a subjective one based on the experience and judgment of First Capital and not
merely the result of mathematical analysis of financial data. Accordingly,
notwithstanding the separate factors summarized below, First Capital believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and of the factors considered by it, without considering all
analyses and factors, could create an incomplete view of the evaluation process
underlying its opinion.
The ranges of valuations resulting from any particular analysis described
below should not be taken to be First Capital's view of the actual value of
Prosperity or Commercial. In performing its analyses, First Capital made
numerous assumptions with respect to industry performance, business and
economic conditions and other matters, many of which are beyond the control of
Prosperity or Commercial. The analyses performed by First Capital are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold. In addition, First Capital's analyses should
not be viewed as determinative of the opinion of the Commercial board of
directors or Commercial's management with respect to the value of Commercial or
the opinion of the Prosperity board of directors or Prosperity's management
with respect to the value of Prosperity.
First Capital's opinion relates to the relative values of Prosperity and
Commercial. First Capital did not express any opinion as to what the value of
Prosperity common stock actually will be when issued pursuant to the merger or
the price at which Prosperity common stock will trade subsequent to the
announcement or consummation of the merger. First Capital was not asked to
consider, and First Capital's opinion does not address, the relative merits of
the merger as compared with any alternative business strategies that might
exist for Prosperity or the effect of any other transaction in which Prosperity
might engage.
First Capital's opinion is necessarily based on financial, economic, stock
market and other conditions and circumstances existing on, and disclosed and
made available to First Capital as of, the date of the opinion. Although
subsequent developments could affect First Capital's opinion, First Capital
does not have any obligation to update or revise its opinion.
First Capital's advisory services and its opinion were provided for the
information of the Prosperity board of directors in its evaluation of the
proposed merger, and First Capital's opinion is not intended to be and does not
constitute a recommendation to any Prosperity shareholder as to how that
shareholder should vote on any matters relating to the proposed merger.
With respect to the material analyses performed by First Capital in
evaluating the fairness to Prosperity from a financial point of view of the
exchange ratio in the merger, the following is a summary of the analyses
performed by First Capital in connection with its opinion. The summary includes
information presented in tabular format. In order to understand fully the
financial analyses used by First Capital, these tables must be read together
with the text of each summary. The tables alone do not constitute a complete
description of the
39
financial analyses. The following quantitative information, to the extent it is
based on market data, is, except as otherwise indicated, based on market data
as it existed at or prior to December 4, 2000, and is not necessarily
indicative of current or future market conditions.
Calculation of Implied Value of Exchange Ratio. First Capital noted that the
exchange ratio of 155 shares of Prosperity common stock for each share of
Commercial common stock had an implied value of $2,935.31 per share of
Commercial common stock based upon the closing price ($18.94) of Prosperity
common stock on November 7, 2000, the trading day prior to the date of the
merger agreement and date of the announcement, with the aggregate implied value
of the consideration being $53.2 million.
Transaction Pricing Multiples. Based on the exchange ratio of 155 and the
closing price of Prosperity common stock on November 7, 2000 of $18.94, First
Capital analyzed the implied per share transaction value of $2,935.31 as a
multiple of Commercial's fully diluted book value per share, fully diluted
tangible book value per share, trailing last 12 months earnings per share,
earnings per share for 1999 and estimated earnings per share for the years 2000
and 2001. First Capital also analyzed the percentage premium to deposits and
price to assets and deposits. Using June 30, 2000 and September 30, 2000, for
comparison to comparable selected transaction data presented below, these
analyses indicated the following:
Commercial Transaction Commercial Transaction
Reference Valuation Reference Valuation
June 30, June 30, September 30, September 30,
2000 2000 2000 2000
---------- ----------- ------------- -------------
(Dollars in millions, except per share amounts)
Price/Fully Diluted Book
Value per share........... $1,457 2.01x $1,487 1.97x
Price/Fully Diluted
Tangible Book Value per
share..................... $1,427 2.06x $1,458 2.01x
Price/LTM Earnings per
share..................... $ 153 19.2x $ 154 19.0x
Price/1999 Earnings per
share..................... $ 185 15.9x $ 185 15.9x
Price/2000E Earnings per
share..................... $ 155 18.9x $ 155 18.9x
Price/2001E Earnings per
share..................... $ 198 14.8x $ 198 14.8x
Premium to Deposits........ $ 356.4 7.7% $ 385.4 7.0%
Price to Deposits.......... $ 365.4 14.9% $ 285.4 13.8%
Price to Assets............ $ 401.3 13.3% $ 428.4 12.4%
Analysis of Selected Transactions. First Capital performed an analysis of
premiums paid in selected pending or recently completed acquisitions of banking
organizations in Arkansas, Louisiana, New Mexico, Oklahoma and Texas (the
"Southwest Region") with comparable characteristics to the merger. The
comparable transactions were comprised to reflect transactions where the seller
possessed similar asset size and regional location and were based on common
stock as the form of consideration and to be accounted for using the pooling of
interests method of accounting. The comparable transactions specifically
consisted of 24 mergers and acquisitions of banking organizations in the
Southwest Region from January 1, 1997 to December 4, 2000, with sellers' total
assets ranging from $200 million to $600 million. In conducting this analysis,
First Capital noted that the sellers' average and median equity to asset ratios
as of the respective announcement dates were 8.89% and 8.61%, respectively,
compared with 6.59% at June 30, 2000 and 6.30% at September 30, 2000 for
Commercial. Based on the closing stock price of Prosperity common stock on
November 7, 2000, and Commercial's financial data as of June 30, 2000 and
September 30, 2000, the analysis yielded ratios of the transactions' purchase
prices as a multiple of:
. equity ranging from 1.00 times to 3.75 times with an average of 2.48
times and a median of 2.54 times (compared with Prosperity's proposed
transaction with Commercial of 2.01 times June 30, 2000 book value and
1.97 times September 30, 2000 book value);
. tangible equity ranging from 1.03 times to 3.75 times with an average of
2.72 times and a median of 2.72 times (compared with Prosperity's
proposed transaction with Commercial of 2.06 times June 30, 2000 tangible
book value and 2.01 times September 30, 2000 tangible book value); and
40
. trailing last 12 months earnings ranging from 6.49 times to 24.99 times
with an average of 17.22 times and a median of 17.85 times (compared with
Prosperity's proposed transaction with Commercial of 19.2 times trailing
12 month June 30, 2000 net income and 19.0 times trailing 12 month
September 30, 2000 net income).
First Capital's analysis also yielded ratios of the transactions' purchase
prices:
. less tangible equity, as a percentage of core deposits of the seller
("core deposit premium") of .37% to 35.10% with an average of 18.84% and
a median of 19.03% (compared with Prosperity's proposed transaction with
Commercial of 8.73% at June 30, 2000 and 7.00% at September 30, 2000);
. as a percentage of deposits of the seller of 10.37% to 38.14% with an
average of 24.76% and a median of 25.44% (compared with Prosperity's
proposed transaction with Commercial of 14.94% at June 30, 2000 and
13.81% at September 30, 2000); and
. as a percentage of total assets of the seller of 9.29% to 32.63% with an
average of 21.74% and a median of 22.30% (compared with Prosperity's
proposed transaction with Commercial of 13.27% at June 30, 2000 and
12.43% at September 30, 2000).
Discounted Cash Flow Analysis. Using discounted cash flow analysis, First
Capital estimated the present value of the future stream of after-tax cash flow
that Commercial could produce through the year 2005, under various
circumstances, assuming that Commercial performed in accordance with the growth
rates and earnings/return projections of Commercial's management including
synergies and merger related expenses. First Capital utilized two separate
terminal values for Commercial at the end of the period by applying multiples
of earnings ranging from 10 times to 14 times and multiples of book ranging
from 1.75 times to 2.25 times. First Capital then discounted the cash flow
streams, dividends paid to the shareholders (assuming any earnings in excess of
that required to maintain the current tangible equity to tangible asset ratio
are paid out in dividends) and terminal values using discount rates ranging
from 10.0% to 14.0% chosen to reflect different assumptions regarding the
required rates of return for Commercial and the inherent risk surrounding the
underlying projections. Earnings were adjusted to reflect the after-tax cost
savings, the after-tax merger related expenses and after-tax revenue
enhancements, based on Prosperity's management assumptions of synergies. This
discounted cash flow analysis indicated a range of $2,534.10 per share to
$3,941.92 per share utilizing multiples of earnings as residual values and
$2,834.46 per share to $4,130.02 per share utilizing multiples of book value.
This compares favorably to the consideration to be paid by Prosperity to
Commercial shareholders of: (1) $2,935.31 per share of Commercial common stock,
based on a closing price of $18.94 per share of Prosperity common stock on the
date prior to announcement, November 7, 2000; and (2) $2,790 per share of
Commercial common stock, based on a closing price of $18.00 per share of
Prosperity common stock on December 4, 2000.
Comparable Company Analysis--Prosperity. First Capital compared selected
balance sheet data, asset quality, capitalization and profitability ratios and
market statistics using financial data at or for the nine months ended
September 30, 2000 annualized, and market data as of December 4, 2000, for
Prosperity to a group of selected bank holding companies which First Capital
deemed to be relevant, including National Bancshares Corporation of Texas,
Summit Bancshares, Inc., Bank of Granite Corporation, FVNB Corp., MetroCorp
Bancshares, Inc., LSB Bancshares, Inc., ABC Bancorp and Southside Bancshares,
Inc., all being bank holding companies with assets between approximately $500
million and $1 billion (collectively, the "Comparable Composite"). This
comparison, among other things, showed that:
. at September 30, 2000, Prosperity's equity to asset ratio was 6.97%,
compared with an average of 9.56% and a median of 9.18% for the
Comparable Composite;
. for the nine-month period ended September 30, 2000, Prosperity's return
on average assets was 1.33%, compared with an average of 1.26% and a
median of 1.21% for the Comparable Composite;
41
. for the nine-month period ended September 30, 2000, Prosperity's return
on average equity was 17.79%, compared with an average of 13.79% and a
median of 12.79% for the Comparable Composite;
. at September 30, 2000, Prosperity's nonperforming loans to gross loans
ratio was 0%, compared with an average of 0.64% and a median of 0.65% for
the Comparable Composite;
. at December 4, 2000, Prosperity's price per share to book value per share
was 1.95 times, compared with an average of 1.36 times and median of 1.20
times for the Comparable Composite;
. at December 4, 2000, Prosperity's price per share to earnings per share
was 12.30 times, compared with an average of 11.39 times and median of
12.10 times for the Comparable Composite; and
. at December 4, 2000 Prosperity's dividend yield was 2.00%, compared with
an average of 3.14% and a median of 3.08% for the Comparable Composite.
First Capital also compared selected stock market results of Prosperity to
the publicly available corresponding data of other composites which First
Capital deemed to be relevant, including Philadelphia KBW Bank Index, Nasdaq
Bank Index of publicly traded banks, the S&P Bank Index and the S&P Regional
Bank Index. Results from indexing the S&P Bank Index, S&P Regional Bank Index,
Philadelphia KBW Bank Index, the Nasdaq Bank Index of publicly traded banks and
Prosperity's stock from January 1, 1999 to December 4, 2000 revealed favorable
trends for Prosperity's common stock performance to that of the other bank
indices. No company or transaction used in the comparable company and
comparable transaction analyses is identical to Prosperity or Commercial or the
merger. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of Prosperity and Commercial and other
factors that could affect the public trading value and performances of the
companies with which they are being compared. Mathematical analysis (such as
determining the average or median) is not in itself a meaningful method of
using comparable transaction data or comparable company data.
Comparative Operating Ratios--Commercial. First Capital reviewed comparative
performance ratios, earnings and revenue growth and capital ratios and credit
statistics ratios for the years 1997 through June 2000 for Prosperity,
Commercial and the combined company. Diluted earnings per share growth rates
and revenue per share growth rates were reviewed for the years 1997 through
June 2000 for Prosperity, Commercial and the combined company. In addition,
First Capital compared the operating results of Commercial at June 30, 2000 to
those of its peer group comprised of 43 banks and bank holding companies
between $300 million and $500 million in assets, located in the Southwest
Region. First Capital found that Commercial compared to its selected Peer Group
as follows:
Peer Group
-------------
Commercial Mean Median
---------- ----- ------
Ratio of total equity to total assets................ 6.31% 8.91% 7.99
Ratio of loans to deposits........................... 42.50 69.44 70.67
Ratio of allowance for credit losses to nonperforming
loans............................................... 115 421 228.72
Ratio of nonperforming loans to total loans.......... 1.30 0.66 0.51
Ratio of nonperforming assets plus other real estate
to total assets..................................... 0.63 0.44 0.38
Return on assets..................................... 0.62 1.17 1.22
Return on equity..................................... 10.01 14.31 12.98
Efficiency ratio..................................... 71.71 61.86 63.21
Pro Forma Merger Analysis. First Capital reviewed selected balance sheet
information and income statement information for each of Prosperity, Commercial
and the combined company and performance ratios and capital and credit quality
levels for Prosperity and Commercial as of and for the period ended
September 30, 2000. First Capital also reviewed the noninterest income and
noninterest expense contributions of each of Prosperity, Commercial and the
combined company for the period ended September 30, 2000, and the loan and
deposit portfolios of each of Prosperity, Commercial and the combined company
as of
42
September 30, 2000. Where appropriate for certain analysis, First Capital
annualized or compared such numbers pursuant to the projections and forecasts
provided by Prosperity and Commercial for December 31, 2000 (See "--Forecasted
Pro Forma Financial Analysis" below).
Pro Forma Market Share Analysis. First Capital reviewed the respective
market shares, in terms of deposits, of Prosperity and Commercial for markets
in Texas. First Capital analyzed the combined company's competitive position in
the above markets which are served by Prosperity and Commercial and concluded
that the combined company would have a significantly enhanced market share in
Harris County, Texas and the contiguous markets served. First Capital also
analyzed the branch locations of each of Prosperity and Commercial.
Forecasted Pro Forma Financial Analysis. First Capital analyzed, at and for
the years ending December 31, 2000, 2001 and 2002, the pro forma financial
impact of the merger on both Prosperity's and Commercial's diluted earnings per
share on both a GAAP basis and a cash basis, on the fully diluted book value
per share and the fully diluted tangible book value per share, excluding
Prosperity's management's estimate for after tax merger-related costs in 2000
and 2001. For purposes of these analyses, First Capital assumed that the merger
would close in the first quarter of 2001 and utilized management provided
earnings per share estimates for Prosperity and Commercial for 2000, 2001 and
2002. First Capital performed this analysis using Prosperity's management's
assumptions with respect to after tax cost savings and revenue enhancements.
First Capital's analysis of the merger showed that the merger, compared with
the continued operation of Prosperity and Commercial on a stand alone basis,
would be:
. neutral to slightly dilutive to Prosperity's GAAP estimated earnings per
share in 2001 and accretive to Prosperity's GAAP estimated earnings per
share by 2002;
. neutral to slightly dilutive to Prosperity's estimated cash earnings per
share in 2001 and accretive to Prosperity's estimated cash earnings per
share in 2002;
. accretive to Prosperity's book value per share in 2001and 2002,
respectively; and
. accretive to Prosperity's tangible book value per share in 2001 and 2002,
respectively.
Contribution Analysis. First Capital analyzed the relative contribution to
selected pro forma financial measures that Commercial and Prosperity would each
be making to the combined company and compared this to the pro forma ownership
of the outstanding common stock of the combined company of Commercial
shareholders and Prosperity shareholders. First Capital based its analyses on
financial data at and for the period ended September 30, 2000. Full credit for
synergies was attributed to Commercial for Prosperity projections.
The following table compares the pro forma ownership of Prosperity and
Commercial shareholders in the combined company based upon the information
referenced in the preceding paragraph:
Pro Forma Pro Forma
Ownership of Ownership of
Prosperity Commercial
Shareholders in Shareholders in
the the
Combined Company Combined Company
---------------- ----------------
Implied Pro Forma Ownership................. 65.84% 34.16%
Income Statement for the Period ended
September 30, 2000, adjusted
Net income with synergies................. 67.68% 32.32%
Balance Sheet as of September 30, 2000:
Total assets.............................. 61.80 38.20
Total loans............................... 60.99 39.01
Total deposits............................ 61.98 38.02
Total liabilities......................... 61.63 38.37
Total liabilities and shareholders'
equity................................... 61.80 38.20
Total equity.............................. 64.17 35.83
43
The preceding discussion is a summary of the material financial analyses
conducted by First Capital, but it does not purport to be a complete
description of the analyses performed by First Capital. The preparation of
financial analyses and fairness opinions is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis or
summary description. First Capital made no attempt to assign specific weights
to particular analyses or factors considered, but rather made qualitative
judgments as to the significance and relevance of all the analyses and factors
considered and determined to give its fairness opinion as described above.
Accordingly, First Capital believes that its analyses, and the summary set
forth above, must be considered as a whole, and that selecting portions of the
analyses and of the factors considered by First Capital, without considering
all of the analyses and factors, could create a misleading or incomplete view
of the processes underlying the analyses conducted by First Capital and its
opinion.
With regard to the peer group public trading levels, peer group performance
levels or the precedent transaction analyses summarized above, First Capital
selected peer groups and transactions on the basis of various factors,
including the size and location of the company; however, no company utilized as
a comparison in these analyses, and no transaction utilized as a comparison in
the precedent transaction analysis summarized above, is identical to
Prosperity, Commercial or the merger. As a result, these analyses are not
purely mathematical, but also take into account differences in financial and
operating characteristics of the peer group companies and other factors that
could affect the transaction or public trading value or performance of the peer
group and transactions with which Prosperity and Commercial and the merger are
being compared. In its analyses, First Capital made numerous assumptions with
respect to Prosperity, Commercial, industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Prosperity and Commercial. Any estimates contained in
First Capital's analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by these analyses. Estimates of values of
companies do not purport to be appraisals or necessarily to reflect the prices
at which companies may actually be sold. Because these estimates are inherently
subject to uncertainty, none of Prosperity, Commercial, Prosperity's board of
directors, Commercial's board of directors, First Capital or any other person
assumes responsibility if future results or actual values differ materially
from the estimates.
First Capital's analyses were prepared solely as part of First Capital's
analysis of the fairness of the exchange ratio in the merger and were provided
to Prosperity's board of directors in that connection. The opinion of First
Capital was only one of the many factors taken into consideration by
Prosperity's board of directors in making its determination to approve the
merger agreement and the merger. See "Description of the Transaction--
Recommendation of Prosperity's Board and Prosperity's Reasons for the Merger."
First Capital is regularly engaged, among other things, in the evaluation of
banking businesses and their securities in connection with mergers and
acquisitions, corporate, strategic planning and other purposes. Prosperity
selected First Capital to act as its financial advisor on the basis of First
Capital's knowledge of Prosperity, Commercial, the banking industry and the
banking market. First Capital has previously rendered advisory services to
Prosperity unrelated to the merger, for which First Capital has received
customary compensation. First Capital has also previously rendered advisory
services to Commercial unrelated to the merger and has received customary
compensation. Prosperity and Commercial were aware of First Capital's
engagement and have waived any conflict or other claim that may arise from that
engagement.
In its engagement letter with First Capital, Prosperity agreed to pay First
Capital customary fees for its services rendered in connection with the merger,
including the delivery of its opinion. A significant portion of First Capital's
fees is contingent on completion of the merger. Prosperity has also agreed to
reimburse First Capital for its reasonable travel and other out-of-pocket
expenses incurred in connection with its engagement, including the reasonable
fees and disbursements of its counsel, and to indemnify First Capital against
specific liabilities and expenses relating to or arising out of its engagement,
including liabilities under the federal securities laws.
44
Exchange of Commercial Stock Certificates
Within five days after the effective time of the merger, Prosperity's
transfer and exchange agent, Computershare Investor Services, will mail to each
Commercial shareholder a form letter of transmittal, together with instructions
for the exchange of such holder's Commercial stock certificates for a
certificate representing the shares of Prosperity common stock to which he or
she is entitled.
As a Commercial shareholder you should not send in your certificates until
you receive a letter of transmittal form and instructions.
After surrendering to the exchange agent one or more certificates for
Commercial common stock, together with a properly completed letter of
transmittal, the exchange agent will issue and mail to the holder a certificate
representing the number of whole shares of Prosperity common stock to which the
holder is entitled. The exchange agent may issue a certificate for Prosperity
common stock in a name other than the name in which the surrendered certificate
is registered only if (1) the certificate surrendered is properly endorsed and
is in proper form for transfer and (2) the person requesting the issuance of
the certificate either pays to the exchange agent any transfer or other taxes
required by the issuance of a certificate for shares in a name other than the
registered holder of the certificate surrendered or establishes to the
satisfaction of the exchange agent that the taxes have been paid or are not
due.
All Prosperity common stock issued in the merger will be deemed issued as of
the effective time of the merger. No dividends with respect to the Prosperity
common stock with a record date after the effective time will be paid to the
former shareholders of Commercial entitled to receive certificates for shares
of Prosperity common stock until such shareholders surrender their certificates
representing shares of Commercial common stock. After the certificates are
surrendered, Prosperity will pay the shareholder of record any dividends,
without any interest thereon, which become payable with respect to the shares
of Prosperity common stock represented by the certificate. If your certificate
for Commercial common stock is lost, stolen or destroyed, the exchange agent
will issue the shares of Prosperity common stock upon your submission of an
affidavit by you claiming the certificate to be lost, stolen or destroyed and
the posting of a bond in such amount as Prosperity may direct as indemnity
against any claim that may be made against Prosperity with respect to the
certificate.
Upon completion of the merger, you will cease to have any rights as a
shareholder of Commercial. Until so surrendered, each certificate will be
deemed for all corporate purposes to represent and evidence solely the right to
receive the consideration to be paid pursuant to the merger agreement. Neither
Prosperity, Commercial, the exchange agent nor any other party will be liable
to any holder of certificates for any amount paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
Effective Time of the Merger
Subject to the conditions to complete the merger, the merger will become
effective when articles of merger reflecting the merger become effective with
the Secretary of State of the State of Texas. The merger will be completed on a
date we specify after the conditions to the merger have been satisfied or
waived. Although we anticipate that the merger will become effective during the
first quarter of 2001, delays may occur.
We cannot assume that the necessary shareholder and regulatory approvals
will be obtained or that the other conditions to the merger can or will be
satisfied. Either of our boards of directors may terminate the merger agreement
if the merger is not completed by June 30, 2001, unless it is not completed
because of the willful breach of the merger agreement by the party seeking
termination.
Conduct of Business Pending Effective Time
The merger agreement requires each of us to maintain the general character
of our business and conduct our business prior to the merger only in the
ordinary course consistent with prudent banking practice.
45
Without the written consent of Prosperity, Commercial and its subsidiaries
may not, among other things:
. make any loans or other extensions of credit in excess of $2,000,000 to
any borrower, with certain exceptions;
. issue, sell or otherwise dispose of any shares of its capital stock or
securities convertible into its capital stock, except that Commercial may
issue shares of its common stock upon the exercise of Commercial stock
options prior to completion of the merger;
. open, close, acquire or sell any branch office, except for the new branch
location on Waugh Drive in Houston expected to open in the first quarter
of 2001;
. enter into, amend or terminate any material agreement, contract or
commitment, except in accordance with prudent banking practices;
. sell or otherwise dispose of any of its or its subsidiaries material
assets or properties other than in the ordinary course of business;
. declare, set aside, make or pay any dividend or other distribution with
respect to its capital stock; provided that Commercial may pay its
regular quarterly dividend in the amount of $12.00 per share and may
issue shares of its common stock upon the exercise of Commercial stock
options prior to completion of the merger;
. amend its articles of incorporation or bylaws or any of the
organizational documents of any of its subsidiaries;
. foreclose upon or otherwise acquire real property prior to the receipt
and approval of Prosperity of a Phase I environmental review of such
property;
. establish a new subsidiary;
. grant any severance or termination pay or enter into any employment or
related agreements;
. materially deviate from policies and procedures with respect to
classification of assets, allowance for credit losses or accrual of
interest on assets;
. pay overdrafts in excess of $100,000, with certain exceptions;
. make any material change in the interest rate risk profile of its
subsidiaries;
. change its deposit account interest rate pricing policies or its loan
pricing policies except in response to changes in the applicable market;
or
. initiate, solicit, encourage or otherwise facilitate an offer for an
alternative acquisition transaction involving Commercial of a nature
defined in the merger agreement; provided, however, that Commercial may
engage in discussions, negotiations or approve an alternative acquisition
proposal, if prior to doing so:
. Commercial's board of directors determines in good faith, based on
consultation with its financial advisors, that the unsolicited
proposal constitutes a more favorable transaction for Commercial's
shareholders;
. Commercial promptly notifies Prosperity that it is furnishing
information to or entering into discussions or negotiations with a
third party; and
. Commercial's board receives a confidentiality agreement from the third
party.
Without the written consent of Commercial, Prosperity and its subsidiaries
may not, among other things:
. change the classification of any loan without providing prior notice of
the change to Commercial; or
46
. amend its articles of incorporation or bylaws or any of the
organizational documents of any of its subsidiaries, except for the
proposed bylaw amendments set forth in this joint proxy statement-
prospectus.
See the merger agreement for additional restrictions on the conduct of the
business of Commercial and Prosperity pending the merger.
Conditions to Completion of the Merger
The merger agreement contains a number of terms, conditions, representations
and covenants which must be satisfied as of the closing date, including, but
not limited to, the following:
. receipt of all required regulatory approvals in a manner that does not
impose any restrictions on the operations of Prosperity or its
subsidiaries which are unacceptable to Prosperity and the expiration of
any applicable waiting periods with respect thereto; provided, however,
that any required branch divestiture shall not be deemed to be
unacceptable to Prosperity;
. the holders of two-thirds of the outstanding shares of Commercial common
stock and the holders of a majority of the outstanding shares of
Prosperity common stock adopt the merger agreement and approve the
issuance of shares of Prosperity common stock;
. the shares Prosperity common stock to be issued to Commercial
shareholders shall have been authorized for listing on the Nasdaq
National Market;
. the registration statement of which this joint proxy statement-prospectus
forms a part shall have become effective and no stop order suspending the
effectiveness of the registration statement shall be in effect and no
proceedings for that purpose shall have been initiated and continuing or
threatened by the Securities and Exchange Commission;
. absence of a suit, claim, action or proceeding challenging or seeking to
restrict or prohibit the transactions contemplated by the merger
agreement or seeking damages as a result of the transaction contemplated
by the merger agreement;
. all representations and warranties of Commercial and Prosperity must be
true in all material respects as of the date of the merger agreement and
the date the merger becomes effective;
. absence of a material adverse change in the financial condition, results
of operation or business of each of us or our respective subsidiaries;
. Commercial and Prosperity must perform or comply in all material respects
with all covenants and conditions required by the merger agreement to be
performed or complied with prior to the date the merger becomes
effective;
. the directors and executive officers of Commercial and certain of its
subsidiaries shall have delivered to Prosperity an instrument dated as of
the effective date releasing Prosperity from any and all claims of such
directors and executive officers (except as to their deposits and
accounts at Heritage Bank and any rights of indemnification pursuant to
the articles of incorporation of Commercial and its subsidiaries);
. Commercial must have delivered to the executive officers and directors of
Commercial and its subsidiaries an instrument dated the effective date
releasing such persons from any and all claims of Commercial and its
subsidiaries, except any claims related to the merger;
. Prosperity shall have entered into an employment agreement with H. E.
Timanus, Jr.;
. the holders of no more than 10% of Commercial common stock shall have
demanded or be entitled to demand payment of the fair value of their
shares as dissenting shareholders;
47
. we must each receive a letter from our respective independent
accountants, dated as of the effective date, that the merger will qualify
for pooling of interests accounting treatment;
. we must each receive an opinion from our own financial advisor to the
effect that the merger is fair to our shareholders from a financial point
of view;
. we must each receive a written opinion as to the tax-free nature of the
merger;
. we must each receive a written opinion of the other company's counsel
regarding the enforceability of the merger agreement, proper
authorization of the merger and other corporate and related matters; and
. Prosperity must receive an affiliate agreement from each Commercial
shareholder who is an affiliate of Commercial.
Any condition to the consummation of the merger, except the required
shareholder and regulatory approvals, and the absence of an order or ruling
prohibiting the merger, may be waived in writing by the party to the merger
agreement entitled to the benefit of such condition.
Additional Agreements
The merger agreement contains additional agreements made by each party, some
of which are substantially reciprocal, the most significant of which include:
. we agreed to cooperate with each other and to use our reasonable best
efforts to promptly prepare and file all necessary documentation to
obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and governmental entities necessary
or advisable to consummate the merger;
. we agreed, upon request, to provide each other all information concerning
ourselves and our subsidiaries, directors, officers and shareholders and
other matters as may be necessary or advisable in connection with this
document, or any other filing necessary in connection with the merger;
. we agreed to give each other access to all of our properties, books,
contracts, commitments and records, to provide information about our
businesses, properties and personnel and to keep that information
confidential;
. we agreed that upon completion of the merger, the surviving company will
initially be operated under the name Prosperity Bancshares, Inc. and the
surviving bank will initially be operated under the name First Prosperity
Bank; however, we also agreed to meet to review the names of each entity
and are open to operating the surviving company and the surviving bank
under the Heritage name or under a new name;
. Prosperity has agreed that for a period of six years after completion of
the merger it will indemnify and hold harmless all past and present
officers, directors and employees of Commercial and its subsidiaries for
liabilities from their acts or omissions in those capacities occurring
prior to completion of the merger to the fullest extent permitted by law;
. Prosperity agreed that for a period of three years after the merger it
will maintain the directors' and officers' liability insurance policy it
currently maintains and amend such policy to include the directors and
officers of Commercial and its subsidiaries with respect to claims
arising from acts or omissions that occurred on or before completion of
the merger; and
. employees of Commercial and its subsidiaries who continue employment with
Prosperity or any of its subsidiaries upon completion of the merger will
be entitled to participate in the employee benefit plans and programs
maintained by Prosperity and its subsidiaries. Prosperity will recognize
such employees' prior service with Commercial or its subsidiaries for all
purposes under Prosperity's employee benefit plans and programs (other
than stock option plans).
48
Interests of Certain Persons in the Merger
As a Commercial shareholder, in considering the recommendations of the
Commercial board of directors to vote for the proposal to adopt the merger
agreement, you should be aware that certain directors and officers of
Commercial may have interests in the merger that are in addition to, or
different from the interests of Commercial shareholders. The Commercial board
of directors was aware of these interests and considered them in approving the
merger agreement.
Employment agreement. Upon completion of the merger, First Prosperity Bank
will enter into an employment agreement with H. E. Timanus, Jr., who will serve
as President and Chief Operating Officer of the bank. The employment agreement
is for an initial term of three years and automatically renews each year
thereafter unless terminated in accordance with its terms. The employment
agreement provides that if Mr. Timanus is terminated without cause (including
constructive termination) or if a change in control of the bank occurs, Mr.
Timanus shall be entitled to receive from the bank a lump sum payment equal to
three years' base salary. The employment agreement does not contain non-compete
restrictions. Mr. Timanus may terminate the employment agreement upon 30 days
prior notice.
Indemnification and insurance. Prosperity has agreed, for a period of six
years after completion of the merger, to indemnify and hold harmless all past
and present officers, directors and employees of Commercial and its
subsidiaries to the fullest extent permitted by law. Prosperity has also agreed
to maintain for a period of three years after completion of the merger the
directors' and officers' liability insurance policy currently maintained by
Prosperity, and has agreed to amend its policy to include the directors and
officers of Commercial currently covered under Commercial's policy with respect
to claims arising from acts or omissions prior to completion of the merger.
Director positions. Upon completion of the merger, Prosperity's board of
directors will increase from eight to 12 members, four of whom will be current
directors of Commercial. The directors of Commercial who become directors of
Prosperity will receive the customary board fees paid to directors of
Prosperity.
Registration rights. Prosperity has granted to Ned S. Holmes, Commercial's
Chairman of the Board and the proposed Chairman of the Board of Prosperity, the
right to request that Prosperity file a continuous or "shelf" registration
statement to register the resale of the shares of Prosperity common stock over
which Mr. Holmes has voting or investment control as of the date of completion
of the merger. Prosperity is required to maintain the effectiveness of such a
registration statement for two years. This registration right is not effective
until the earlier of (1) the date Mr. Holmes no longer serves as either an
officer or director of Prosperity or (2) three years from the date of
completion of the merger.
Employee Matters
All employees of Commercial who continue employment after the effective date
shall be eligible to participate in the employee benefit plans and programs of
Prosperity and First Prosperity Bank. Prosperity will credit such employees for
their length of service with Commercial for all purposes of under each of the
employee benefit plans and programs (except stock option plans).
Amendment and Termination
Mutual Consent. The merger agreement may be terminated and the merger
abandoned at any time upon the mutual consent of Prosperity and Commercial.
By Either Party. The merger agreement may be terminated and the merger
abandoned at any time prior to the effective date by either Prosperity or
Commercial if:
. any court of competent jurisdiction or other federal or state
governmental body shall have indicated that it intends to deny or to
refuse to grant a regulatory approval required to consummate the merger;
49
. any approval of shareholders required to consummate the merger is not
obtained by reason of the failure to obtain the required vote at the
meeting; or
. the merger shall not have become effective on or before June 30, 2001 and
the party exercising its termination right is not in default under the
merger agreement.
By Commercial. The merger agreement may be terminated and the merger
abandoned at any time by Commercial if:
. Prosperity fails to comply in any material respect with any of its
covenants or agreements or any of its representations or warranties shall
be defective in any material respect, and Prosperity does not correct the
breach within 15 days following receipt of notice of the breach;
. there is a material adverse change in the assets, business or financial
condition of Prosperity and Prosperity does not remedy the change within
15 days following receipt of notice of the change;
. the average of the daily closing sales prices for Prosperity common stock
for the ten successive trading days ending on the day immediately prior
to receipt of approval of the transaction from the Federal Reserve is
less than $16.00 per share. Prosperity has the right to nullify
Commercial's termination by increasing the number of shares to be issued
in the merger so that based on the ten-day closing price average, the
aggregate value of the merger consideration is equal to $45,000,000;
. the board of directors of Commercial receives an acquisition proposal
that, based on opinions of independent legal counsel and financial
advisors, it determines to be a superior proposal and that failure to
accept such superior proposal would be a breach of the board's fiduciary
duties;
. the board of directors of Prosperity resolves to accept a superior
proposal, recommends to shareholders of Prosperity that they tender their
shares in a tender or exchange offer or withdraws or modifies its
approval of the merger; or
. Prosperity executes a definitive agreement to acquire another entity
pursuant to which Prosperity will issue shares of its common stock as
consideration and Commercial does not consent to such acquisition.
In the event Commercial desires to terminate the merger agreement as
provided in the first or second item above, Commercial must notify Prosperity
in writing of its intent to terminate stating the reason therefor. Prosperity
has 15 days from the receipt of the notice to cure the grounds for termination.
"Material" for purposes of the first item above shall be any noncompliance,
defect or combination of the two, which in the aggregate adversely affects, or
will affect when accounted for, the financial condition or results of operation
of Prosperity by $2,000,000 or more.
By Prosperity. The merger agreement may be terminated and the merger
abandoned at any time by Prosperity if:
. Commercial fails to comply in any material respect with any of its
covenants or agreements or any of its representations or warranties shall
be defective in any material respect, and Commercial does not correct the
breach within 15 days following receipt of notice of the breach;
. there is a material adverse change in the assets, business or financial
condition of Commercial and Commercial does not remedy the change within
15 days following receipt of notice of the change;
. the board of directors of Prosperity receives an acquisition proposal
which specifically excludes Commercial and that, based on opinions of
independent legal counsel and financial advisors, it determines to be
superior proposal and that failure to accept such superior proposal would
be a breach of the board's fiduciary duties;
. the board of directors of Commercial resolves to accept a superior
proposal, recommends to shareholders of Commercial that they tender their
shares in a tender or exchange offer or withdraws or modifies its
approval of the merger; or
50
. the estimated remedial or cleanup costs of environmental issues at
Commercial exceeds $1,000,000 or results in a material adverse change in
Commercial's financial condition, results of operation or business.
In the event the board of directors of Prosperity desires to terminate the
merger agreement as provided in either the first or second item above,
Prosperity must notify Commercial in writing of its intent to terminate stating
the reason therefor. Commercial has 15 days from the receipt of the notice to
cure the grounds for termination. "Material" for purposes of the first item
above shall be any noncompliance, defect or combination of the two, which in
the aggregate adversely affects, or will affect when accounted for, the
financial condition or results of operation of Commercial by $1,000,000 or
more.
Remedies. In the event of the termination of the merger agreement without
breach by any party hereto, the merger agreement will be void and have no
effect, without liability on the part of any party or the directors, officers
or shareholders of any party, except as specifically contemplated in the merger
agreement. If the merger agreement is terminated by either party for any reason
other than as contemplated in the merger agreement or because they accept or
receive a superior proposal, the terminating party must pay to the other party
a $2,500,000 break-up fee.
Expenses
Except as otherwise provided in the merger agreement, Prosperity and
Commercial will each pay their own expenses in connection with the merger.
Nasdaq Stock Market Listing
Prosperity has agreed to use its best efforts to cause the shares of
Prosperity common stock to be issued in the merger to be approved for quotation
on the Nasdaq National Market. The obligations of Commercial to complete the
merger are subject to approval for quotation of such shares on the Nasdaq
National Market.
Amendment of Prosperity's Bylaws
In connection with the merger, the board of directors of Prosperity has
agreed to amend Prosperity's bylaws in the form of the adoption of Amended and
Restated Bylaws. The proposed amendments will be made to:
. acknowledge that upon completion of the merger Prosperity will have a
Chairman of the Board who will not also serve as the Chief Executive
Officer and a separate person who will serve as President and Chief
Executive Officer. Accordingly, all references in the bylaws to President
will be amended to be references to President and Chief Executive
Officer;
. revise the powers and duties of each of the Chairman of the Board and the
President and Chief Executive Officer;
. provide that special meetings of the board of directors may be called by
the Chairman of the Board, the President and Chief Executive Officer or
upon written request of three or more members of the board; and
. provide that Prosperity will have an audit committee, nominating
committee and compensation committee, among others, and designate the
membership requirements for such committees.
Prosperity's board does not intend to effect the amendments if the merger is
not completed.
Material Federal Income Tax Consequences
The following discussion is a general summary of the anticipated material
United States federal income tax consequences of the merger to Commercial
shareholders who hold Commercial common stock as a capital asset. This
discussion is based upon the Internal Revenue Code, regulations promulgated by
the United States
51
Treasury Department, court cases and administrative rulings in each case as in
effect as of the date hereof and all of which are subject to change at any
time, possibly with retroactive effect.
The obligations of the parties to complete the merger are conditioned upon
the receipt by Prosperity of an opinion of counsel from Bracewell & Patterson,
L.L.P., and the receipt by Commercial of an opinion of counsel from Locke
Liddell & Sapp LLP, in each case as to the anticipated United States federal
income tax consequences of the merger, but specifically excluding the
following:
. state, local, foreign or other federal tax consequences of the merger not
specifically addressed in the opinion;
. federal income tax consequences to Commercial or Prosperity shareholders
who are subject to special rules under the Internal Revenue Code, such as
foreign persons, tax-exempt organizations, insurance companies, financial
institutions, dealers in securities and other persons who do not own such
stock as a capital asset;
. federal income tax consequences affecting shares of Commercial common
stock acquired upon the exercise of stock options, similar derivative
securities or otherwise as compensation; and
. the federal income tax consequences to holders of options or other rights
to acquire shares of Commercial common stock and Prosperity common stock
or persons who hold their Commercial common stock as part of a straddle,
hedge or conversion transaction.
Each of Bracewell & Patterson, L.L.P. and Locke Liddell & Sapp LLP will
render its tax opinion to Prosperity and Commercial, respectively, on the basis
of facts, representations and assumptions set forth or referred to in such
opinion which are consistent with the state of facts existing at the effective
time of the merger. In rendering its tax opinion, each such counsel may require
and rely upon representations and covenants, including those contained in
certificates of officers of Prosperity and Commercial, reasonably satisfactory
in form and substance to such counsel. An opinion of counsel represents
counsel's best legal judgment, but has no binding effect or official status of
any kind, and no assurance can be given that contrary positions will not be
taken by the IRS or a court considering the issues. We have not requested nor
do we intend to request a ruling from the IRS as to the tax consequences of the
merger.
The opinions to be rendered are to the effect that, for United States
federal income tax purposes:
. the merger will constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code and Commercial and Prosperity will
each be a party to the reorganization;
. no gain or loss will be recognized by Commercial or Prosperity as a
result of the merger;
. no gain or loss will be recognized by Commercial shareholders upon the
exchange of their Commercial common stock solely for Prosperity common
stock pursuant to the merger;
. a shareholder's aggregate tax basis in the shares of Prosperity common
stock received pursuant to the merger in exchange for Commercial common
stock will be equal to the aggregate tax basis of the shares of
Commercial common stock surrendered in exchange therefor;
. the holding period of the Prosperity stock common received by Commercial
shareholders in the merger will include the holding period of the shares
of Commercial common stock surrendered in exchange therefor; and
. a Commercial shareholder who exercises the right to dissent in connection
with the merger and receives only cash in exchange for such shareholder's
Commercial common stock will be treated as having received such cash as a
distribution in redemption of such shareholder's Commercial common stock
and will recognize a capital gain or loss equal to the difference between
the amount of cash received and the adjusted basis of such shareholder's
Commercial common stock, unless such payment, under each such
shareholder's particular facts and circumstances, is deemed to have the
52
effect of a dividend distribution and not a redemption treated as an
exchange under the principles of Section 302 of the Internal Revenue
Code.
Capital gain or loss recognized by a Commercial shareholder on the share
exchange will be long-term capital gain or loss if the holding period of such
share, as determined above, exceeds one year. In the case of individuals, the
maximum federal income tax rate applicable to long-term capital gains
generally is 20%.
The foregoing is a summary discussion of material federal income tax
consequences of the merger. The discussion is included for general information
purposes only and may not apply to a particular Commercial shareholder in
light of such shareholder's particular circumstances. Commercial shareholders
should consult their own tax advisors as to the particular tax consequences to
them of the merger, including the application of state, local and foreign tax
laws and possible future changes in federal income tax laws and the
interpretation thereof, which can have retroactive effects.
Dissenters' Rights of Appraisal and Related Issues
Commercial shareholders have a statutory right to dissent from the merger
by following the specific procedures set forth below. If the merger is
approved by the shareholders and consummated, any Commercial shareholder who
properly perfects his dissenters' rights will be entitled to receive an amount
of cash equal to the fair value of his shares of Commercial stock rather than
being required to receive the consideration established by the merger
agreement. The following summary is not a complete statement of the statutory
dissenters' rights of appraisal, and such summary is qualified by reference to
the applicable provisions of the Texas Business Corporation Act ("TBCA"),
which are reproduced in full in Appendix D to this joint proxy statement-
prospectus. You must follow the exact procedure required by the TBCA in order
to properly exercise your dissenter's rights of appraisal and avoid waiver of
those rights.
Any Commercial shareholder who desires to dissent from the merger must file
a written objection to the merger with the Secretary of Commercial, James H.
Pouns, 4295 San Felipe, Houston, Texas 77027, prior to the meeting. The
written notice must state that the shareholder will exercise his right to
dissent if the merger is consummated and give the shareholder's address to
which notice of effectiveness of the merger should be sent. A vote against the
merger is not sufficient to perfect a shareholder's statutory right to dissent
from the merger. If the merger is consummated, each shareholder of Commercial
who sent notice to Commercial as described above and who did not vote in favor
of the merger will be deemed to have dissented from the merger (each a
"Dissenting Shareholder"). Failure to vote against the merger will not
constitute a waiver of the dissenters' rights of appraisal; on the other hand,
a vote in favor of the merger will constitute such a waiver.
As the company surviving the merger, Prosperity will be liable for any
payments to Dissenting Shareholders and, within ten days of the effective date
of the merger, must notify the Dissenting Shareholders in writing that the
merger has occurred. Each Dissenting Shareholder so notified must, within ten
days of the delivery or mailing of such notice, make a written demand on
Prosperity, for payment of the fair value of the Dissenting Shareholder's
shares as estimated by the Dissenting Shareholder. Failure to follow this
procedure will constitute a waiver of his dissenter's rights of appraisal by
such Dissenting Shareholder. The demand shall state the number and class of
the shares owned by the Dissenting Shareholder and the fair value of the
shares as estimated by the Dissenting Shareholder. The fair value of the
shares shall be the value thereof as of the date immediately preceding the
meeting, excluding any appreciation or depreciation in anticipation of the
merger. Dissenting Shareholders who fail to make a written demand within the
ten day period will be bound by the merger and lose their rights to dissent.
Within twenty days after making a demand, the Dissenting Shareholder must
submit his stock certificates to Prosperity for notation thereon that such
demand has been made. Dissenting Shareholders who have made a demand for
payment of their shares shall not thereafter be entitled to vote or exercise
any other rights of a shareholder except the right to receive payment for
their shares pursuant to the provisions of the TBCA and the right to maintain
an appropriate action to obtain relief on the basis of fraud.
53
Within twenty days after receipt of a Dissenting Shareholder's demand letter
as described above, Prosperity shall deliver or mail to the Dissenting
Shareholder written notice stating that Prosperity accepts the amount claimed
in the demand letter and agrees to pay that amount, within ninety days after
the effective date, upon surrender of the certificates duly endorsed by the
Dissenting Shareholder, or containing Prosperity's written estimate of the fair
value of the shares of Commercial stock together with an offer to pay such
amount within ninety days after the effective date of the merger if Prosperity
receives notice, within sixty days after the effective date of the merger,
stating that the Dissenting Shareholder agrees to accept that amount and upon
surrender of the certificates duly endorsed by the Dissenting Shareholder. In
either case, the Dissenting Shareholder shall cease to have any ownership
interest in Commercial following consummation of the merger.
If the Dissenting Shareholder and Prosperity cannot agree on the fair value
of the shares within sixty days after the effective date, the Dissenting
Shareholder may, within sixty days of the expiration of the initial sixty day
period, file a petition ("Petition") in any court of competent jurisdiction in
Harris County, Texas requesting a finding and determination of the fair value
of the Dissenting Shareholder's shares. Each Dissenting Shareholder is not
required to file a separate Petition. If one Dissenting Shareholder files a
Petition, Prosperity must file, with the clerk of the court in which the
Petition was filed, a list containing the names and addresses of the Dissenting
Shareholders with whom agreements as to the value of their shares have not been
reached. The court will give notice of the time and place of the hearing on the
Petition to the Dissenting Shareholders named on the list. Dissenting
Shareholders so notified by the court will be bound by the final judgment of
the court regarding fair value of the shares. If no Petition is filed within
the appropriate time period, then all Dissenting Shareholders who have not
reached an agreement with Prosperity on the value of their shares shall be
bound by the merger and lose their rights to dissent.
After a hearing concerning the Petition, the court shall determine which
Dissenting Shareholders have complied with the provisions of the TBCA and have
become entitled to the valuation of, and payment for, their shares, and shall
appoint one or more qualified appraisers to determine the value of the shares
of Commercial stock in question. The appraiser shall determine such value and
file a report with the court. The court shall then in its judgment determine
the fair value of the shares of Commercial. The judgment of the court shall be
binding on Prosperity and on all Dissenting Shareholders receiving notice of
the hearing. This value may be more than, less than, or equal to what is
received by non-Dissenting Shareholders. The court shall direct Prosperity to
pay such amount, together with interest thereon beginning ninety-one days after
the effective date to the date of judgment, to the Dissenting Shareholders
entitled thereto. The judgment shall be payable upon the surrender to
Prosperity of the certificates fully endorsed by the Dissenting Shareholder.
Upon payment of the judgment, the Dissenting Shareholder shall cease to have
any interest in the certificates. All court costs shall be allotted between the
Dissenting Shareholders and Prosperity in the manner the court determines to be
fair and equitable.
Any Dissenting Shareholder who has made a written demand on Prosperity for
payment of the fair value of his Commercial stock may withdraw such demand at
any time before payment for his shares has been made or before a Petition has
been filed with an appropriate court for determination of the fair value of
such shares. If a Dissenting Shareholder withdraws his demand, or if he is
otherwise unsuccessful in asserting his dissenters' rights of appraisal, such
Dissenting Shareholder shall be bound by the merger and his status as a former
shareholder shall be restored without prejudice to any corporate proceedings,
dividends, or distributions which may have occurred during the interim.
In the absence of fraud in the transaction, a Dissenting Shareholder's
statutory right to appraisal is the exclusive remedy for the recovery of the
value of his shares or money damages to the Shareholder with respect to the
merger. See Appendix D.
Accounting Treatment
Prosperity expects to account for the merger using the pooling of interests
method of accounting. As a condition to the obligations of each party to the
merger agreement, Prosperity and Commercial will each
54
receive a letter from its respective independent accountants stating that the
merger will qualify for pooling of interests accounting treatment. Deloitte &
Touche LLP serves as the independent accountants for both Prosperity and
Commercial. With pooling of interests accounting treatment, assets and
liabilities are recorded at their book value as they existed on the books of
Commercial at the time of the merger (i.e., goodwill is not recorded).
Restrictions on Resales of Prosperity Common Stock
Prosperity common stock to be issued in the merger will be registered under
the Securities Act of 1933, as amended. Therefore, the Prosperity common stock
to be issued to Commercial shareholders in the merger will be freely
transferable by Commercial shareholders who are not considered to be
"affiliates" of either of us. "Affiliates" generally are defined as persons or
entities who control, are controlled by or are under common control with either
of us at the time of our respective special meetings and generally include
executive officers, directors and beneficial owners of 10% or more of the
common stock.
If you are considered an affiliate of Commercial or become an affiliate of
Prosperity after the merger, you may resell the shares of Prosperity common
stock acquired in connection with the merger only pursuant to an effective
registration statement under the securities laws, pursuant to Rule 145 of the
Securities and Exchange Commission's rules, or in transactions otherwise exempt
from registration under the securities laws. Under Rule 145, during the first
calendar year after the merger becomes effective, affiliates of Commercial may
publicly resell the Prosperity common stock they receive in the merger but only
within certain limitations as to the number of shares of Prosperity common
stock they can sell in any three-month period and as to the manner of sale.
After the one-year period, affiliates of Commercial who are not affiliates of
Prosperity may resell their shares without restriction. Prosperity must
continue to satisfy its reporting requirements under the Securities Exchange
Act of 1934, as amended, in order for affiliates to resell, under Rule 145,
shares of Prosperity common stock received in the merger.
Except with respect to shares beneficially owned by Ned S. Holmes,
Prosperity is not obligated and does not intend to register for resale the
shares issued to affiliates of Commercial. Pursuant to the merger agreement,
Prosperity has granted Mr. Holmes the right to request that Prosperity file a
continuous or "shelf" registration statement to register the resale of the
shares of Prosperity common stock over which Mr. Holmes has voting or
investment control as of the completion of the merger. Prosperity is required
to maintain the effectiveness of such a registration statement for two years.
This registration right is not effective until the earlier of (1) the date Mr.
Holmes no longer serves as either an officer or director of Prosperity or (2)
three years from the date of completion of the merger.
The Commission's rules governing pooling of interests accounting prohibit
resales of the Prosperity common stock by affiliates of Commercial until such
time as financial results covering at least 30 days of combined operations of
Commercial and Prosperity have been published. Pursuant to the merger
agreement, Prosperity has agreed to publish such financial results at the
earliest opportunity after the last day of the first full month of combined
operations.
Pursuant to the merger agreement, each affiliate of Commercial will sign a
written agreement to the effect that he will not offer or sell or otherwise
dispose of any of the shares of Prosperity common stock issued to him in the
merger in violation of the Securities Act. These agreements provide further
that none of Commercial's affiliates will offer, sell or otherwise dispose of
Prosperity common stock during any period in which such transfer would
disqualify the merger from pooling of interests accounting treatment.
Regulatory Approvals
The merger must be approved by the Federal Reserve. On November 20, 2000,
Prosperity filed an application with the Federal Reserve Bank of Dallas to
obtain prior approval of the merger. It is expected that the Federal Reserve
will approve the application in February 2001. The merger of Heritage Bank into
First
55
Prosperity Bank must be approved by the Federal Deposit Insurance Corporation
("FDIC") and the Texas Department of Banking ("TDB"). On December 8, 2000,
Prosperity filed an application with the FDIC and TDB to obtain prior approval
of the bank merger. It is expected that the FDIC and TDB will approve the
application in January of 2001.
A period of 15 to 30 days must expire following approval by the Federal
Reserve during which time the Department of Justice may file objections to the
merger under the federal antitrust laws. While Commercial and Prosperity
believe that the likelihood of such action is remote, there can be no assurance
that the Department of Justice will not initiate such a proceeding, or if such
a proceeding is initiated, as to the result of any such challenge.
The approval of any application merely implies satisfaction of regulatory
criteria for approval, which does not include review of the merger from the
standpoint of the adequacy of the consideration to be received by, or fairness
to, shareholders. Regulatory approvals do not constitute an endorsement or
recommendation of the proposed merger.
Prosperity and Commercial are not aware of any governmental approvals or
compliance with banking laws and regulations that are required for the merger
to become effective other than those described above. There can be no assurance
that any required approval or action can be obtained or taken prior to the
special meeting. The receipt of all necessary regulatory approvals is a
condition to effecting the merger.
56
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Prosperity Board of Directors
The merger agreement provides that the board of directors of Prosperity
following the merger shall consist of 12 persons, including the eight current
directors of Prosperity and four directors of Commercial. Therefore, a vote in
favor of the merger agreement by Prosperity shareholders will also be a vote to
elect the four directors of Commercial listed below to serve as directors of
Prosperity.
The Prosperity board will continue to be divided into three classes, with
the terms of the office of the classes ending in successive years. With respect
to current directors of Prosperity, the terms of the Class III directors expire
at the 2001 annual meeting of shareholders, the terms of the Class I directors
expire at the 2002 annual meeting of shareholders and the terms of the Class II
directors expire at the 2003 annual meeting of shareholders. With respect to
current directors of Commercial who will serve as directors of Prosperity
following the merger, each person must be reelected to his respective class at
Prosperity's 2001 annual meeting of shareholders.
The initial members of the Prosperity board upon completion of the merger,
including the directors to be added, and the classes in which each director
will serve, are as follows:
Current
Director
Name Class of
---- --------- ----------
J. T. Herin............................................. Class I Prosperity
A. Virgil Pace, Jr...................................... Class I Commercial
Charles M. Slavik....................................... Class I Prosperity
Harrison Stafford II.................................... Class I Prosperity
Harry Bayne............................................. Class II Prosperity
James A. Bouligny....................................... Class II Prosperity
Robert Steelhammer...................................... Class II Prosperity
H. E. Timanus, Jr....................................... Class II Commercial
Charles A. Davis, Jr.................................... Class III Commercial
Ned S. Holmes........................................... Class III Commercial
Tracy T. Rudolph........................................ Class III Prosperity
David Zalman............................................ Class III Prosperity
The board of directors of First Prosperity Bank will include the nine
current members of the board of First Prosperity Bank, the seven non-employee
members of the board of Heritage Bank and Mr. Timanus.
Executive Officers
Upon completion of the merger, Ned S. Holmes will serve as Chairman of the
Board of Prosperity, David Zalman will serve as President and Chief Executive
Officer, H.E. Timanus, Jr. will serve as Executive Vice President and Chief
Operating Officer and David Hollaway will serve as Chief Financial Officer. The
executive officers of First Prosperity Bank will be David Zalman as Chairman of
the Board and Chief Executive Officer, H. E. Timanus, Jr. as President and
Chief Operating Officer and David Hollaway as Chief Financial Officer.
Brief biographical information for each director and executive officer of
Commercial who will serve as a director or executive officer of Prosperity upon
completion of the merger is provided below:
Ned S. Holmes. Mr. Holmes has served as Chairman of the Board of Commercial
since 1991 and as a director of Commercial since 1986. Mr. Holmes was born in
Houston, Texas and served as the President of Commercial from 1979 to 1986. In
1991, Mr. Holmes was named Senior Chairman of the Board of Heritage Bank. From
1980 through the present, Mr. Holmes has served as Chairman of the Board and
President of
57
Parkway Investments/Texas, Inc. and managed his Houston-based real estate
assets, the San Diego Princess Hotel and other special real estate projects.
Mr. Holmes is Chairman of the Board of P&O Ports North America, Inc. and is
affiliated with NH-5, Inc., Ned S. Holmes Investments, Inc., Laing Properties,
Inc. and Bovis Homes, Inc. He also serves as a director of Archstone
Communities Trust, a real estate investment trust which is traded on the New
York Stock Exchange. P&O Ports North America, Inc., Parkway Investments/Texas,
Inc., Bovis Homes, Inc. and Laing Properties, Inc. are each wholly-owned
subsidiaries of P&O Steam Navigation Co., a London stock exchange company. Mr.
Holmes is the Chairman Emeritus of The Port of Houston Authority and former
Chairman of the Greater Houston Partnership.
H. E. Timanus, Jr. Mr. Timanus has served as President and Chief Executive
Officer of Commercial since 1986 and as Chief Executive Officer and Chairman of
Heritage since 1988. Mr. Timanus was born in Houston, Texas.
Charles A. Davis. Mr. Davis has served as a member of the board of directors
of Commercial since 1983 and as a member of the board of directors of Heritage
Bank since 1974 (then known as Wharton Bank & Trust). Mr. Davis was born in
Wharton, Texas and is affiliated with Wharton Turf Grass, Inc. Mr. Davis has
been a member of the Gulf Coast Medical Foundation since 1980 and has served as
Treasurer since 1983. He has also served as Treasurer of the Wharton County
Historical Museum since 1990.
A. Virgil Pace, Jr. Mr. Pace is a director of Commercial and was born in
Houston, Texas. Mr. Pace is a retired banker and has served on the board of
directors of Commercial since 1979.
For information regarding the directors and executive officers of
Prosperity, see Prosperity's proxy statement dated March 17, 2000 for its
annual meeting of shareholders held on April 18, 2000, which is incorporated by
reference in Prosperity's Annual Report on Form 10-K for the year ended
December 31, 1999, which is incorporated by reference in this joint proxy
statement-prospectus.
Executive Compensation
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by Commercial to or on behalf of Commercial's
Chief Executive Officer, H. E. Timanus, who will become the Executive Vice
President and Chief Operating Officer of Prosperity upon completion of the
merger, for the fiscal year ended December 31, 1999:
All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- -------- ------- ------------
H. E. Timanus, Jr........................... 1999 $194,016 $50,000 $4,800(1)
President and Chief Executive Officer of
Commercial and Chairman and Chief Executive
Officer of Heritage
- --------
(1) Consists of contributions made by Commercial to Commercial's 401(k) plan
for the benefit of Mr. Timanus.
58
COMPARISON OF RIGHTS OF SHAREHOLDERS OF PROSPERITY AND COMMERCIAL
The rights of Commercial shareholders under the articles of incorporation
and bylaws of Commercial will differ in some respects from the rights
Commercial shareholders will have as shareholders of Prosperity under the
articles of incorporation and bylaws of Prosperity. Prosperity's articles of
incorporation and bylaws contain several provisions which may make Prosperity a
less attractive target for an acquisition by anyone who does not have the
support of the Prosperity board of directors. Such provisions include a
classified board of directors, a restriction on a shareholder's ability to call
a special meeting of shareholders and a requirement of advance notice of
shareholder proposals and nominations to be brought before a meeting of
shareholders. Copies of Prosperity's articles of incorporation and bylaws have
been previously filed by Prosperity with the Securities and Exchange
Commission. Copies of Commercial's articles of incorporation and bylaws are
available upon written request from Commercial.
Certain differences between the provisions contained in Commercial's
articles of incorporation and bylaws and Prosperity's articles of incorporation
and bylaws as such differences may affect the rights of shareholders are set
forth below. The summary set forth below is not intended to be complete and is
qualified by reference to Texas law, the Commercial articles of incorporation,
the Commercial bylaws, the Prosperity articles of incorporation and the
Prosperity bylaws.
Summary of Material Differences Between Current Rights of Commercial
Shareholders and Rights
Those Persons Will Have as Shareholders of Prosperity Following the Merger
Commercial Prosperity
---------- ----------
Corporate Governance: The rights of Commercial The rights of Prosperity
shareholders are currently shareholders are governed by
governed by Texas corporate law Texas corporate law and the
and the articles of incorporation articles of incorporation and
and bylaws of Commercial. bylaws of Prosperity.
Following the completion of the
merger, rights of Commercial
shareholders who become
Prosperity shareholders will be
governed by Texas law and the
articles of incorporation and
bylaws of Prosperity.
Classification of the Commercial does not have a Prosperity's board is divided
Board of Directors: classified board. The Commercial into three classes, as nearly
bylaws require that all directors equal in number as possible, with
be elected at each annual meeting each class serving a staggered
of shareholders for a one-year three-year term. This means that
term. only one-third of the board is
elected at each annual meeting of
shareholders. The classification
makes it more difficult to change
the composition of Prosperity's
Board of Directors because at
least two annual meetings of
shareholders are required to
change control of the Board of
Directors.
59
Commercial Prosperity
---------- ----------
Removal of Directors: Texas law provides that at any Prosperity's bylaws provide that
meeting of shareholders called any director or the entire board
expressly for that purpose, any of directors may be removed, but
director or the entire board of only for cause, by the
directors may be removed, with or affirmative vote of the holders
without cause, by a specified of a majority of shares entitled
portion of votes not less than a to vote at an election of
majority of shares entitled to directors.
vote at an election of directors,
unless otherwise provided in a
corporation's articles of
incorporation or bylaws. The
Commercial bylaws provide that
any director may be removed, with
or without cause, by the
affirmative vote of a majority in
number of shares of the
shareholders present, in person
or proxy, at such a meeting and
entitled to vote for the election
of the director(s).
Vote Required for Texas law provides that on Prosperity's articles of
Certain Shareholder matters other than the election incorporation do contain a
Actions: of directors, the affirmative provision which reduces the
vote of the holders of a majority required shareholder approval
of the shares entitled to vote level to a majority for certain
and represented at a actions such as a merger, a
shareholders' meeting shall be consolidation, a share exchange,
the act of the shareholders, certain sales of substantially
unless the vote of a greater all of Prosperity's assets, a
number is required by law, the dissolution or an amendment to
articles of incorporation or Prosperity's articles of
bylaws. Under Texas law, a incorporation. Absent this
corporation's articles of provision, each of the above
incorporation may provide for a matters would require two-thirds
different level of approval, not shareholder approval under Texas
less than a majority. The law.
Commercial articles of
incorporation do not provide for
a different number.
Amendment of Articles of Commercial's articles of Prosperity's articles of
Incorporation and incorporation may be amended incorporation may be amended upon
Bylaws: under Texas law upon the approval the holders of a majority of the
of two-thirds of the outstanding outstanding shares of stock
shares of Commercial stock. entitled to vote thereon.
Under Texas law, unless a Prosperity's articles of
corporation's articles of incorporation and bylaws provide
incorporation or a bylaw adopted that Prosperity's bylaws may be
by the shareholders provides amended only by Prosperity's
otherwise, a corporation's Board of Directors. The
shareholders may amend the Prosperity shareholders do not
bylaws. The Commercial bylaws have the power to amend the
provide that the bylaws may be bylaws.
amended or repealed or new bylaws
adopted by the board of
directors.
60
Commercial Prosperity
---------- ----------
Shareholder Actions Under Texas law, shareholders may Prosperity's articles of
Without a Meeting: act without a meeting if a incorporation also do not provide
written consent is signed by all for less than unanimous consent
the shareholders entitled to vote when shareholder action is taken
on the matter, unless a without a meeting, so no action
corporation's articles of may be taken by written consent
incorporation require less than unless all shareholders agree.
unanimous consent (but not less
than the number of votes
necessary to take the action at a
meeting). Commercial's articles
of incorporation do not provide
for less than unanimous consent
when shareholder action is taken
without a meeting, so no action
may be taken by written consent
unless all shareholders agree.
Special Meetings of A special meeting of shareholders Prosperity's articles of
Shareholders: of a Texas corporation may be incorporation provide that
called by the president, the special meetings of shareholders
board of directors, other persons can be called by the chairman of
so authorized in the the board, the president, a
corporation's articles of majority of the board of
incorporation or bylaws or the directors, a majority of the
holders of not less than 10% of executive committee (if any) or
all the shares entitled to vote by shareholders, but only at the
at the meeting, unless a request of the holders of not
different percentage, not to less than 50% of the outstanding
exceed 50%, is provided for in shares of stock entitled to vote
the articles of incorporation. at the meeting.
Commercial's articles of
incorporation do not require the
holders of a greater percentage
of shares to call a special
meeting of shareholders,
therefore, in addition to the
other named persons, the holders
of 10% of the outstanding shares
entitled to vote may call a
special meeting of shareholders.
Proposal of Business; The Commercial bylaws do not The Prosperity bylaws contain
Nomination of Directors: contain advance notice and detailed advance notice and
informational procedures which informational procedures which
must be complied with in order must be complied with in order
for a shareholder to nominate a for a shareholder to nominate a
person to serve as a director. person to serve as a director.
The Prosperity bylaws generally
require a shareholder to give
notice of a proposed nominee in
advance of the shareholders'
meeting at which directors will
be elected. In addition, the
Prosperity bylaws contain
detailed advance notice and
informational procedures which
must be followed in order for a
Prosperity shareholder to propose
an item of business for
consideration at a meeting of
Prosperity shareholders. To be
timely, a shareholder's notice
must be delivered to Prosperity
no later than 60 days prior to
the meeting.
61
Commercial Prosperity
---------- ----------
Limitation of Director Article 1302-7.06 of the Texas Prosperity's articles provide
Liability: Civil Statutes provides that the that no director of Prosperity
articles of incorporation may will be liable to Prosperity or
provide that a director of the its shareholders for monetary
corporation shall not be liable, damages for an act or omission in
or shall be liable only to the the director's capacity as a
extent provided in the articles director, except to the extent
of incorporation, to the the foregoing exemption from
corporation or its shareholders liability is not permitted under
for monetary damages for an act Texas law.
or omission in the director's
capacity as a director, provided
that there shall be no limitation
of liability of a director to the
extent the director is found
liable for (1) a breach of the
director's duty of loyalty to the
corporation or its shareholders,
(2) an act or omission not in
good faith that constitutes a
breach of duty of the director to
the corporation or that involves
intentional misconduct or a
knowing violation of law, (3) a
transaction from which the
director received an improper
benefit, whether or not the
benefit resulted from an action
taken within the scope of the
director's office, or (4) an act
or omission for which the
liability of a director is
expressly provided by an
applicable statute. Commercial's
articles of incorporation do not
contain a provision regarding
limitation of liability.
Merger: Except as described below, the Except as described below, the
affirmative vote of two-thirds of affirmative vote of a majority of
the outstanding shares of stock the outstanding shares of stock
entitled to vote thereon is entitled to vote thereon is
required to approve a merger or required to approve a merger or
consolidation involving consolidation involving
Commercial or the sale, lease or Prosperity or the sale, lease or
exchange of all or substantially exchange of all or substantially
all of Commercial's assets. No all of Prosperity's assets. No
vote of the shareholders is vote of the shareholders is
required, however, in connection required, however, in connection
with a merger in which Commercial with a merger in which Prosperity
is the surviving corporation and is the surviving corporation and
(1) the agreement of merger for (1) the agreement of merger for
the merger does not amend in any the merger does not amend in any
respect the Commercial's articles respect the Prosperity Articles
of incorporation, (2) each share of Incorporation, (2) each share
of capital stock outstanding of capital stock outstanding
immediately before the merger is immediately before the merger is
to be an identical outstanding or to be an identical outstanding or
treasury share of Commercial treasury share of Prosperity
after the merger and (3) the after the merger and (3) the
number of shares of capital stock number of shares of capital stock
to be issued in the merger (or to to be issued in the merger (or to
be issuable upon conversion of be issuable upon conversion of
any convertible instruments to be any convertible instruments to be
issued in the merger) does not issued in the merger) does not
exceed 20% of the shares of exceed 20% of the shares of
Commercial's capital stock Prosperity's capital stock
outstanding immediately before outstanding immediately before
the merger. the merger.
62
In addition, Prosperity is subject to the provisions of the Texas Business
Combination Law (Articles 13.01 through 13.08 of the TBCA), which provide that
a Texas corporation such as Prosperity 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: (1) 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 (2) 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:
. 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 adopts 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;
. 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;
. 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;
. 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
. 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 Prosperity contain
any provision expressly providing that Prosperity 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 Prosperity, even if such event would be beneficial to Prosperity's
shareholders.
63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COMMERCIAL
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Commercial analyzes the major elements of Commercial's balance
sheets and statements of earnings. This section should be read in conjunction
with Commercial's consolidated financial statements and accompanying notes and
other detailed information appearing elsewhere in this joint proxy statement-
prospectus.
Overview
Net earnings available to common shareholders for the nine months ended
September 30, 2000 were $2.0 million or $112.00 per share compared with $2.3
million or $142.69 per share for the nine months ended September 30, 1999, a
decrease of 11.7%. The decrease was primarily due to the opening of three new
banking locations during 1999 and 2000.
Total assets at September 30, 2000 were $428.1 million compared with $419.0
million at December 31, 1999. Total assets at December 31, 1999, 1998 and 1997
were $419.0 million, $363.8 million and $333.3 million, respectively. Total
loans increased to $154.7 million at September 30, 2000, from $143.3 million at
December 31, 1999, an increase of $11.4 million or 8.0%. Total loans at
December 31, 1999, 1998 and 1997 were $143.3 million, $105.6 million and $88.4
million, respectively. Total deposits at September 30, 2000 were $385.0 million
compared with $343.8 million at December 31, 1999. Total deposits at December
31, 1999, 1998 and 1997 were $343.8 million, $323.7 million and $301.6 million,
respectively. Shareholders' equity was $27.0 million at September 30, 2000
compared with $25.8 million at December 31, 1999, an increase of $1.2 million
or 4.8%. Shareholders' equity at December 31, 1999, 1998 and 1997 was $25.8
million, $20.3 million and $19.1 million, respectively. Commercial posted
returns on average assets of 0.64% and 0.80% for the nine months ended
September 30, 2000 and 1999, respectively. The return on average assets for the
years ended December 31, 1999, 1998 and 1997 were 0.76%, 0.76% and 0.82%,
respectively. Returns on average equity were 10.19% and 14.31% for the nine
months ended September 30, 2000 and 1999, respectively. The return on average
equity for the years ended December 31, 1999, 1998 and 1997 were 13.34%, 13.34%
and 10.27%, respectively.
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 Commercial'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.
Commercial's net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities, referred to as a
"volume change." It is also affected by changes in yields earned on interest-
earning assets and rates paid on interest-bearing deposits and other borrowed
funds, referred to as a "rate change."
Net interest income was $9.2 million for the nine months ended September 30,
2000 compared with $9.0 million for the nine months ended September 30, 1999,
an increase of $217,000 or 2.4%. The increase in net interest income resulted
primarily from growth in average earning assets to $392.0 million for the nine
months ended September 30, 2000 from $357.9 million for the nine months ended
September 30 1999, an increase of $34.1 million or 9.5%.
1999 versus 1998. Net interest income increased from $10.8 million in 1998
to $11.9 million in 1999, a $1.1 million increase, primarily due to growth in
interest income of $2.4 million. This increase was partially offset by an
increase in interest expense of $1.4 million. This resulted in net interest
margins of 3.25% and 3.37% and net interest spreads of 2.58% and 2.57% for 1999
and 1998, respectively.
64
1998 versus 1997. Net interest income totaled $10.8 million in 1998 compared
with $9.9 million in 1997, an increase of $956,000 or 9.7%. The additional
interest income resulted from an increase in average interest-earning assets of
$56.0 million in 1998 over 1997, versus an increase in average interest-bearing
liabilities of $48.2 million during the same period. A decrease in the net
interest margin to 3.37% in 1998 from 3.72% in 1997 partially offset the
increase.
The following tables set forth for the periods indicated an analysis of net
interest income by each major category of interest-earning assets and interest-
bearing liabilities, the average amounts outstanding, the interest earned or
paid on such amounts, and the average rate earned or paid. The tables also set
forth the average rate earned on total interest-earning assets, the average
rate paid on total interest-bearing liabilities, and the net interest margin on
average total interest-earning assets for the same periods. Nonaccruing loans
have been included in the table as loans carrying a zero yield.
Nine Months Ended September 30,
---------------------------------------------------------
2000 1999
---------------------------- ----------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1)
----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans................. $149,282 $ 9,682 8.65% $120,536 $ 7,412 8.20%
Securities............ 219,873 10,390 6.30 229,212 10,598 6.16
Federal funds sold.... 22,887 1,051 6.12 8,135 306 5.01
-------- ------- -------- -------
Total interest-earning
assets............... 392,042 21,123 7.18 357,883 18,316 6.82
------- -------
Less allowance for
credit losses........ (2,289) (2,083)
-------- --------
Total interest-
earning assets, net
of allowance........ 389,753 355,800
Nonearning assets....... 28,284 23,776
FHLB Stock.............. 2,983 3,214
-------- --------
Total assets......... $421,020 $382,790
======== ========
Liabilities and
Shareholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
demand deposits...... 113,847 3,775 4.42% 115,086 3,187 3.69%
Savings and money
market accounts...... 71,236 2,159 4.04 65,712 1,708 3.46
Time deposits......... 114,359 4,681 5.46 87,894 3,143 4.77
Federal funds
purchased and other
borrowings........... 29,031 1,326 6.09 30,700 1,313 5.71
-------- ------- -------- -------
Total interest-bearing
liabilities.......... 328,473 11,941 4.85 299,392 9,351 4.16
------- -------
Noninterest-bearing
liabilities:
Demand deposits....... 61,135 55,794
Other liabilities..... 5,034 3,252
Minority interest..... -- 3,084
-------- --------
Total liabilities.... 394,642 361,522
Shareholders' equity.... 26,378 21,268
-------- --------
Total liabilities and
shareholders'
equity.............. $421,020 $382,790
======== ========
Net interest income..... $ 9,182 $ 8,965
======= =======
Net interest spread..... 2.34% 2.66%
Net interest margin..... 3.12% 3.34%
- --------
(1) Annualized
65
Years Ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans.................. $125,491 $10,324 8.23% $ 95,659 $ 8,532 8.92% $ 79,837 $7,504 9.40%
Securities............. 224,245 13,878 6.19 213,610 13,428 6.29 171,807 10,979 6.39
Federal funds sold..... 15,723 844 5.37 11,909 644 5.41 13,573 744 5.49
-------- ------- -------- ------- -------- ------
Total interest-earning
assets................ 365,459 25,046 6.85 321,178 22,604 7.04 265,217 19,227 7.25
------- ------- ------
Less allowance for
credit losses......... (2,126) (1,723) (1,023)
-------- -------- --------
Total interest-earning
assets, net of
allowance............. 363,333 319,455 264,194
Nonearning assets....... 22,763 24,381 27,404
FHLB Stock.............. 3,928 1,723 941
-------- -------- --------
Total assets........... $390,024 $345,559 $292,539
======== ======== ========
Liabilities and
shareholders' equity:
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. 115,942 4,393 3.79% 106,511 4,342 4.08% 81,532 3,252 3.99%
Savings and money
market accounts....... 65,500 2,383 3.64 55,101 2,027 3.68 45,184 1,533 3.39
Time deposits.......... 91,265 4,340 4.75 90,249 4,688 5.19 86,221 4,433 5.14
Federal funds purchased
and other borrowings.. 34,938 2,040 5.84 11,879 738 6.21 2,633 156 5.96
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities........... 307,645 13,156 4.28 263,740 11,795 4.47 215,570 9,374 4.35
------- ------- ------
Noninterest-bearing
liabilities:
Demand deposits........ 56,549 53,651 49,174
Other liabilities...... 1,351 5,701 1,839
Minority interest...... 2,313 2,826 2,679
-------- -------- --------
Total liabilities...... 367,858 325,918 269,262
Shareholders' equity.... 22,166 19,641 23,277
-------- -------- --------
Total liabilities and
shareholders' equity.. $390,024 $345,559 $292,539
======== ======== ========
Net interest income..... $11,890 $10,809 $9,853
======= ======= ======
Net interest spread..... 2.58% 2.57% 2.90%
Net interest margin..... 3.25% 3.37% 3.72%
66
The following tables present the dollar amount of changes in interest income
and interest expense for the major components of interest-earning assets and
interest-bearing liabilities and distinguish between the increase (decrease)
related to outstanding balances and the volatility of interest rates. For
purposes of these tables, changes attributable to both rate and volume which
can be segregated have been allocated to rate.
Nine Months Ended
September 30,
----------------------
2000 vs. 1999
----------------------
Increase
(Decrease)
Due to
--------------
Volume Rate Total
------ ------ ------
(Dollars in
thousands)
Interest-earning assets:
Loans................................................ $1,768 $ 502 $2,270
Securities........................................... (432) 224 (208)
Federal funds sold................................... 556 189 745
------ ------ ------
Total increase (decrease) in interest income....... 1,892 915 2,807
------ ------ ------
Interest-bearing liabilities:
Interest-bearing demand deposits..................... (34) 622 588
Savings and money market accounts.................... 143 308 451
Certificates of deposit.............................. 946 592 1,538
Federal funds purchased and other borrowings......... (71) 84 13
------ ------ ------
Total increase (decrease) in interest expense...... 984 1,606 2,590
------ ------ ------
Increase (decrease) in net interest income......... $ 908 $ (691) $ 217
====== ====== ======
Years Ended December 31,
----------------------------------------------
1999 vs. 1998 1998 vs. 1997
--------------------- -----------------------
Increase Increase
(Decrease) (Decrease) Due
Due To To
------------- ---------------
Volume Rate Total Volume Rate Total
------ ------ ------ ------ ------- ------
(Dollars in thousands)
Interest-earning assets:
Loans.................... $2,661 $ (869) $1,792 $1,487 $ (459) $1,028
Securities............... 669 (219) 450 2,671 (222) 2,449
Federal funds sold....... 206 (6) 200 (91) (9) (100)
------ ------ ------ ------ ------- ------
Total increase
(decrease) in interest
income................ 3,536 (1,094) 2,442 4,067 (690) 3,377
------ ------ ------ ------ ------- ------
Interest-bearing
liabilities:
Interest-bearing demand
deposits................ 384 (333) 51 996 94 1,090
Savings and money market
accounts................ 383 (27) 356 336 158 494
Certificates of deposit.. 53 (401) (348) 207 48 255
Federal funds purchased
and other borrowings.... 1,433 (131) 1,302 548 30 582
------ ------ ------ ------ ------- ------
Total increase
(decrease) in interest
expense............... 2,253 (892) 1,361 2,067 331 2,421
------ ------ ------ ------ ------- ------
Increase (decrease) in net
interest income........... $1,283 $ (202) $1,081 $1,980 $(1,024) $ 956
====== ====== ====== ====== ======= ======
Provision for Credit Losses
Provisions for credit losses are charged to income to bring the total
allowance for credit losses to a level deemed appropriate by management of
Commercial based on such factors as historical experience, the volume and type
of lending conducted by Commercial, the amount of nonperforming assets,
regulatory policies,
67
generally accepted accounting principles, general economic conditions, and
other factors related to the collectibility of loans in Commercial's portfolio.
For a further discussion of our allowance for credit losses, see "--Financial
Condition--Allowance for Credit Losses."
Commercial made no provision for credit losses for the nine months ended
September 30, 2000 compared with a provision of $115,000 for the nine months
ended September 30, 1999. For the nine months ended September 30, 2000, net
recoveries were $134,000. For the years ended December 31, 1999, 1998 and 1997,
Commercial recorded provisions for credit losses of $140,000, $25,000 and
$530,000, respectively.
Noninterest Income
Commercial's primary sources of recurring noninterest income are service
charges on deposit accounts and fee income. Noninterest income for the nine
months ended September 30, 2000 decreased to $1.8 million from $2.0 million for
the nine months ended September 30, 1999, a decrease of $243,000 or 12.0%. The
decrease was primarily due to the collection of a loan previously charged-off
in excess of the amount charged-off. The proceeds collected in excess of the
amount previously charged-off were recorded as noninterest income. Noninterest
income for the year ended December 31, 1999 was $2.6 million, an increase of
$314,000 or 13.6% from $2.3 million in 1998. Noninterest income was $2.5
million for the year ended December 31, 1997, a decrease of 7.1% for 1998.
The following table presents, for the periods indicated, the major
categories of noninterest income:
Nine Months
Ended Years Ended December
September 30, 31,
------------- --------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Service charges on deposit accounts......... $1,424 $1,421 $1,915 $1,992 $2,341
Other noninterest income.................... 353 599 715 324 153
------ ------ ------ ------ ------
Total noninterest income.................. $1,777 $2,020 $2,630 $2,316 $2,494
====== ====== ====== ====== ======
Noninterest Expense
Noninterest expense totaled $7.9 million for the nine months ended September
30, 2000 compared with $7.2 million for the nine months ended September 30,
1999, an increase of $665,000 or 9.2%. For the years ended December 31, 1999,
1998 and 1997, noninterest expense totaled $9.7 million, $8.9 million and $8.2
million, respectively. The 8.4% increase in 1999 was primarily the result of
the opening of two branch locations in 1999. In addition, net occupancy expense
increased from $854,000 in 1998 to $914,000 in 1999, an increase of $60,000 or
7.0%. The increase in total noninterest expense for 1998 over 1997 of $730,000
or 8.9% was primarily the result of increased rent expense and increased
depreciation expense. Commercial's efficiency ratios, calculated by dividing
total noninterest expenses (excluding securities losses) by net interest income
plus noninterest income, were 66.7% in 1999, 68.1% in 1998 and 66.4% in 1997.
68
The following table presents, for the periods indicated, the major
categories of noninterest expense:
Nine Months
Ended Years Ended December
September 30, 31,
------------- --------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Employee compensation and
benefits................... $4,254 $3,764 $4,951 $4,549 $4,173
Non-staff expenses:
Net occupancy expense..... 921 730 914 854 754
Furniture and equipment... 555 506 681 590 531
Legal and professional
fees..................... 299 267 338 313 296
Data processing........... 473 469 771 740 602
Other real estate and
repossessed assets....... 11 -- 15 -- (4)
Minority interest......... -- 334 419 381 356
Other..................... 1,391 1,169 1,595 1,504 1,493
------ ------ ------ ------ ------
Total non-staff
expenses............... 3,650 3,475 4,733 4,382 4,028
------ ------ ------ ------ ------
Total noninterest
expense................ $7,904 $7,239 $9,684 $8,931 $8,201
====== ====== ====== ====== ======
Employee compensation and benefits expense for the nine months ended
September 30, 2000 was $4.3 million, an increase of $490,000 or 13.0% compared
with $3.8 million for the same period in 1999. The increase was due primarily
to the addition of new locations. The number of full-time equivalent employees
was 142 at September 30, 2000 compared with 138 at September 30, 1999, an
increase of 2.9%. Employee compensation and benefits at December 31, 1999, 1998
and 1997 was $5.0 million, $4.6 million and $4.2 million, respectively.
Income Taxes
Federal income tax is reported as income tax expense and is influenced by
the amount of taxable income, the amount of tax-exempt income, the amount of
nondeductible interest expense and the amount of other non-deductible expense.
Income tax expense decreased $309,000 to $1.0 million for the nine months ended
September 30, 2000 from $1.3 million for the same period in 1999. The decrease
was primarily attributable to decreased taxable income. The effective tax rates
in 1999, 1998 and 1997 were 37.0%, 37.1% and 33.9%, respectively.
Additionally, the State of Texas imposes a Texas franchise tax. 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 from
federal securities. Total franchise tax expense was $60,000 in 1999, $59,000 in
1998 and $60,000 in 1997. Such expense was included as a part of other
noninterest expense.
Impact of Inflation
The effects of inflation on the local economy and on Commercial's operating
results have been relatively modest for the past several years. Since
substantially all of Commercial'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. Commercial 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" below.
69
Financial Condition
Loan Portfolio
Commercial provides a broad range of commercial, real estate and consumer
loan products to small and medium-sized businesses and individuals. Total
loans were $154.7 million at September 30, 2000, an increase of $11.4 million
or 8.0% from $143.3 million at December 31, 1999. Loan growth occurred
primarily in commercial and industrial loans and mortgage loans. Loans
comprised 38.6% of total earning assets at September 30, 2000 compared with
36.9% at December 31, 1999.
Total loans increased by $37.7 million or approximately 35.7% to $143.3
million at December 31, 1999 from $105.6 million at December 31, 1998. In
1998, total loans increased by $17.2 million to $105.6 million at December 31,
1998 from $88.4 million at December 31, 1997.
The following table summarizes the loan portfolio of Commercial by type of
loan at the periods indicated:
September 30, December 31,
2000 1999
---------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in thousands)
Commercial and industrial..................... $ 17,623 11.4% $ 13,724 9.6%
Real estate:
Construction and land development........... 17,638 11.4 17,318 12.1
1-4 family residential...................... 71,635 46.3 67,879 47.4
Commercial mortgages........................ 28,870 18.7 25,986 18.1
Farmland.................................... 1,192 0.8 1,148 0.8
Multi-family residential.................... 1,232 0.8 1,234 0.9
Consumer/Other................................ 16,508 10.6 16,009 11.1
-------- ----- -------- -----
Total loans............................... $154,698 100.0% $143,298 100.0%
======== ===== ======== =====
December 31,
----------------------------------------------------------------
1998 1997 1996 1995
---------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Commercial and
industrial............. $ 16,270 15.4% $16,610 18.8% $13,148 17.9% $14,882 19.3%
Real estate:
Construction and land
development.......... 10,750 10.2 8,660 9.8 3,790 5.2 2,449 3.2
1-4 family
residential.......... 43,519 41.2 27,092 30.5 22,320 30.4 23,055 29.9
Commercial mortgages.. 19,196 18.2 20,238 22.9 18,898 25.7 18,426 23.9
Farmland.............. 307 0.3 402 0.5 1,038 1.4 982 1.3
Multi-family
residential.......... 984 0.9 897 1.0 977 1.3 4,662 6.0
Consumer/Other.......... 14,602 13.8 14,536 16.5 13,355 18.1 12,714 16.4
-------- ----- ------- ----- ------- ----- ------- -----
Total loans.......... $105,628 100.0% $88,435 100.0% $73,526 100.0% $77,170 100.0%
======== ===== ======= ===== ======= ===== ======= =====
The primary lending focus of Commercial is to small and medium-sized
businesses. Commercial offers business loans, commercial real estate loans,
equipment loans, working capital loans, term loans, revolving lines of credit
and letters of credit. Most commercial loans are collateralized and on payment
programs. The purpose of a particular loan generally determines its structure.
In almost all cases, Commercial requires personal guarantees on commercial
loans to help assure repayment.
Commercial's commercial mortgage loans are generally secured by first liens
on real estate and amortize over a 10 to 20 year period with balloon payments
due at the end of one to nine years. Slightly more than one-half of these
commercial mortgage loans have floating interest rates. In underwriting
commercial mortgage loans, consideration is given to the property's operating
history, future operating projections, current and projected occupancy,
location and physical condition. The underwriting analysis also includes
credit checks, appraisals and a review of the financial condition of the
borrower.
70
Commercial 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. Commercial 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 Commercial's construction lending activities. In keeping with
the community-oriented nature of its customer base, Commercial provides
construction and permanent financing for churches located within its market
area.
Commercial rarely makes loans at its legal lending limit. Lending officers
are assigned various levels of loan approval authority based upon their
respective levels of experience and expertise. Commercial's strategy for
approving or disapproving loans is to follow conservative loan policies and
underwriting practices which include: (1) granting loans on a sound and
collectible basis; (2) investing funds properly for the benefit of shareholders
and the protection of depositors; (3) serving the legitimate needs of the
community and Commercial's general market area while obtaining a balance
between maximum yield and minimum risk; (4) ensuring that primary and secondary
sources of repayment are adequate in relation to the amount of the loan; (5)
developing and maintaining adequate diversification of the loan portfolio as a
whole and of the loans within each category; and (6) ensuring that each loan is
properly documented and, if appropriate, insurance coverage is adequate.
Commercial's loan review and compliance personnel interact daily with
commercial and consumer lenders to identify potential underwriting or technical
exception variances. In addition, Commercial has placed increased emphasis on
the early identification of problem loans to aggressively seek resolution of
the situations and thereby keep loan losses at a minimum. Management believes
that this strict adherence to conservative loan policy guidelines has
contributed to Commercial's below average level of loan losses compared to its
industry peer group over the past few years.
Commercial's loans collateralized by single-family residential real estate
generally are originated in amounts of no more than 90% of the lower of cost or
appraised value. Commercial requires mortgage title insurance and hazard
insurance in the amount of the loan. Commercial generally retains all of the
mortgage loans it originates. As of September 30, 2000, Commercial's one to
four family real estate loan portfolio was $71.6 million. A significant portion
of this amount is repriceable after one year.
Commercial provides a wide variety of consumer loans including motor
vehicle, watercraft, education loans, personal loans (collateralized and
uncollateralized) and deposit account collateralized loans. The terms of these
loans typically range from 12 to 72 months and vary based upon the nature of
collateral and size of loan.
The contractual maturity ranges of each of the primary categories of
Commercial's loan portfolio and the amount of such loans with predetermined
interest rates and floating interest rates in each maturity range as of
December 31, 1999 are summarized in the following table:
December 31, 1999
-----------------------------------
One After One After
Year or Through Five
Less Five Years Years Total
------- ---------- ------- --------
(Dollars in thousands)
Commercial and industrial.................. $ 8,309 $ 4,444 $ 971 $ 13,724
Construction and land development.......... 11,156 2,143 4,019 17,318
1-4 family residential..................... 5,769 9,658 52,452 67,879
Commercial mortgages....................... 5,429 4,221 16,336 25,986
Farmland................................... 179 215 754 1,148
Multi-family residential................... 289 375 570 1,234
Consumer/Other............................. 5,215 7,175 3,619 16,009
------- ------- ------- --------
Total.................................... $36,346 $28,231 $78,721 $143,298
======= ======= ======= ========
Loans with a predetermined interest rate... $12,574 $17,964 $63,769 $ 94,307
Loans with a floating interest rate........ 23,772 10,267 14,952 48,991
------- ------- ------- --------
Total.................................... $36,346 $28,231 $78,721 $143,298
======= ======= ======= ========
71
Nonperforming Assets
Commercial has several procedures in place to assist it in maintaining the
overall quality of its loan portfolio. Commercial has established underwriting
guidelines to be followed by its officers and also monitors its delinquency
levels for any negative or adverse trends. There can be no assurance, however,
that Commercial's loan portfolio will not become subject to increasing
pressures from deteriorating borrower credit due to general economic
conditions.
Nonperforming assets were $1.0 million at September 30, 2000 compared with
$1.3 million at December 31, 1999. The ratio of nonperforming assets to total
loans and other real estate owned was 0.63% and 0.88% at September 30, 2000 and
December 31, 1999, respectively. Nonperforming assets increased during 1999
from $386,000 at December 31, 1998 to $1.3 million at December 31, 1999.
Nonperforming assets decreased $1.6 million from December 31, 1997 to December
31, 1998.
Commercial generally places a loan on nonaccrual status and ceases to accrue
interest when loan payment performance is deemed unsatisfactory. Loans where
the interest payments jeopardize the collection of principal are placed on
nonaccrual status, unless the loan is both well-secured and in the process of
collection. Cash payments received while a loan is classified as nonaccrual are
recorded as a reduction of principal as long as doubt exists as to collection.
While Commercial is sometimes required to revise a loan's interest rate or
repayment terms in a troubled debt restructuring, Commercial had no
restructured loans at September 30, 2000 and $5,000 in restructured loans at
December 31, 1999. In addition to an internal loan review, Commercial retains
The Bankers Advantage Group for a semi-annual external review to evaluate the
loan portfolio.
Commercial obtains appraisals on loans secured by real estate, as required
by applicable regulatory guidelines, and may update such appraisals for loans
categorized as nonperforming loans and potential problem loans. In instances
where updated appraisals reflect reduced collateral values, an evaluation of
the borrower's overall financial condition is made to determine the need, if
any, for possible writedowns or appropriate additions to the allowance for loan
losses. Commercial records other real estate at fair value at the time of
acquisition, less estimated costs to sell.
A loan is considered impaired based on current information and events if it
is probable that Commercial will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement 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 following table presents information regarding nonperforming assets as
of the dates indicated:
December 31,
September 30, --------------------------------
2000 1999 1998 1997 1996 1995
------------- ------ ---- ------ ---- ----
(Dollars in thousands)
Nonaccrual loans.............. $376 $ 756 $103 $1,681 $642 $226
Accruing loans past due 90
days or more................. 59 4 133 258 162 267
Restructured loans............ 5 150
Other real estate............. 544 500 -- -- 38 141
---- ------ ---- ------ ---- ----
Total nonperforming assets.. $979 $1,265 386 $1,939 $842 $634
==== ====== ==== ====== ==== ====
Nonperforming assets to total
loans and other real estate.. 0.63% 0.88% 0.37% 2.19% 1.14% 0.82%
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 Commercial's loan portfolio. Based on an evaluation of the
loan portfolio,
72
management presents a monthly review of the allowance for credit losses to
Commercial'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
Commercial'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 and
the evaluation of its loan portfolio by the semi-annual external loan review
conducted by The Bankers Advantage Group. Charge-offs occur when loans are
deemed to be uncollectible.
Commercial follows an internal loan review program to evaluate the credit
risk in the loan portfolio. In addition, Commercial contracts with The Bankers
Advantage Group to perform an external loan review semi-annually. Through the
loan review process, Commercial maintains an internal loan watch 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 internally categorized as "substandard" or in the more severe
categories of "doubtful" or "loss" are those loans that at a minimum have 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. At September 30, 2000,
Commercial had $872,000 of such loans compared with $1.6 million at September
30, 1999, a 44.3% decrease. The primary reason for the decrease was the
collection of loans which had been previously categorized as substandard.
Loans categorized on the internal loan watch list as "watch list only" and
"other assets especially mentioned" are those loans that show warning elements
where the present status portrays one or more deficiencies that require
attention in the short term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans do
not have all of the characteristics of a loan categorized as substandard,
doubtful or loss but do show weakened elements as compared with those of a
satisfactory credit. Commercial reviews these loans to assist in assessing the
adequacy of the allowance for credit losses. At September 30, 2000, Commercial
had $822,000 of such loans. Since September 30, 2000, as a result of the
monthly review of the loan portfolio by Commercial's management and the results
of a recent regulatory examination, Commercial has added loans to the "watch
list only" and "other assets especially mentioned" categories. As of December
19, 2000, Commercial had $6.1 million of loans in these categories.
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
historical charge-off experience. Commercial 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.
In originating loans, Commercial recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. Commercial maintains an allowance
for credit losses based upon, among other things, historical experience, the
volume and type of lending conducted by Commercial, the amount of nonperforming
assets, regulatory policies, generally accepted accounting principles, general
economic conditions, and other factors related to the collectibility of loans
in Commercial's portfolio. In addition to unallocated allowances, specific
allowances are provided for individual loans when ultimate collection is
considered improbable by management after reviewing the current status of loans
which are contractually past due and considering the net realizable value of
the collateral for the loan.
Management actively monitors Commercial's asset quality and provides
specific loss allowances when necessary. Loans are charged-off against the
allowance for credit losses when appropriate. Although
73
management believes it uses the best information available to make
determinations with respect to the allowance for credit losses, future
adjustments may be necessary if economic conditions differ from the assumptions
used in making the initial determinations. As of September 30, 2000, the
allowance for credit losses amounted to $2.4 million or 1.56% of total loans.
The allowance for credit losses as a percentage of nonperforming loans was
554.48% at September 30, 2000.
For the twelve months ended December 31, 1999, net loan recoveries totaled
$306,000 or 2.4% of average loans outstanding for the period compared with
$256,000 in net loan recoveries or 2.7% of average loans for the year ended
December 31, 1998. During 1999, Commercial recorded a provision for credit
losses of $140,000 compared with $25,000 for 1998. The increase in the
provision for 1999 is the result of a $37.7 million increase in loans during
1999. Commercial made a provision for credit losses of $530,000 for 1997. At
December 31, 1999, the allowance for credit losses totaled $2.3 million, or
1.59% of total loans. At December 31, 1998 and 1997, the allowance for credit
losses totaled $1.8 million or 1.73% of total loans and $1.6 million or 1.75%
of total loans, respectively.
The following table presents, for the periods indicated, an analysis of the
allowance for credit losses and other related data:
Nine Months
Ended Years Ended December 31,
September 30, -----------------------------------------------
2000 1999 1998 1997 1996 1995
------------- -------- -------- ------- ------- -------
(Dollars in thousands)
Average loans
outstanding............ $149,282 $125,491 $ 95,659 $79,837 $75,864 $75,732
======== ======== ======== ======= ======= =======
Gross loans outstanding
at end of period....... $154,698 $143,298 $105,628 $88,435 $73,526 $77,170
======== ======== ======== ======= ======= =======
Allowance for credit
losses at beginning of
period................. $ 2,278 $ 1,832 $ 1,551 $ 1,045 $ 1,147 $ 1,116
Provision for credit
losses................. -- 140 25 530 (100) (123)
Charge-offs:
Commercial and
industrial........... (100) (17) (67) (80) (33) (37)
Real estate........... -- -- -- -- -- (81)
Consumer.............. (13) (9) (16) (27) (42) (13)
Other................. -- -- -- (27) (16) --
Recoveries:
Commercial and
industrial........... 8 202 271 58 43 157
Real estate........... 204 101 52 37 39 112
Consumer.............. 35 16 16 14 7 16
Other................. -- 13 -- 1 -- --
-------- -------- -------- ------- ------- -------
Net loan (charge-offs)
recoveries............. 134 306 256 (24) (2) 154
Allowance for credit
losses at end of
period................. $ 2,412 $ 2,278 $ 1,832 $ 1,551 $ 1,045 $ 1,147
======== ======== ======== ======= ======= =======
Ratio of allowance to
end of period loans.... 1.56% 1.59% 1.73% 1.75% 1.42% 1.49%
Ratio of net loan
(recoveries) charge-
offs to average loans.. (0.09)% (0.24)% (0.27)% 0.03% --% (0.20)%
Ratio of allowance to
end of period
nonperforming loans.... 554.48% 297.78% 474.61% 79.99% 129.98% 232.66%
74
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,
September 30, -----------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Total Total Total
Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Balance of allowance for
credit losses
applicable to:
Commercial and
industrial............ $ 437 18.11% $ 563 24.73% $ 502 27.41%
Real estate:
Construction and land
development........... 17 0.69 -- -- -- --
1-4 family
residential........... 35 1.46 12 0.53 9 0.50
Commercial mortgage.... 10 0.41 -- -- -- --
Farmland............... -- -- -- -- -- --
Multi-family........... -- -- -- -- -- --
Consumer................. 25 1.03 18 0.80 13 0.70
Unallocated.............. 1,888 78.30 1,685 73.94 1,308 71.39
------ ------ ------ ------ ------ ------
Total allowance for
credit losses....... $2,412 100.00% $2,278 100.00% $1,832 100.00%
====== ====== ====== ====== ====== ======
December 31,
-----------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Total Total Total
Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Balance of allowance for
credit losses
applicable to:
Commercial and
industrial............ $ 517 33.30% $ 27 2.54% $ 7 0.63%
Real estate:
Construction and land
development........... 22 1.39 -- -- --
1-4 family
residential........... 1 0.07 42 4.03 54 4.68
Commercial mortgage.... -- -- 4 0.38 8 0.71
Farmland............... -- -- -- -- -- --
Multi-family........... -- -- -- -- -- --
Consumer................. 14 0.87 17 1.64 12 1.05
Unallocated.............. 997 64.37 955 91.41 1,066 92.93
------ ------ ------ ------ ------ ------
Total allowance for
credit losses....... $1,551 100.00% $1,045 100.00% $1,147 100.00%
====== ====== ====== ====== ====== ======
Management believes that the allowance for credit losses at September 30,
2000 is adequate to cover losses inherent in the portfolio as of such date.
There can be no assurance, however, that Commercial will not sustain losses in
future periods, which could be substantial in relation to the size of the
allowance for credit losses at September 30, 2000.
75
Securities
Commercial uses its securities portfolio to ensure liquidity for cash
requirements, to manage interest rate risk, to provide a source of income, to
ensure collateral is available for municipal pledging requirements and to
manage asset quality. Securities totaled $212.2 million at September 30, 2000,
an increase of $9.8 million from $202.3 million at December 31, 1999. The
increase primarily occurred due to an increase in deposits in excess of the
amount of loans funded. At September 30, 2000, securities represented 49.6% of
total assets compared with 48.3% of total assets at December 31, 1999. The
yield on average securities for the nine months ended September 30, 2000 was
6.30% compared with 6.16% for the same period in 1999. At September 30, 2000,
securities included $2.0 million in U.S. Treasury securities, $135.9 million in
U.S. Government securities, $38.7 million in mortgage-backed securities, $24.9
million in corporate debt securities and $10.5 million in municipal securities.
The average life of the securities portfolio at September 30, 2000 was
approximately two and one-half years.
At December 31, 1999, investment securities totaled $202.3 million, a
decrease of $25.1 million from $227.5 million at December 31, 1998. The
decrease was primarily attributable to increased loan demand. During 1998,
securities increased approximately $34.9 million from $192.6 million at
December 31, 1997 to $227.5 million at December 31, 1998. The increase was
primarily attributable to increased deposit growth. At December 31, 1999,
investment securities represented 48.3% of total assets compared with 62.5% of
total assets at December 31, 1998. The yield on the investment portfolio for
the year ended December 31, 1999 was 6.19% compared with a yield of 6.29% for
the year ended December 31, 1998. The yield on the investment portfolio for the
year ended December 31, 1997 was 6.39%.
The following table summarizes the amortized cost of investment securities
held by Commercial as of the dates shown:
December 31,
September 30, --------------------------
2000 1999 1998 1997
------------- -------- -------- --------
(Dollars in thousands)
U.S. Treasury securities.............. $ 2,003 $ 3,011 $ 15,142 $ 29,284
U.S. Government securities............ 135,913 131,411 161,847 143,291
Corporate debt securities............. 24,919 28,037 27,610 14,414
Mortgage-backed securities............ 38,736 28,772 11,632 4,308
State and municipal securities........ 10,466 11,048 11,202 1,304
Other................................. 27 27 27 27
-------- -------- -------- --------
Total amortized cost................ 212,064 202,306 227,460 192,628
Mark to market........................ 86 6 -- --
-------- -------- -------- --------
Total............................... $212,150 $202,312 $227,460 $192,628
======== ======== ======== ========
76
The following table summarizes the contractual maturity of investment
securities on an amortized cost basis and their weighted average yields as of
September 30, 2000:
September 30, 2000
-------------------------------------------------------------------------
After One After Five
Year but Years but
Within One Within Five Within Ten After Ten
Year Years Years Years
------------ ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
------ ----- ------- ----- ------- ----- ------- ----- -------- -----
(Dollars in thousands)
U.S. Treasury
securities............. $2,003 6.40% $ -- --% $ -- --% $ -- --% $ 2,003 6.40%
U.S. Government
securities............. 5,049 6.07 53,044 6.22 75,857 6.17 1,963 7.99 135,913 6.21
Corporate debt
securities............. -- -- 17,909 5.96 7,010 8.02 -- 24,919 5.98
Mortgage-backed
securities............. 2 7.33 4,063 5.88 280 7.69 34,391 6.88 38,736 6.79
State and municipal
securities............. 725 5.73 3,828 5.81 3,267 5.72 2,646 5.49 10,466 5.69
Other................... -- -- 27 8.09 -- -- -- -- 27 8.09
------ ------- ------- ------- --------
Total amortized cost... $7,779 $78,871 $86,414 $39,000 212,064
====== ======= ======= ======= ========
Mark to market.......... 86 --
--------
Total.................. $212,150
========
The following table summarizes the carrying value and classification of
securities as of the dates shown:
December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Available for sale............................... $ 8 $ 2 $ --
Held to maturity................................. 202,304 227,458 192,628
-------- -------- --------
Total securities............................... $202,312 $227,460 $192,628
======== ======== ========
The following table summarizes the amortized cost of securities classified
as held to maturity and their approximate fair values as of the dates shown:
September 30, 2000 December 31, 1999
---------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(Dollars in thousands)
Held to maturity:
U.S. Treasury
securities and
obligations of U.S.
government agencies... $126,676 $15 $(4,335) $122,356 $134,422 $ 7 $(6,437) $127,992
Corporate debt
securities 23,893 -- (1,075) 22,818 28,037 2 (1,162) 26,877
Mortgage-backed
securities............ 26,005 34 (1,188) 24,851 28,772 41 (1,644) 27,169
Obligations of states
and political
subdivisions.......... 9,743 -- (480) 9,263 11,048 -- (716) 10,332
Other securities....... 25 -- -- 25 25 -- -- 25
-------- --- ------- -------- -------- --- ------- --------
Total................. $186,342 $49 $(7,078) $179,313 $202,304 $50 $(9,959) $192,395
======== === ======= ======== ======== === ======= ========
77
December 31, 1998 December 31, 1997
---------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(Dollars in thousands)
Held to maturity:
U.S. Treasury
securities and
obligations of U.S.
government agencies... $176,989 $2,936 $(118) $179,807 $172,577 $ 937 $(160) $173,354
Corporate debt
securities............ 27,610 667 (89) 28,188 14,414 54 (4) 14,464
Mortgage-backed
securities............ 11,632 109 (49) 11,692 4,308 80 (23) 4,365
Obligations of states
and political
subdivisions.......... 11,202 127 (44) 11,285 1,304 5 -- 1,309
Other securities....... 25 -- -- 25 25 -- -- 25
-------- ------ ----- -------- -------- ------ ----- --------
Total................. $227,458 $3,839 $(300) $230,997 $192,628 $1,076 $(187) $193,517
======== ====== ===== ======== ======== ====== ===== ========
The following table summarizes the amortized cost of securities classified
as available for sale and their approximate fair values as of September 30,
2000:
September 30, 2000
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- -------
(Dollars in thousands)
Equity securities..................... $ 2 $ 4 $ -- $ 6
U.S. Treasury securities and
obligations of U.S government
agencies............................. 11,237 18 (17) 11,238
Corporate debt securities............. 1,026 -- (15) 1,011
Mortgage-backed securities............ 12,732 120 (21) 12,831
Obligations of states and political
subdivisions......................... 725 -- (3) 722
------- ---- ---- -------
Total............................... $25,722 $142 $(56) $25,808
======= ==== ==== =======
On July 1, 2000, $24.9 million in securities were classified as available
for sale. Prior to July 2000, Commercial had an insignificant amount of
securities classified as available for sale. Commercial expects to continue
classifying a portion of its securities as available for sale.
At the date of purchase, Commercial classifies 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
Commercial offers a variety of deposit accounts having a wide range of
interest rates and terms. Commercial's deposit accounts consist of demand,
savings, money market and time accounts. Commercial relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits. Commercial does not have or accept any brokered deposits.
At September 30, 2000, demand, money market and savings deposits accounted
for approximately 69.6% of total deposits, while certificates of deposit made
up 31.4% of total deposits. Noninterest-bearing demand deposits totaled $67.8
million or 17.6% of total deposits at September 30, 2000 compared with $60.4
million or 17.6% of
78
total deposits at December 31, 1999. The average cost of deposits, including
noninterest-bearing demand deposits, was 3.92% for the nine months ended
September 30, 2000 compared with 3.30% for the same period in 1999. The
increase in the average cost of deposits was primarily due to the higher
interest rate environment during the first nine months of 2000 compared with
the same period in 1999.
At December 31, 1999, total deposits increased to $343.9 million from $323.7
million at December 31, 1998, an increase of $20.1 million or 6.2%. The
increase is attributable to an increase in the amount of deposits held in
personal certificates of deposit. In 1998, deposits rose to $323.7 million from
$301.6 million in 1997, an increase of $22.1 million or 7.3%. This increase is
primarily attributable to an increase in public funds deposits. Commercial's
ratio of average noninterest-bearing demand deposits to average total deposits
for years ended December 31, 1999, 1998 and 1997 were 17.2%, 17.6% and 18.8%,
respectively.
The following table presents for the periods indicated the daily average
balances and weighted average rates paid on deposits:
Nine Months
Ended Years Ended December 31,
September 30, -------------------------------------------
2000 1999 1998 1997
------------- ------------- ------------- -------------
Amount Rate Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ---- -------- ----
(Dollars in thousands)
Noninterest-bearing
demand................. $ 61,135 --% $ 56,549 --% $ 53,651 --% $ 49,174 --%
Interest-bearing
demand................. 113,847 4.42 115,942 3.79 106,511 4.08 81,532 3.99
Savings and money
market................. 71,236 4.04 65,500 3.64 55,101 3.68 45,184 3.39
Time.................... 114,359 5.46 91,265 4.75 90,249 5.19 86,221 5.14
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits........ $360,577 3.92% $329,256 3.38% $305,512 3.62% $262,111 3.52%
======== ==== ======== ==== ======== ==== ======== ====
The following table sets forth the amount of Commercial's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
September 30,
2000
-------------
(Dollars in
thousands)
Three months or less........................................ $20,349
Over three months through six months........................ 9,928
Over six months through one year............................ 11,519
Over one year............................................... 5,826
-------
Total..................................................... $47,622
=======
Interest Rate Sensitivity and Liquidity
Commercial's asset liability and funds management policy provides management
with the necessary guidelines for effective funds management, and Commercial
has established a measurement system for monitoring its net interest rate
sensitivity position.
Interest rate risk is managed by the Funds Management and Interest Rate Risk
Committee ("Funds Committee") which is composed of certain officers and
directors of Heritage Bank, in accordance with policies approved by Heritage's
board of directors. The Funds Committee formulates strategies based on
appropriate levels of interest rate risk. In determining the appropriate level
of interest rate risk, the Funds Committee considers the impact on earnings and
capital based on the current outlook on interest rates, potential changes in
interest rates, regional economies, liquidity, business strategies and other
factors. The Funds Committee 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 activity, commitments
79
to originate loans, and the maturities of investments and borrowings.
Additionally, the Funds Committee reviews liquidity, cash flow flexibility,
maturities of deposits and consumer and commercial deposit activity. Management
uses two methodologies to manage interest rate risk: (1) an analysis of
relationships between interest-earning assets and interest-bearing liabilities;
and (2) an interest rate shock simulation model. Commercial has traditionally
managed its business to reduce its overall exposure to changes in interest
rates, however, under current policies of Commercial's and Heritage's boards of
directors, management has been given some latitude to increase Commercial's
interest rate sensitivity position within certain limits if, in management's
judgement, it will enhance profitability. As a result, changes in market
interest rates may have a greater impact on Commercial's financial performance
in the future than they have had historically.
To effectively measure and manage interest rate risk, Commercial uses an
interest rate shock simulation model to determine the impact on net interest
income under various interest rate scenarios, balance sheet trends and
strategies. From these simulations, interest rate risk is quantified and
appropriate strategies are developed and implemented. Additionally, duration
and market value sensitivity measures are utilized when they provide added
value to the overall interest rate risk management process. The overall
interest rate risk position and strategies are reviewed by Commercial's board
of directors on an ongoing basis.
Commercial manages its exposure to interest rates by structuring its balance
sheet in the ordinary course of business. Commercial does not currently enter
into instruments such as leveraged derivatives, interest rate swaps, caps,
floors, financial options, financial futures 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. However, it is
management's intent to achieve a proper balance so that incorrect rate
forecasts should not have a significant impact on earnings.
80
The following table sets forth an interest rate sensitivity analysis for
Commercial at September 30, 2000:
Volumes Subject to Repricing Within
------------------------------------------------------
Greater
31-180 181-365 than 1
0-30 Days Days Days Year Total
--------- --------- --------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Loans................. $ 2,382 $ 2,838 $ 3,007 $146,471 $154,698
Securities............ 3,128 3,202 2,528 203,292 212,150
Time deposits......... 293 297 495 198 1,283
Federal funds sold and
other temporary
investments.......... 35,200 -- -- -- 35,200
--------- --------- --------- -------- --------
Total interest-earning
assets................. $ 41,003 $ 6,337 $ 6,030 $349,961 $403,331
Interest-bearing
liabilities:
Demand, money market
and savings
deposits............. $ 200,232 $ -- $ -- $ -- $200,232
Certificates of
deposit and other
time deposits........ 16,653 48,667 32,656 19,088 117,064
FHLB advances......... -- -- -- 14,081 14,081
--------- --------- --------- -------- --------
Total interest-bearing
liabilities............ $ 216,885 $ 48,667 $ 32,656 $ 33,169 $331,377
Period GAP.............. $(175,882) $ (42,330) $ (26,626) $316,792 $ 71,954
Cumulative GAP.......... $(175,882) $(218,212) $(244,838) $ 71,954
Period GAP to total
assets................. (41.09)% (9.89)% (6.22)% 74.01%
Cumulative GAP to total
assets................. (41.09)% (50.98)% (57.20)% 16.81%
Commercial's one-year cumulative GAP position at September 30, 2000 was
negative $244.8 million or 57.2% of assets. This is a one-day position that is
continually changing and is not indicative of Commercial's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. For example, the GAP position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay
more rapidly during periods of declining interest rates than during periods of
rising interest rates. Because of this and other risk factors not contemplated
by the GAP position, an institution could have a matched GAP position in the
current rate environment and still have its net interest income exposed to
increased rate risk. The Funds Committee reviews Commercial's interest rate
risk position on a quarterly basis.
In addition to GAP analysis, Commercial 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 Commercial's simulation analysis,
Commercial estimates that a 200 basis point rise in rates over the next 12
month period would have an impact of approximately (15.7%) on its net interest
income for the period, while a 200 basis point decline in rates over the next
12 month period would have an impact of approximately 6.1% on its net interest
income for the period. The results are primarily from the behavior of demand,
money market and savings deposits. Commercial 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.
81
Liquidity involves Commercial'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
Commercial on an ongoing basis. Commercial's liquidity needs are primarily met
by growth in core deposits. Although access to purchased funds from
correspondent banks is available and has been utilized on occasion to take
advantage of investment opportunities, Commercial does not rely on these
external funding sources. The cash and federal funds sold position,
supplemented by amortizing investments along with payments and maturities
within the loan portfolio, have historically created an adequate liquidity
position.
Capital Resources
Capital management consists of providing equity to support both current and
future operations. Commercial is subject to capital adequacy requirements
imposed by the Federal Reserve and Heritage Bank is subject to capital adequacy
requirements imposed by the Federal Deposit Insurance Corporation. Both the
Federal Reserve 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 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 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%. 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 the Federal Deposit Insurance Corporation Improvement Act of
1991, 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. Heritage Bank is subject to capital adequacy guidelines of the FDIC
that are substantially similar to the Federal Reserve'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." Heritage Bank is
classified "well capitalized" for purposes of the FDIC's prompt corrective
action regulations.
Total shareholders' equity as of September 30, 2000 was $27.0 million, an
increase of $1.2 million or 4.8% compared with shareholders' equity of $25.8
million at December 31, 1999. The increase was due to net earnings for the
period of $2.0 million offset by the payment of dividends in the amount of
$650,000.
82
The following table provides a comparison of Commercial's and Heritage
Bank's leverage and risk-weighted capital ratios as of September 30, 2000 and
December 31, 1999 to the minimum and well-capitalized regulatory standards:
Minimum
Required To be Well Actual Ratio Actual Ratio
for Capitalized Under at at
Capital Prompt Corrective December 31, September 30,
Purposes Action Provisions 1999 2000
-------- ----------------- ------------ -------------
Commercial
Leverage ratio.......... 3.0%(1) N/A 6.5% 6.4%
Tier 1 risk-based
capital ratio.......... 4.0% N/A 13.3 13.8
Risk-based capital
ratio.................. 8.0% N/A 14.5 15.0
Heritage Bank
Leverage ratio.......... 3.0%(2) 5.0% 6.5% 6.4%
Tier 1 risk-based
capital ratio.......... 4.0% 6.0% 13.1 13.6
Risk-based capital
ratio.................. 8.0% 10.0% 14.3 14.8
- --------
(1) The Federal Reserve may require Commercial to maintain a leverage ratio
above the required minimum.
(2) The FDIC may require Heritage Bank to maintain a leverage ratio above the
required minimum.
83
BUSINESS OF COMMERCIAL
General
Commercial was organized as a bank holding company for Heritage Bank in
1979. Heritage Bank is Texas banking association that was chartered in 1898.
Commercial offers a variety of services through Heritage Bank to satisfy the
needs of the consumer and commercial customers in its market area. The
principal services offered by Commercial include most types of lending,
including commercial, consumer and real estate loans. It also offers safe
deposit boxes, a night deposit facility, motor bank, wire transfer and ATM
cards. As of September 30, 2000, Commercial had total assets of $428.1 million,
loans of $154.7 million, total deposits of $385.0 million and total
shareholders' equity of $27.0 million.
Facilities
Commercial conducts business at 11 full service banking locations in and
around the Houston metropolitan area. Commercial's headquarters are located at
4295 San Felipe, Suite 100, Houston, Texas in a three story office building in
which Commercial leases approximately 18,000 square feet. Commercial owns all
of the buildings in which its banking centers are located other than the
Downtown, Medical Center, Cypress, Fairfield, Bellaire, and River Oaks banking
centers. The lease terms of the Medical Center, Cypress, Fairfield, Bellaire
and River Oaks banking locations expire at various times from the years 2001
through 2007. The lease term of the Downtown location expires in 2012. The
expiration dates do not include renewal option periods which may be available.
The following table sets forth specific information on each of Commercial
banking locations:
Deposits at
Location Address September 30, 2000
-------- ------- ----------------------
(Dollars in thousands)
Bellaire................ 6800 West Loop South, Suite 100 $29,450
Bellaire, Texas 77041
Cleveland............... 104 W. Crockett 52,859
Cleveland, Texas 77327
Cypress(1).............. 26130 Hempstead Highway 28,272
Cypress, Texas 77429
Downtown................ Two Shell Plaza 4,908
777 Walker
Houston, Texas 77002
Fairfield............... 15050 Fairfield Village Square Drive 5,212
Cypress, Texas 77429
Liberty................. 520 Main Street 51,134
Liberty, Texas 77575
Magnolia................ 18935 FM 1488 Road 25,205
Magnolia, Texas 77355
Medical Center.......... 7505 S. Main 12,390
Houston, Texas 77030
River Oaks/Galleria..... 4295 San Felipe 96,862
Houston, Texas 77027
Tanglewood/Memorial..... 5707 Woodway 8,244
Houston, Texas 77057
Wharton................. 143 W. Burleson 70,538
Wharton, Texas 77488
Waugh Drive(2).......... 55 Waugh Drive (2)
Houston, Texas 77007
84
- --------
(1) The Cypress branch is expected to relocate to 25820 Northwest Freeway in
the fourth quarter of 2001.
(2) Expected to open for business in the first quarter of 2001.
Competition
The banking business is highly competitive, and the profitability of
Commercial depends principally on Commercial's ability to compete in the market
areas in which its banking operations are located. Commercial 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 nonbank 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 Commercial. Commercial has been able to compete
effectively with other financial institutions by emphasizing customer service,
technology and local office decision-making; 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.
Employees
As of September 30, 2000, Commercial had 142 full-time employees, two of
whom were executive officers of Commercial and 12 of whom were executive
officers of Heritage Bank. Commercial provides medical and hospitalization
insurance to its full-time employees. Commercial considers its relations with
its employees to be excellent. Neither Commercial nor Heritage Bank is a party
to any collective bargaining agreement.
Legal Proceedings
Commercial and Heritage Bank from time to time are involved in legal
proceedings arising in the normal course of business. Other than such
proceedings incidental to their business, Commercial's management does not
believe that there is any pending or threatened legal proceedings against
Commercial or the bank which, upon resolution, would have a material adverse
effect upon Commercial's financial condition, results of operations or cash
flows. The continued absence of such proceedings is a condition to Prosperity's
obligation to consummate the merger.
Supervision and Regulation
Bank holding companies and banks are regulated extensively under both
federal and state law. Commercial and Heritage Bank are subject to regulation
and supervision by the Federal Reserve, the FDIC and the Texas Department of
Banking. The deposits of Heritage Bank are insured by the FDIC. Although the
various laws and regulations which apply to Commercial and Heritage Bank are
intended to insure safe and sound banking practices, they are mainly intended
to benefit depositors and the federal deposit insurance fund, not the
shareholders of Commercial or Heritage Bank. The following discussion
summarizes certain laws and regulations affecting Commercial and Heritage Bank.
References to applicable statutes and regulations in this "Supervision and
Regulation" section are brief summaries thereof, do not purport to be complete
and are qualified in their entirety by reference to such statutes and
regulations.
Commercial is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "BHC Act") and is registered as such with
the Federal Reserve. As a bank holding company, Commercial is required to file
with the Federal Reserve an annual report and such additional information as
the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve
may also make examinations of Commercial and each of its subsidiaries. Under
the BHC Act, bank holding companies are prohibited, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company engaging in activities other than banking or
managing or controlling banks or furnishing
85
services to or performing services for their banking subsidiaries. However, the
BHC Act authorizes the Federal Reserve to permit bank holding companies to
engage in, and to acquire or retain shares of companies that engage in
activities which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Under the Gramm-Leach-Bliley Act, bank holding companies may also elect to
become financial holding companies if they meet certain requirements relating
to capitalization and management and have filed a declaration with the Federal
Reserve electing to be a financial holding company. Bank holding companies that
elect to become financial holding companies remain subject to all of the rules
and regulations governing bank holding companies discussed above. However,
financial holding companies may engage not only in activities already
permissible for bank holding companies but also in a full range of financial
activities, including not only banking, insurance and securities activities,
but also merchant banking and additional activities determined to be "financial
in nature." Commercial is not a financial holding company.
The BHC Act requires bank holding companies, including financial holding
companies, to obtain the prior approval of the Federal Reserve before they may
acquire substantially all of the assets of any bank or ownership or control of
any voting shares of any bank if, after such acquisition, they would own or
control, directly or indirectly, more than five percent of the voting shares of
any such bank.
The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks which are members of the
Federal Reserve System and other affiliates (which includes any holding company
of which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve System are
also subject to these limitations. Further, federal law prohibits a bank
holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or the furnishing of services.
If a depository institution fails to meet regulatory capital requirements,
the regulatory agencies can require submission and funding of a capital
restoration plan by the institution, place limits on its activities, require
the raising of additional capital and, ultimately, require the appointment of a
conservator or receiver for the institution. The obligation of a controlling
bank holding company to fund a capital restoration plan is limited to the
lesser of 5% of an undercapitalized subsidiary's assets or the amount required
to meet regulatory capital requirements. If the controlling bank holding
company fails to fulfill its obligations and files (or has filed against it) a
petition under the Federal Bankruptcy Code, the FDIC's claim may be entitled to
a priority in such bankruptcy proceeding over third party creditors of the bank
holding company.
In general, federal and state banking laws and regulations govern all areas
of the operations of Commercial and Heritage Bank, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state bank regulatory agencies also have
the general authority to limit the dividends paid by insured banks and bank
holding companies if such payments may be deemed to constitute an unsafe and
unsound practice. Federal and state banking agencies also have authority to
impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
Commercial is organized under the laws of the State of Texas and is
supervised, regulated and regularly examined by the Federal Reserve. Heritage
Bank is organized under the laws of the State of Texas and is a member of the
Federal Reserve System.
Federal law further provides that no insured depository institution may make
any capital distribution (which would include a cash dividend) if, after making
the distribution, the institution would not satisfy one or more of its minimum
capital requirements. Moreover, the federal bank regulatory agencies also have
the general authority to limit the dividends paid by insured banks if such
payments may be deemed to constitute an unsafe and unsound practice. Insured
banks are prohibited from paying dividends on its capital stock while in
86
default in the payment of any assessment due to the FDIC except in those cases
where the amount of the assessment is in dispute and the insured bank has
deposited satisfactory security for the payment thereof.
Other legislative and regulatory proposals regarding changes in banking, and
the regulation of banks, thrifts and other financial institutions, are from
time to time introduced in Congress. Certain of these proposals, if adopted,
could significantly change the regulations of banks and the financial services
industry. We cannot be predicted whether any of these proposals will be adopted
or, if adopted, how these proposals will affect the financial condition or
results of operation of Commercial or Heritage Bank.
87
BENEFICIAL OWNERSHIP OF COMMERCIAL STOCK BY
MANAGEMENT OF COMMERCIAL AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Commercial common stock as of the Record Date by (1) directors and
executive officers of Commercial, (2) each person who is known by Commercial to
own beneficially 5% or more of the Commercial stock and (3) all directors and
executive officers as a group. Also included is the number of shares and
percentage of Prosperity common stock to be owned by such persons and by
directors and executive officers as a group upon the exchange of Commercial
common stock for Prosperity common stock pursuant to the merger. Unless
otherwise indicated, based on information furnished by such shareholders,
management of Commercial believes that each person has sole voting and
dispositive power with respect to all shares of which he is the beneficial
owner and the address of such shareholder is the same as Commercial's address.
Pro Forma
Amount Amount
(Percent) and (Percent) and
Nature of Nature of
Beneficial Beneficial
Ownership of Ownership of
Commercial Prosperity
Name of Beneficial Owner Position with Commercial Common Stock(1) Common Stock(2)
- ------------------------ ------------------------ --------------- ---------------
Charles A. Davis, Jr.... Director 232 35,960
(1.99)% (*)
Ned S. Holmes........... Chairman of the Board 6,678 (3) 1,035,090
(36.96)% (12.86)%
Ned S. Holmes Childrens
Trust.................. Principal Shareholder 1,314 203,670
(7.27)% (2.53)%
Holmes Family
Securities, Ltd........ Principal Shareholder 2,693 (4) 417,415
(14.91)% (5.18)%
A. Virgil Pace, Jr...... Director 638 98,890
(3.53)% (1.23)%
James H. Pouns.......... Director, Vice President, 104 (5) 16,120
Secretary and (*) (*)
Treasurer
H. E. Timanus, Jr....... Director, President and Chief 1,592 246,760
Executive (8.81)% (3.06)%
Officer
Directors and Executive
Officers as 9,244 1,432,820
a Group (5 persons).... (51.17)% (17.79)%
- --------
*Indicates ownership which does not exceed 1.0%.
(1) The percentage beneficially owned was calculated based on 18,067 shares of
Commercial common stock issued and outstanding.
(2) The percentage beneficially owned was calculated based on 5,251,525 shares
of Prosperity common stock issued and outstanding and assumes the issuance
of 155 shares of Prosperity common stock in exchange for each share of
Commercial common stock in connection with the merger.
(3) Includes 2,693 shares held of record by Holmes Family Securities, Ltd., of
which Mr. Holmes is managing partner, 208 shares held of record by Mr.
Holmes as custodian for Erin E. Holmes, 187 shares held of record by Mr.
Holmes as custodian for Allison S. Holmes, 969 shares held of record by the
Ned S. Holmes Profit Sharing Plan and 500 shares held of record by the
spouse of Mr. Holmes. Mr. Holmes expressly disclaims beneficial ownership
of the 500 shares held of record by his spouse.
(4) These shares are also included in the above shareholder table under Ned S.
Holmes because, as managing partner of the limited partnership, he is
deemed to be the beneficial owner of such shares.
(5) Includes 20 shares held of record by Primevest Financial Services, Inc. as
custodian for the James H. Pouns Individual Retirement Account.
88
PRINCIPAL HOLDERS OF PROSPERITY COMMON STOCK
Information regarding ownership of Prosperity common stock by (1) each
director and executive officer of Prosperity, (2) all directors and executive
officers of Prosperity as a group and (3) each person owning 5% or more of the
outstanding shares of Prosperity common stock is contained in Prosperity's
proxy statement dated March 17, 2000 for its annual meeting of shareholders
held on April 18, 2000, which is incorporated by reference in Prosperity's
Annual Report on Form 10-K for the year ended December 31, 1999, incorporated
by reference in this joint proxy statement-prospectus.
COMPARATIVE MARKET PRICES AND DIVIDEND DATA
Market prices. The Prosperity common stock commenced trading on The Nasdaq
Stock Market National Market System under the symbol "PRSP" on November 12,
1998. Prior to that date, Prosperity's common stock was privately held and not
listed on any public exchange or quotation system or actively traded.
Quotations of the sales volume and the closing sales prices of the common stock
of Prosperity are listed daily in Nasdaq's national market listings.
There has been no active public trading market for shares of Commercial
stock, although it is traded infrequently in private transactions about which
Commercial's management has little reliable information regarding price.
The following table includes, for the periods indicated since Prosperity's
initial public offering, the range of high and low sale prices of Prosperity's
common stock as quoted by Nasdaq's monthly statistical report. Share prices for
the Prosperity common stock have been restated to adjust for the four-for-one
stock split effected on September 10, 1998.
High Low
------- -------
1998 Fourth Quarter (since November 12, 1998)............ $12.625 $12.000
1999 First Quarter....................................... 13.250 12.063
Second Quarter...................................... 15.000 12.313
Third Quarter....................................... 16.875 13.875
Fourth Quarter...................................... 17.875 14.000
2000 First Quarter....................................... 16.563 12.875
Second Quarter...................................... 16.875 13.938
Third Quarter....................................... 18.875 16.125
Fourth Quarter (through December 18, 2000).......... 19.500 17.125
On November 7, 2000, the last trading day prior to the date of the joint
announcement by Prosperity and Commercial that they had entered into the merger
agreement, as reported in The Wall Street Journal, the closing per share sales
price of Prosperity common stock was $18.9375. The pro forma equivalent per
share value of the Commercial common stock on November 7, 2000 was $2,935.31
per share. This pro forma equivalent per share value is calculated by
multiplying the quoted Prosperity common stock price by the merger exchange
ratio of 155. On , 200 , as reported in The Wall Street Journal, the
closing price of Prosperity common stock was $ . You are urged to
obtain current market quotations.
As of September 30, 2000, Commercial had approximately 314 shareholders of
record and Prosperity had approximately 196 shareholders of record. The number
of beneficial owners of Prosperity common stock is unknown to Prosperity at
this time.
Following the merger, Prosperity common stock will continue to be quoted by
Nasdaq.
89
Dividend data. The following table sets forth the dividends declared per
share of Commercial common stock and Prosperity common stock for the periods
indicated:
Commercial Prosperity
---------- ----------
1997
First Quarter..................................... $24.00 $.025
Second Quarter.................................... 24.00 .025
Third Quarter..................................... 24.00 .05
Fourth Quarter.................................... 24.00 .05
1998
First Quarter..................................... $24.00 $ .05
Second Quarter.................................... 24.00 .05
Third Quarter..................................... 24.00 .05
Fourth Quarter.................................... 24.00 .05
1999
First Quarter..................................... $12.00 $ .05
Second Quarter.................................... 12.00 .05
Third Quarter..................................... 12.00 .05
Fourth Quarter.................................... 12.00 .05
2000
First Quarter..................................... $12.00 $ .09
Second Quarter.................................... 12.00 .09
Third Quarter..................................... 12.00 .09
Fourth Quarter (through December 18, 2000)........ 12.00 .09
The principal source of cash revenues to Commercial is dividends paid by
Heritage Bank with respect to its capital stock. The principal source of cash
revenues to Prosperity is dividends paid by First Prosperity Bank with respect
to its capital stock. There are certain restrictions on the payment of such
dividends imposed by federal and state banking laws, regulations and
authorities. As of September 30, 2000, an aggregate of approximately $5.3
million was available for payment of dividends by Heritage Bank to Commercial
under applicable restrictions, without regulatory approval. As of September 30,
2000, an aggregate of approximately $18.7 million was available for payment of
dividends by First Prosperity Bank to Prosperity under applicable restrictions,
without regulatory approval. Regulatory authorities could impose
administratively stricter limitations on the ability of Heritage Bank or First
Prosperity Bank to pay dividends to Commercial or Prosperity, respectively, if
such limits were deemed appropriate to preserve certain capital adequacy
requirements.
If Prosperity and Commercial do not merge, the board of directors of
Commercial intends to continue to consider the payment of quarterly dividends
on the outstanding shares of Commercial common stock. The merger agreement
prohibits Commercial from declaring or paying any dividends on shares of
Commercial stock, other than its regular quarterly cash dividend of $12.00 per
share. The declaration and payment of such dividends will be at the discretion
of the board of directors of Commercial and will depend upon future earnings of
Commercial, its general financial condition, the success of its business
activities, its capital requirements and general business conditions.
90
DESCRIPTION OF PROSPERITY CAPITAL STOCK
General
Prosperity has authorized two classes of stock: (1) 50,000,000 authorized
shares of Prosperity common stock, par value $1.00 per share, 5,251,525 shares
of which are issued and outstanding as of September 30, 2000; and (2)
20,000,000 authorized shares of preferred stock, par value $1.00 per share,
none of which have been issued. The following summary is qualified in its
entirety by reference to the articles of incorporation and bylaws of
Prosperity.
Prosperity Common Stock
The holders of Prosperity common stock are entitled to one vote for each
share of Prosperity common stock owned. Except as expressly provided by law and
except for any voting rights which may be conferred on any shares of preferred
stock issued by the Prosperity board, all voting power is in Prosperity common
stock. Holders of Prosperity common stock may not cumulate their votes for the
election of directors. Holders of Prosperity common stock do not have
preemptive rights to acquire any additional, unissued or treasury shares of
Prosperity, or securities of Prosperity convertible into or carrying a right to
subscribe to or acquire shares of Prosperity.
Holders of Prosperity common stock will be entitled to receive dividends out
of funds legally available therefor, if and when properly declared by the
Prosperity board. However, the Prosperity board may not declare or pay cash
dividends on Prosperity common stock, and no Prosperity common stock may be
purchased by Prosperity, unless full dividends on outstanding preferred stock
for all past dividend periods and for the current dividend period, if any, have
been declared and paid.
On liquidation of Prosperity, the holders of Prosperity common stock are
entitled to share pro rata in any distribution of the assets of Prosperity,
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 Prosperity
has been retired.
Preferred Stock
Prosperity is authorized to issue 20,000,000 shares of preferred stock. The
preferred stock is available for issuance from time to time for various
purposes as determined by the Prosperity board, including making future
acquisitions, raising additional equity capital and financing. Subject to
certain limits set by the Prosperity articles, the preferred stock may be
issued on such terms and conditions, and at such times and in such situations,
as the Prosperity board 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 Prosperity.
Moreover, except as otherwise limited by the Prosperity articles or
applicable laws, rules or regulations, the Prosperity board has the sole
authority to determine the relative rights and preferences of the preferred
stock and any series thereof without shareholder approval. The Prosperity
articles require all shares of preferred stock to be identical, except as to
the following characteristics, which may vary between different series of
preferred stock:
. dividend rate, preference of dividend with respect to any other class or
series of stock, and cumulativity, non-cumulativity or partial
cumulativity of dividends;
. 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;
. sinking fund provisions, if any, for the redemption or purchase of
shares;
91
. the amount payable upon shares in the event of voluntary or involuntary
liquidation;
. the terms and conditions on which shares may be converted, if the shares
of any series are issued with the privilege of conversion; and
. voting rights.
The Prosperity board does not intend to seek shareholder approval prior to
any issuance of preferred stock or any series thereof, unless otherwise
required by law or the rules of any applicable securities exchange. Under Texas
law, shareholder approval prior to the issuance of shares of Prosperity common
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 Prosperity board that the delay necessary for shareholder approval of a
specific issuance could be to the detriment of Prosperity and its shareholders.
The preferred stock could be deemed to have an anti-takeover effect in that,
if a hostile takeover situation should arise, shares of preferred stock could
be issued to purchasers sympathetic with Prosperity'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
Prosperity's securities or the removal of incumbent management.
The effects of the issuance of the preferred stock on the holders of
Prosperity common stock could include:
. reduction of the amount otherwise available for payments of dividends on
Prosperity common stock if dividends are payable on the series of
preferred stock;
. restrictions on dividends on Prosperity common stock if dividends on the
series of preferred stock are in arrears;
. dilution of the voting power of Prosperity 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;
. dilution of the equity interest of holders of Prosperity common stock if
the series of preferred stock is convertible, and is converted, into
Prosperity common stock; and
. restrictions on the rights of holders of Prosperity common stock to share
in Prosperity's assets upon liquidation until satisfaction of any
liquidation preference granted to the holders of the series of preferred
stock.
92
BUSINESS OF PROSPERITY
Prosperity is a bank holding company headquartered in Houston, Texas.
Prosperity conducts business through its subsidiary First Prosperity Bank.
Prosperity operates 18 full-service banking centers located throughout the
greater Houston metropolitan area and nine contiguous counties situated south
and southwest of Houston.
Prosperity operates under a community banking philosophy and seeks to
develop broad customer relationships based on service and convenience while
maintaining its conservative approach to lending and strong asset quality.
Prosperity offers its customers, primarily consumers and small and medium-sized
businesses, a variety of traditional loan and deposit products, which it
tailors to the specific needs of customers in a given market.
Prosperity began operations in 1983 as a vehicle to acquire the former
Allied Bank in Edna which was chartered in 1949, and has grown through a
combination of internal growth, the acquisition of community banks and branches
and the opening of new banking centers. As of September 30, 2000, Prosperity
had total assets of $693.1 million, total deposits of $628.5 million and total
shareholders' equity of $48.3 million.
Incorporation of Certain Documents by Reference
Certain documents filed by and relating to Prosperity are incorporated
herein by reference. See "Where You Can Find More Information" on page 94 for a
list of these documents.
Interests of Certain Persons
No director or executive officer of Prosperity has any material direct or
indirect financial interest in Commercial or the merger, except as a director,
executive officer or shareholder of Prosperity or its subsidiaries.
EXPERTS
The consolidated financial statements of Prosperity as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
incorporated in this joint proxy statement-prospectus by reference from the
Prosperity Annual Report on Form 10-K for the year ended December 31, 1999 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The consolidated financial statements of Commercial as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
included in this joint proxy statement-prospectus have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Prosperity common stock to be issued by
Prosperity will be passed upon by Bracewell & Patterson, L.L.P., Houston,
Texas. Certain legal matters with respect to the merger will be passed upon for
Commercial by Locke Liddell & Sapp LLP, Houston, Texas.
93
OTHER MATTERS
As of the date of this joint proxy statement-prospectus, each of our boards
of directors knows of no matters that will be presented for consideration at
the special meeting of our respective shareholders other than as described in
this joint proxy statement-prospectus. However, if any other matters are
properly brought before the Prosperity special meeting or the Commercial
special meeting or any adjournment or postponement of the respective special
meeting and are voted upon, it is intended that holders of the proxies will act
in accordance with their best judgment unless "Authority Withheld" is indicated
in the appropriate box on the proxy.
WHERE YOU CAN FIND MORE INFORMATION
Prosperity files reports, proxy statements and other information with the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
You may read and copy this information at the following locations of the
Commission:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-
2511
You may obtain information on the operation of the Public Reference Room by
calling the Commission at 1-800-SEC-0330. The Commission also maintains an
Internet world wide web site that contains reports, proxy statements and other
information about issuers, like Prosperity, who file electronically with the
Commission. The address of that site is http://www.sec.gov.
The Commission allows Prosperity to "incorporate by reference", which means
that Prosperity can disclose important business and financial information to
you by referring you to another document filed separately with the Commission.
The information that Prosperity incorporates by reference is considered to be
part of this joint proxy statement-prospectus, and later information that
Prosperity files with the Commission will automatically update and supersede
the information Prosperity included in this joint proxy statement-prospectus.
Prosperity incorporates by reference the documents listed below:
. Annual Report on Form 10-K for the year ended December 31, 1999;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000;
. Quarterly Report on Form 10-Q for the quarter ended September 30, 2000;
. Current Report on Form 8-K dated November 8, 2000; and
. Description of Prosperity common stock contained on Form 8-A dated
November 10, 1998.
Prosperity also incorporates by reference any future filings it makes with
the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this joint proxy statement-prospectus and before the meeting.
Any statement contained in this joint proxy statement-prospectus or in a
document incorporated or deemed to be incorporated by reference in this joint
proxy statement-prospectus shall be deemed to be modified or superseded to the
extent that a statement contained herein or in any subsequently filed document
which also is, or is deemed to be, incorporated by reference herein modified or
superceded such statement.
94
Upon your written or oral request, Prosperity will provide you without
charge a copy of any or all of the documents incorporated by reference herein,
other than the exhibits to those documents, unless the exhibits are
specifically incorporated by reference into the information that this proxy
statement/memorandum incorporates. Your written or oral requests for copies of
this proxy statement/memorandum and documents Prosperity has incorporated by
reference should be directed to:
Prosperity Bancshares, Inc.
1301 N. Mechanic
El Campo, Texas 77438
Attention: David Hollaway
Telephone (979) 543-2200
Facsimile (979) 543-1906
To obtain timely delivery, you must make a written or oral request for a
copy of such information by [five business days prior to meeting] ,
2001.
95
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
COMMERCIAL BANCSHARES, INC.
Page
----
Independent Auditors' Report for the Years Ended December 31, 1999, 1998
and 1997................................................................. F-2
Consolidated Balance Sheets as of September 30, 2000 (Unaudited), December
31, 1999 and 1998........................................................ F-3
Consolidated Statements of Income for the Nine Months Ended September 30,
2000 and 1999 (Unaudited) and the Years Ended December 31, 1999, 1998 and
1997..................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Nine
Months Ended September 30, 2000 (Unaudited) and for the Years Ended
December 31, 1999, 1998 and 1997......................................... F-5
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2000 and 1999 (Unaudited) and for the Years Ended December 31, 1999,
1998 and 1997............................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Commercial Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Commercial
Bancshares, Inc. and its subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally
accepted in the United States of America. 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 Commercial Bancshares, Inc.
and its subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States of America.
Deloitte & Touche LLP
Houston, Texas
February 11, 2000 (except for
Note 18 as to which the date
is November 8, 2000)
F-2
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
September 30, ------------------
2000 1999 1998
------------- -------- --------
(Dollars in thousands)
(Unaudited)
ASSETS
Cash and cash equivalents (Note 2).............. $ 15,507 $ 19,073 $ 12,364
Federal funds sold.............................. 35,200 39,200 7,050
Interest-bearing deposits in financial
institutions................................... 1,283 1,085 1,976
Available for sale securities, at fair value
(amortized cost of $25,722 (unaudited) at
September 30, 2000, and $2 at December 31, 1999
and 1998)...................................... 25,808 8 2
Held to maturity securities, at cost (fair value
of $179,313 (unaudited) at September 30, 2000
and $192,395 and $230,997 at December 31, 1999
and 1998, respectively)........................ 186,342 202,304 227,458
Loans (Notes 4, 5 and 9)........................ 154,698 143,298 105,628
Less allowance for credit losses (Note 6)....... (2,412) (2,278) (1,832)
-------- -------- --------
Loans, net................................ 152,286 141,020 103,796
Premises and equipment, net (Note 7)............ 4,589 4,610 3,351
Goodwill, net................................... 538 566 603
Accrued interest receivable..................... 3,902 3,735 4,309
Other real estate owned......................... 544 500 --
Other assets.................................... 2,101 6,857 2,937
-------- -------- --------
TOTAL........................................... $428,100 $418,958 $363,846
======== ======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS'
EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing......................... $ 67,691 $ 60,284 $ 57,316
Interest-bearing (Note 8)................... 317,296 283,549 266,390
-------- -------- --------
Total deposits............................ 384,987 343,833 323,706
Advances from the Federal Home Loan Bank (Note
9)........................................... 14,081 47,419 15,071
Accrued interest payable...................... 782 629 504
Other liabilities............................. 1,242 1,318 1,313
-------- -------- --------
Total liabilities......................... 401,092 393,199 340,594
COMMITMENTS AND CONTINGENCIES (Notes 10 and 14)
MINORITY INTEREST IN EQUITY OF SUBSIDIARY....... -- -- 2,906
SHAREHOLDERS' EQUITY (Notes 13, 15, and 16):
Common stock, $.10 par value; 40,000,000
shares authorized; 18,161(unaudited) shares
issued at September 30, 2000 and 18,161 and
16,007 shares issued at December 31, 1999 and
1998, respectively; 18,067 (unaudited) shares
outstanding at September 30, 2000 and 18,079
and 15,925 shares outstanding at December 31,
1999 and 1998, respectively.................. 2 2 2
Paid-in capital............................... 12,850 13,019 13,019
Retained earnings............................. 14,195 12,829 7,420
Treasury stock, at cost; 82 shares............ (95) (95) (95)
Accumulated other comprehensive income--net
unrealized gains on available for sale
securities, net of tax....................... 56 4 --
-------- -------- --------
Total shareholders' equity.................... 27,008 25,759 20,346
-------- -------- --------
TOTAL........................................... $428,100 $418,958 $363,846
======== ======== ========
See notes to consolidated financial statements.
F-3
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Nine
Months Ended For the Years Ended
September 30, December 31,
--------------- -----------------------
2000 1999 1999 1998 1997
------- ------- ------- ------- -------
(Unaudited)
(Dollars in thousands, except per share
data)
INTEREST INCOME:
Loans, including fees............... $ 9,682 $ 7,412 $10,324 $ 8,532 $ 7,504
Securities.......................... 10,329 10,525 13,792 13,300 10,819
Federal funds sold.................. 1,051 306 844 644 744
Deposits in financial institutions.. 61 73 86 128 160
------- ------- ------- ------- -------
Total interest income............. 21,123 18,316 25,046 22,604 19,227
------- ------- ------- ------- -------
INTEREST EXPENSE:
Deposits............................ 10,615 8,038 11,116 11,057 9,218
Federal funds purchased............. -- 144 145 -- --
Securities sold under repurchase
agreements......................... 74 125 124 2 15
Other borrowings.................... 1,252 1,044 1,771 736 141
------- ------- ------- ------- -------
Total interest expense............ 11,941 9,351 13,156 11,795 9,374
------- ------- ------- ------- -------
NET INTEREST INCOME................... 9,182 8,965 11,890 10,809 9,853
PROVISION FOR CREDIT LOSSES (Note 6).. -- 115 140 25 530
------- ------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES.................... 9,182 8,850 11,750 10,784 9,323
------- ------- ------- ------- -------
NONINTEREST INCOME:
Service charges on deposit
accounts........................... 1,424 1,421 1,915 1,992 2,341
Other............................... 353 599 715 324 153
------- ------- ------- ------- -------
Total noninterest income.......... 1,777 2,020 2,630 2,316 2,494
------- ------- ------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits (Note
13)................................ 4,254 3,764 4,951 4,549 4,173
Net occupancy expense............... 921 730 914 854 754
Data processing..................... 473 469 771 740 602
Furniture and equipment............. 555 506 681 590 531
Net loss and carrying cost of real
estate acquired by foreclosure..... 11 -- 15 -- (4)
Legal and professional fees......... 299 267 338 313 296
Minority interest................... -- 334 419 381 356
Other............................... 1,391 1,169 1,595 1,504 1,493
------- ------- ------- ------- -------
Total noninterest expense......... 7,904 7,239 9,684 8,931 8,201
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES............ 3,055 3,631 4,696 4,169 3,616
PROVISION FOR INCOME TAXES (Note 12).. 1,039 1,348 1,739 1,548 1,225
------- ------- ------- ------- -------
NET INCOME............................ $ 2,016 $ 2,283 $ 2,957 $ 2,621 $ 2,391
======= ======= ======= ======= =======
EARNINGS PER SHARE (Note 1):
Basic............................... $112.00 $142.69 $184.81 $163.81 $149.44
======= ======= ======= ======= =======
Diluted............................. $112.00 $142.69 $184.81 $163.81 $149.44
======= ======= ======= ======= =======
See notes to consolidated financial statements.
F-4
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Comprehensive
Income--Net
Unrealized
Loss on
Common Stock Available for Total
------------- Pain-In Retained Treasury Sale Shareholders'
Shares Amount Capital Earnings Stock Securities Equity
------ ------ ------- -------- -------- ------------- -------------
(Amounts in thousands, except share data)
BALANCE AT JANUARY 1,
1997................... 15,892 $ 2 $ 8,994 $ 9,270 -- -- $18,266
Net income............. 2,391 2,391
Net change in
unrealized loss on
available for sale
securities............ --
-------
Total comprehensive
income................ 2,391
-------
Exercise of stock
options............... 55 12 12
Purchase of treasury
stock................. (95) (95)
Cash dividends
declared, $96.00 per
share................. (1,524) (1,524)
------ --- ------- ------- ---- --- -------
BALANCE AT DECEMBER 31,
1997................... 15,947 2 9,006 10,137 (95) -- 19,050
Net income............. 2,621 2,621
Net change in
unrealized loss on
available for sale
securities............ --
-------
Total comprehensive
income................ 2,621
-------
Exercise of stock
options............... 60 14 14
Transfer of retained
earnings.............. 4,000 (4,000) --
Cash dividends
declared, $84.00 per
share................. (1,338) (1,338)
------ --- ------- ------- ---- --- -------
BALANCE AT DECEMBER 31,
1998................... 16,007 2 13,019 7,420 (95) -- 20,346
Net income............. 2,957 2,957
Net change in
unrealized loss on
available for sale
securities............ 4 4
-------
Total comprehensive
income................ 2,960
-------
Issuance of common
stock in exchange for
common stock of
Heritage Bank......... 2,154 3,216 3,216
Cash dividends
declared, $48.00 per
share................. (764) (764)
------ --- ------- ------- ---- --- -------
BALANCE AT DECEMBER 31,
1999................... 18,161 2 13,019 12,829 (95) 4 25,759
Comprehensive income:
Net income
(unaudited)........... 2,016 2,016
Net change in
unrealized gain (loss)
on available for sale
securities
(unaudited)........... 52 52
-------
Total comprehensive
income(unaudited)..... 2,068
-------
Cash paid to dissenting
shareholder in
connection with the
issuance of common
stock in exchange for
common stock of
Heritage Bank......... (156) (156)
Cash paid in lieu of
fractional shares..... (13) (13)
Cash dividends declared
(unaudited), $36.00
per share............. (650) (650)
------ --- ------- ------- ---- --- -------
BALANCE AT SEPTEMBER 30,
2000................... 18,161 $ 2 $12,850 $14,195 $(95) $56 $27,008
====== === ======= ======= ==== === =======
See notes to consolidated financial statements.
F-5
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine
Months Ended For the Years Ended
September 30, December 31,
---------------- --------------------------
2000 1999 1999 1998 1997
------- ------- ------- -------- -------
(Unaudited)
(Dollars in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income...................... $ 2,016 $ 2,283 $ 2,957 $ 2,621 $ 2,391
Adjustments to reconcile net
income to net cash provided by
operating activities:
Net amortization of premium on
investments.................. 154 232 390 574 551
Provision for credit losses... 134 420 140 25 530
Gain on sale of real estate
acquired by foreclosure...... -- -- -- -- (78)
Depreciation and
amortization................. 486 431 644 662 605
Minority interest in equity of
subsidiary................... -- 249 310 181 128
Change in operating assets and
liabilities:
Decrease (increase) in accrued
interest receivable.......... (167) 372 573 (566) (717)
Decrease (increase) in other
assets....................... (163) (477) 11 (68) (18)
Increase (decrease) in accrued
interest payable............. 152 65 125 (49) 62
Increase (decrease) in other
liabilities.................. (75) 338 4 (85) (485)
------- ------- ------- -------- -------
Net cash provided by
operating activities....... 2,537 3,913 5,154 3,295 2,969
------- ------- ------- -------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from maturities, calls
and principal paydowns of held
to maturity securities......... 35,668 44,232 53,895 83,442 38,965
Purchase of held to maturity
securities..................... (44,784) (29,130) (29,130) (118,847) (77,170)
Proceeds from maturities, calls
and principal paydowns of
available for sale
securities..................... 3,258 -- -- -- --
Purchase of available for sale
securities..................... (4,086) -- -- -- --
Sale (purchase) of Federal Home
Loan Bank stock................ 5,009 (3,843) (3,931) (892) (528)
Net (increase) decrease in
interest-bearing deposits in
financial institutions......... (198) 891 891 198 495
Net increase in loans........... (11,400) (32,689) (37,865) (16,937) (14,932)
Net (increase) decrease of real
estate acquired by
foreclosure.................... (44) -- -- -- 116
Capital expenditures............ (553) (1,611) (1,865) (380) (464)
------- ------- ------- -------- -------
Net cash (used in) investing
activities................. (17,130) (22,150) (18,005) (53,416) (53,518)
------- ------- ------- -------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase in noninterest-
bearing deposits............... 7,407 379 2,968 2,822 2,344
Net increase (decrease) in
interest-bearing deposits...... 33,747 14,903 17,159 19,314 52,824
Dividends paid.................. (620) (573) (764) (1,337) (1,524)
Cash paid to dissenting
shareholder in connection with
the issuance of common stock
in exchange for common stock
of Heritage Bank............... (156) -- -- -- --
Cash paid in lieu of fractional
shares......................... (13) -- -- -- --
Purchase of treasury stock...... -- -- -- -- (95)
Proceeds from exercise of stock
options........................ -- -- -- 14 12
Net (decrease) increase in
advances from the Federal Home
Loan Bank...................... (33,338) 32,849 32,347 7,047 7,572
------- ------- ------- -------- -------
Net cash provided by
financing activities....... 7,027 47,558 51,710 27,860 61,133
------- ------- ------- -------- -------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS............ $(7,566) $29,321 $38,859 $(22,261) $10,584
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR............... 58,273 19,414 19,414 41,675 31,091
------- ------- ------- -------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.......................... $50,707 $48,735 $58,273 $ 19,414 $41,675
======= ======= ======= ======== =======
SUPPLEMENTAL INFORMATION:
Cash paid for interest.......... $11,788 $ 9,285 $13,031 $ 11,844 $ 9,312
Cash paid for taxes............. $ 830 $ 1,310 $ 1,597 $ 1,828 $ 1,549
See notes to consolidated financial statements.
F-6
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Commercial Bancshares, Inc. ("CBI"), is a bank holding
company headquartered in Houston, Texas, that provides retail and commercial
banking services through Heritage Bank (the "Bank"), its Texas-chartered
banking subsidiary. The Bank provides a broad line of financial products and
services to small to medium-sized businesses and to consumers through its
community banking offices in southeast Texas. CBI owns 100% of Heritage
Bancshares, Inc. ("HBI"). HBI owned 100.0% and 87.3% of the Bank at December
31, 1999 and 1998, respectively (see Note 15).
Summary of Significant Accounting and Reporting Policies--The accounting and
reporting policies of CBI and its subsidiaries (collectively referred to as the
"Company") generally conform to accounting principles generally accepted in the
United States of America ("GAAP") and the prevailing practices within the
banking industry.
Basis of Presentation--The consolidated financial statements include the
accounts of CBI, HBI and the Bank. Intercompany transactions have been
eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. Such estimates include, but are not limited
to, the allowance for credit losses.
Securities--Held to maturity securities 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 deterioration of the issuer's creditworthiness or a change in tax
law or statutory or regulatory requirements), these securities may be sold or
transferred to another portfolio.
Available for sale securities are carried at fair value. Unrealized gains
and losses are excluded from earnings and reported, net of tax, as accumulated
comprehensive income until realized. Securities with the available for sale
portfolio may be used as part of the Bank's asset/liability strategy and may be
sold in response to changes in interest rate risk, prepayment risk or other
similar economic forces.
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.
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 installment 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 of accounting. Both methods
approximate the interest method. For other loans, such income is recognized
using the simple interest method.
A loan is defined as impaired if, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due, both
principal and interest, according to the contractual terms of the loan
agreement. The allowance for credit losses related to an impaired loan is
determined based on the difference between the carrying value of loans and the
present value of expected cash flows discounted at the loan's
F-7
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Nonperforming and Past-Due Loans--Included in the nonperforming loan
category are loans that have been categorized by management as nonaccrual
because collection of interest is doubtful and loans that 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,
accrued interest is charged to operations. Generally, any payments received on
nonaccrual loans are applied first to outstanding loan amounts and next to the
recovery of charged-off loan amounts. Any excess is treated as recovery of lost
interest.
Allowance for Credit Losses--The allowance for credit losses is a valuation
allowance available for losses incurred on loans. All losses are charged to the
allowance when the loss actually occurs or when a determination is made that a
loss has occurred. 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 credit losses is adequate to absorb losses
in the existing portfolio. Based on these estimates, an amount is charged to
the provision for credit losses and credited to the allowance for credit losses
in order to adjust the allowance to a level determined to be adequate to absorb
losses.
Management's judgment as to the level of losses on existing loans involves
the consideration of current and anticipated economic conditions and their
potential effects on specific borrowers; an evaluation of the existing
relationships among loans, potential credit losses and the present level of the
allowance; results of examinations of the loan portfolio by regulatory
agencies; and management's internal review of the loan portfolio. In
determining the collectibility of certain loans, management also considers the
fair value of any underlying collateral.
It should be understood that estimates of credit losses involve an exercise
of judgment. While it is reasonably possible that in the near term the Company
may sustain losses that 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 credit
losses that exist in the current loan portfolio.
Premises and Equipment--Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation expense is computed
principally using the straight-line method of accounting over the estimated
useful lives of the assets. Leasehold improvements are amortized straight-line
over the periods of the leases or the estimated useful lives, whichever is
shorter.
Real Estate Acquired by Foreclosure--Real estate acquired by foreclosure is
recorded at fair value at the time of foreclosure less estimated costs to sell.
Any adjustments to reflect declines in value below the recorded amounts are
recognized as a valuation allowance. Increases or decreases in the valuation
allowance are charged or credited to income. Operating expenses of such
properties, net of related income, and gains and losses on their disposition
are included in other noninterest expense. The carrying amount of real estate
acquired by foreclosure was $500,000 at December 31, 1999. The Company had no
real estate acquired by foreclosure at December 31, 1998.
Income Taxes--CBI files a consolidated federal income tax return with its
subsidiaries. Each computes federal income taxes as if it filed a separate
return and remits to, or is reimbursed by, CBI based on the portion of taxes
currently due or refundable.
F-8
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes are accounted for by applying statutory tax rates in
effect at the balance sheet date to differences between the book basis and the
tax basis of assets and liabilities. The resulting deferred tax assets and
liabilities are adjusted to reflect changes in enacted tax laws or rates.
Comprehensive Income--Comprehensive income is comprised of net income and
all changes to stockholders' equity, except those due to investments by owners
(changes in capital surplus) and distributions to owners (dividends). CBI has
elected to report comprehensive income in the consolidated statements of
shareholders' equity.
Consolidated Statements of 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.
Goodwill--Goodwill is amortized using the straight-line method of accounting
over a period of 10 to 20 years. Management periodically performs an evaluation
of whether any impairment of the goodwill has occurred; if any such impairment
is identified, a write-down of the goodwill is recorded. There were no such
write-downs in 1999 or 1998.
Interest Rate Risk--The Bank is principally engaged in providing short-term
commercial loans with interest rates that fluctuate with various market
indices; medium and long-term real estate loans; and interim-term real estate
construction loans. These loans are primarily funded through short-term demand
deposits and longer-term certificates of deposit with variable and fixed rates.
The real estate loans are generally more sensitive to interest rate risk than
the commercial loans since most have fixed rates and longer maturities. In
addition, the Bank invests in fixed-rate securities. The value of these
securities is sensitive to changes in market interest rates.
Recent 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,
2000. The Company has no derivative instruments currently. Management believes
the implementation of this pronouncement will not have a material effect on the
Company's consolidated financial statements.
Reclassifications--Certain reclassifications have been made to prior year
amounts 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 share for all periods
presented has been calculated in accordance with SFAS No. 128. Outstanding
stock options issued by the Company represent the only dilutive effect
reflected in diluted weighted average shares.
Interim Financial Data--The interim financial data and related notes for the
nine month periods ended September 30, 2000 and 1999 included herein are
unaudited; however, in the opinion of management such interim financial data
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair representation of the results of the interim periods. The
operating results for interim periods may not be indicative of the results
expected for the full year.
F-9
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. CASH AND CASH EQUIVALENTS
The Bank is required by the Federal Reserve Bank to maintain average reserve
balances. Cash and cash equivalents in the consolidated balance sheets includes
amounts so restricted of approximately $4,633,000 and $4,965,000 at December
31, 1999 and 1998, respectively.
3. SECURITIES
The amortized cost and fair value of investments in debt securities were as
follows:
December 31, 1999
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ---------- ----------- ------------
Available for Sale
Equity securities............ 2,106 5,520 -- 7,626
------------ ------- ----------- ------------
Total available for sale
securities.................. $ 2,106 $ 5,520 $ -- $ 7,626
============ ======= =========== ============
Held to Maturity
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $134,421,709 $ 6,622 $(6,435,937) $127,992,394
Corporate debt securities.... 28,037,557 1,283 (1,161,623) 26,877,217
Mortgage-backed securities... 28,771,668 41,519 (1,644,273) 27,168,914
Obligations of states and
political subdivisions...... 11,048,383 318 (716,995) 10,331,706
Other securities............. 25,000 -- -- 25,000
------------ ------- ----------- ------------
Total held to maturity
securities.................. $202,304,317 $49,742 $(9,958,828) $192,395,231
============ ======= =========== ============
December 31, 1998
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ---------- ---------- ------------
Available for Sale
Equity securities.............. 2,106 -- -- 2,106
------------ ---------- --------- ------------
Total available for sale
securities.................... $ 2,106 $ -- $ -- $ 2,106
============ ========== ========= ============
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies..... $176,988,799 $2,936,065 $(118,217) $179,806,647
Corporate debt securities...... 27,609,940 666,637 (89,173) 28,187,404
Mortgage-backed securities..... 11,632,225 108,850 (48,648) 11,692,427
Obligations of states and
political subdivisions........ 11,202,259 127,226 (44,282) 11,285,203
Other securities............... 25,000 -- -- 25,000
------------ ---------- --------- ------------
Total held to maturity
securities.................... $227,458,223 $3,838,778 $(300,320) $230,996,681
============ ========== ========= ============
F-10
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and fair value of debt securities at December 31, 1999,
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.
Amortized
Held to Maturity Cost Fair Value
---------------- ------------ ------------
Due in one year or less........................... $ 10,910,421 $ 10,900,224
Due after one year through five years............. 59,393,409 57,795,364
Due after five years through ten years............ 101,294,658 94,840,130
Due after ten years............................... 1,934,161 1,690,599
------------ ------------
Total............................................. 173,532,649 165,226,317
Total mortgage-backed securities.................. 28,771,668 27,168,914
------------ ------------
Total held-to-maturity............................ $202,304,317 $192,395,231
============ ============
The Bank does not own any investment securities of any one issuer, excluding
the U.S. government and its agencies, of which aggregate-adjusted cost exceeded
10% of its shareholders' equity at December 31, 1999.
Investment securities with an amortized cost of $86,661,839 and $67,901,779
and a fair value of $80,420,938 and $68,803,927 at December 31, 1999 and 1998,
respectively, were pledged to secure public deposits and for other purposes
required or permitted by law.
4. LOANS
The loan portfolio consists of various types of loans made principally to
borrowers located in Wharton, Liberty, Montgomery and Harris Counties in Texas
and is classified by major type as follows:
December 31,
--------------------------
1999 1998
------------ ------------
Commercial and industrial........................ $ 27,376,316 $ 26,945,093
Real estate...................................... 112,473,854 74,705,424
Consumer......................................... 3,855,517 4,413,790
Lease financing.................................. 17,185 28,487
------------ ------------
Total............................................ 143,722,872 106,092,794
Less unearned discount........................... (424,415) (464,652)
------------ ------------
Total............................................ $143,298,457 $105,628,142
============ ============
At December 31, 1999 and 1998, the recorded investment in impaired loans was
approximately $761,000 and $253,000, respectively. These impaired loans
required an allowance for credit losses of approximately $459,828 and $2,365 as
of December 31, 1999 and 1998, respectively. The average recorded investment in
impaired loans for the years ended December 31, 1999 and 1998 was $728,411 and
$519,726, respectively. The Bank recognized no interest revenue on impaired
loans during 1999. The Bank recognized interest revenue on these impaired loans
of approximately $49,000 during 1998.
F-11
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999 and 1998, loans outstanding to directors, officers
and their affiliates were $2,263,745 and $2,691,191, respectively. In the
opinion of management, all transactions entered into between the Bank and such
related parties have been and are, in the ordinary course of business, made on
the same terms and conditions as similar transactions with unaffiliated
persons. An analysis of activity with respect to these related-party loans is
as follows:
Year Ended
December 31,
----------------------
1999 1998
---------- ----------
Beginning balance.................................... $2,691,191 $3,197,041
New loans............................................ 1,363,161 1,756,214
Repayments........................................... (1,790,607) (2,262,064)
---------- ----------
Ending balance....................................... $2,263,745 $2,691,191
========== ==========
5. NONPERFORMING LOANS AND PAST-DUE LOANS
The following table presents information relating to nonperforming loans and
past-due loans:
December 31,
-----------------
1999 1998
-------- --------
Nonaccrual loans.......................................... $755,534 $103,304
Loans past due for 90 days or more, not on nonaccrual..... 4,479 132,939
Restructured loans........................................ 5,471 149,469
-------- --------
Total..................................................... $765,484 $385,712
======== ========
With respect to the above nonaccrual loans, additional interest income of
$65,557 and $34,096 would have been earned under the original terms of the
loans for the years ended December 31, 1999 and 1998, respectively. No interest
income was earned on such loans during those years.
6. ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses is as follows:
Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Balance at beginning of year............. $1,832,149 $1,551,159 $1,044,839
Provision charged to operations.......... 140,000 25,000 530,000
Loans charged off........................ (26,379) (83,513) (134,058)
Loan recoveries.......................... 331,866 339,503 110,378
---------- ---------- ----------
Balance at end of year................... $2,277,636 $1,832,149 $1,551,159
========== ========== ==========
F-12
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
----------------------
1999 1998
---------- ----------
Land................................................. $1,817,727 $ 750,700
Buildings and leasehold improvements................. 4,043,730 3,779,611
Furniture, fixtures and equipment.................... 3,106,537 2,572,550
---------- ----------
Total................................................ 8,967,994 7,102,861
Less accumulated depreciation and amortization....... (4,357,942) (3,751,887)
---------- ----------
Premises and equipment, net.......................... $4,610,052 $3,350,974
========== ==========
8. INTEREST-BEARING 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, 1999 and 1998 were as follows:
December 31,
-----------------------
1999 1998
----------- -----------
Three months or less................................ $11,327,981 $15,117,975
Four through six months............................. 7,213,040 4,559,963
Seven through twelve months......................... 10,234,110 7,107,897
Thereafter.......................................... 8,020,249 5,221,526
----------- -----------
Total............................................... $36,795,380 $32,007,361
=========== ===========
Interest expense for certificates of deposit in excess of $100,000 was
$1,471,435 and $1,681,874 for the years ended December 31, 1999 and 1998,
respectively. The Bank has no brokered deposits, and there are no major
concentrations of deposits.
9. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank at December 31, 1999 and 1998 are
summarized as follows:
Interest Rates 1999 Amount 1998 Amount
-------------- ----------- -----------
Advances from the Federal Home Loan
Bank--due 2000 to 2019............ 5.39% to 6.48% $47,418,568 $15,070,987
The Federal Home Loan Bank ("FHLB") advances are secured by a blanket lien
of the Bank's first mortgage loans against one-to-four family residential
properties and certain investment securities owned by the Bank. The FHLB
requires that the amount of funds borrowed not exceed the greater of 75% of
the aggregate outstanding balances of the pledged loans or 35% of total
assets. At December 31, 1999, these advances were secured by loans with a
principal balance of approximately $64 million and investment securities with
a market value of approximately $1 million.
F-13
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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, the Bank is a party to various financial
instruments with off-balance-sheet risk in the normal course of business. These
financial instruments include commitments to extend credit and standby letters
of credit and involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the consolidated balance sheets.
The contract amounts of these instruments reflect the extent of the Bank's
involvement 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 these instruments. The Bank
uses the same credit policies in making these commitments and conditional
obligations as it does for on-balance-sheet instruments.
The following is a summary of the various financial instruments entered into
by the Bank:
December 31,
-----------------------
1999 1998
----------- -----------
Financial Instruments Whose Contract Amount
Represents Credit Risk:
Commitments to extend credit.................... $20,643,819 $27,177,356
Standby letters of credit....................... 289,000 973,983
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 customer creditworthiness on a case-by-case basis. The
amount of collateral obtained, if considered necessary, by the Bank upon
extension of credit is based on management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
11. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
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 Short-Term Investments--For such short-term instruments, the
carrying amount is a reasonable estimate of fair value.
F-14
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Securities--For securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans--The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposits--The fair values of deposits with no stated maturity are, as
required by SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," equal to the carrying value of such deposits. These deposits
include noninterest-bearing demand deposits, savings accounts, checking with
interest accounts and money market accounts. Discounted cash flows have been
used to value term deposits such as certificates of deposit. The discount rate
used is based on interest rates currently being offered on comparable deposits
as to amount and term.
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 values of commitments to
extend credit and standby letters of credit are estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. These amounts are not significant at the reporting date.
The estimated fair values of the Company's financial instruments at December
31, 1999 and 1998 were as follows (in thousands):
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets:
Cash and short-term
investments............ $ 59,358 $ 59,358 $ 21,390 $ 21,390
Securities.............. 202,312 192,403 227,458 230,997
Loans................... 143,298 135,251 105,628 103,331
Less allowance for
credit losses.......... (2,278) (2,278) (1,832) (1,832)
-------- -------- -------- --------
Total..................... $402,690 $384,734 $352,644 $353,886
======== ======== ======== ========
Financial liabilities:
Deposits................ $343,833 $344,032 $323,706 $324,339
Other borrowings........ 47,419 47,419 15,071 15,071
-------- -------- -------- --------
Total..................... $391,252 $391,451 $338,777 $339,410
======== ======== ======== ========
The fair value estimates presented are based on pertinent information
available to management as of December 31, 1999 and 1998. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore, current estimates of
fair value may differ from the amounts presented.
F-15
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. INCOME TAXES
The components of the provision for federal income taxes for the years ended
December 31, 1999 and 1998 were as follows:
Year Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
Taxes calculated at statutory rate......... $1,597,000 $1,417,000 $1,229,000
Increase (decrease) resulting from:
Minority interest........................ 142,000 129,000 121,000
Other.................................... -- 2,000 (125,000)
---------- ---------- ----------
Total...................................... $1,739,000 $1,548,000 $1,225,000
========== ========== ==========
The provision for income taxes differs from the amount computed by applying
the federal income tax statutory rate on income as follows:
1999 1998
---------- ----------
Taxes calculated at statutory rate.................... $1,597,000 $1,417,000
Increase (decrease) from:
Minority interest................................... 142,000 129,000
Other............................................... 2,000
---------- ----------
Total................................................. $1,739,000 $1,548,000
========== ==========
Deferred income taxes and benefits are provided for differences between the
financial statement carrying amount of existing assets and liabilities and
their respective tax bases. Significant deferred tax assets and liabilities at
December 31, 1999 and 1998 were as follows:
1999 1998
------- -------
Deferred tax assets:
Nonaccrual loans.......................................... $78,000 $67,000
Goodwill.................................................. 63,000 43,000
------- -------
Total deferred tax assets................................... 141,000 110,000
------- -------
Deferred tax liabilities:
Allowance for credit losses............................... 1,000 48,000
Depreciable assets........................................ 92,000 69,000
FHLB stock dividends...................................... 124,000 90,000
------- -------
Total deferred tax liabilities.............................. 217,000 207,000
------- -------
Net deferred tax liability.................................. $76,000 $97,000
======= =======
F-16
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. EMPLOYEE BENEFIT PLANS
Deferred Compensation Agreements--The Company had deferred compensation
agreements under a terminated retirement plan that provides for payments to the
employees or their surviving beneficiaries for a period of ten years beginning
at retirement. The liability for these agreements was completely funded at
December 31, 1999. Estimated future payments under the agreements are as
follows:
Years Ending December 31,
-------------------------
2000.............................................................. $ 16,500
2001.............................................................. 15,800
2002.............................................................. 15,000
2003.............................................................. 15,000
2004.............................................................. 15,000
Thereafter........................................................ 24,500
--------
Total........................................................... $101,800
========
Stock Option Plans--Under the Company's qualified and nonqualified incentive
stock option plans, options to purchase common stock may be granted to key
employees and directors at not less than market value at the date of grant.
Stock option transactions under the plans are summarized as follows:
Number Weighted-Average
of Shares Exercise Price
--------- ----------------
Outstanding at January 1, 1998.................... 160 $217
Exercised....................................... (60) 225
---
Outstanding at December 31, 1998 and 1999......... 100 $212
===
Options become exercisable one year after grant and expire ten years after
grant. All of the options were exercisable as of December 31, 1999 at a range
of $200-$225 per share. The weighted-average remaining contractual life at
December 31, 1999 was 1.79 years. Since the option prices are considered to
approximate fair market value at the date of grant, no compensation expense has
been recognized.
401(k) Plan--The Company has established a deferred compensation 401(k) plan
whereby the Company will match employee contributions up to 3% of their
compensation. Plan expense for the years ended December 31, 1999 and 1998 was
approximately $108,000 and $87,900, respectively.
F-17
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases certain premises and equipment under agreements
that require payment of minimum annual rentals plus an additional amount for
property taxes, insurance and maintenance. It is expected that in the normal
course of business, leases that expire will be renewed or replaced by leases on
other premises and equipment. Rent expense for the years ended December 31,
1999 and 1998 was approximately $394,000 and $326,000, respectively. Future
minimum rental payments under the noncancelable operating leases are as
follows:
Years Ending December 31,
-------------------------
2000............................................................ $ 700,000
2001............................................................ 707,000
2002............................................................ 680,000
2003............................................................ 447,000
2004............................................................ 314,000
Thereafter...................................................... 327,000
----------
Total......................................................... $3,175,000
==========
Litigation--A lawsuit is pending against the Company in the normal course of
business. Management, after reviewing this lawsuit with outside counsel,
considers that the aggregate liability, if any, will not be material to the
consolidated financial statements.
15. SHAREHOLDERS' EQUITY
During the year, a new entity named Heritage Interim Bank was formed.
Effective December 20, 1999, minority shareholders of Heritage Bank became
shareholders of CBI (under the Plan of Merger and Reorganization discussed
below), and Heritage Bank was merged into Heritage Interim Bank. Heritage
Interim Bank was then renamed Heritage Bank. CBI then contributed the shares it
owned in Heritage Interim Bank (renamed Heritage Bank) to Heritage Bancshares,
Inc. The result of the transaction was that CBI owns 100% of Heritage
Bancshares, Inc., which owns 100% of Heritage Bank. Legal counsel is of the
opinion that the exchange of shares by Heritage Bank minority shareholders for
shares in CBI is a nontaxable event.
Shareholders of Heritage Bank approved a Plan of Merger and Reorganization
(the "Plan") at a special shareholders meeting on October 23, 1999. Terms of
the Plan allowed minority shareholders of Heritage Bank to exchange their
shares for shares in CBI at a ratio of .121563 shares of CBI for each share of
Heritage Bank. The Plan also provided that CBI would not issue fractional
shares, and shareholders responding to the Plan within the prescribed time
frame would be allowed to either round up or round down with appropriate cash
adjustment.
16. REGULATORY MATTERS
The Company is 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 financial statements.
Under the capital adequacy guidelines, the Company must meet specific capital
requirements based on its assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company'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.
F-18
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To meet the capital adequacy requirements, the Company must maintain minimum
amounts and ratios as defined in the regulations. Management believes that as
of December 31, 1999 and 1998, the Company met all capital adequacy
requirements to which it was subject.
As of December 31, 1999, the most recent notification from the 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 below. There have been no
conditions or events since that notification that management believes changed
the Bank's category.
In 1998, per regulatory guidelines, the Company transferred $4.0 million
from retained earnings to paid in capital. This allowed the Bank to raise its
legal lending limit.
The following is a summary of the Company's capital ratios at December 31,
1999 and 1998 (dollars in thousands):
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- ------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ -----
CONSOLIDATED:
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets)............................ $27,467 14.5% $15,177 8.0% N/A N/A
Tier I Capital (to Risk Weighted
Assets)............................ $25,189 13.3% $ 7,589 4.0% N/A N/A
Tier I Capital (to Average Assets).. $25,189 6.5% $16,735 4.0% N/A N/A
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets)............................ $21,575 13.1% $13,232 8.0% N/A N/A
Tier I Capital (to Risk Weighted
Assets)............................ $19,743 12.0% $ 6,616 4.0% N/A N/A
Tier I Capital (to Average Assets).. $19,743 5.7% $14,464 4.0% N/A N/A
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
BANK ONLY:
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets)........................... $27,169 14.3% $15,189 8.0% $18,986 10.0%
Tier I Capital (to Risk Weighted
Assets)........................... $24,891 13.1% $ 7,594 4.0% $11,391 6.0%
Tier I Capital (to Average
Assets)........................... $24,891 6.5% $16,727 4.0% $20,909 5.0%
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets)........................... $24,177 14.5% $13,322 8.0% $16,652 10.0%
Tier I Capital (to Risk Weighted
Assets)........................... $22,344 13.4% $ 6,661 4.0% $ 9,991 6.0%
Tier I Capital (to Average
Assets)........................... $22,344 6.2% $14,352 4.0% $17,940 5.0%
Dividends paid by CBI and the Bank are subject to restrictions by certain
regulatory agencies. There was an aggregate of approximately $4,343,000 and
$5,063,000, respectively, available for payment of dividends as of December 31,
1999 under these restrictions.
F-19
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. PARENT-COMPANY-ONLY FINANCIAL INFORMATION
The following are parent-company-only condensed balance sheets as of
December 31, 1999 and 1998 and condensed statements of income and condensed
statements of cash flows for the years then ended:
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
ASSETS ----------- -----------
Cash and cash equivalents............................ $ 76,664 $ 83,059
Other assets......................................... 369,253 358,775
Investment in subsidiaries........................... 25,515,970 20,098,731
----------- -----------
TOTAL................................................ $25,961,887 $20,540,565
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES--Dividends payable and other............. $ 203,304 $ 194,513
STOCKHOLDERS' EQUITY:
Common stock....................................... 1,816 1,601
Paid-in capital.................................... 13,019,283 13,019,283
Retained earnings.................................. 12,828,761 7,420,088
Treasury stock..................................... (94,920) (94,920)
Accumulated other comprehensive income--net
unrealized gain on available for sale securities,
net of tax........................................ 3,643
----------- -----------
Total stockholders' equity....................... 25,758,583 20,346,052
=========== ===========
TOTAL................................................ $25,961,887 $20,540,565
=========== ===========
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
REVENUES--Dividends from subsidiaries....... $ 780,000 $1,365,000 $1,600,000
---------- ---------- ----------
EXPENSES:
Net occupancy expense..................... 8,791 8,039 3,668
Legal and professional fees............... -- 3,800 22,921
General and administrative................ 21,995 (15,920) 58,756
---------- ---------- ----------
Total expenses.......................... 30,786 (4,081) 85,345
---------- ---------- ----------
INCOME BEFORE INCOME TAX BENEFIT AND EQUITY
IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES.. 749,214 1,369,081 1,514,655
INCOME TAX (EXPENSE) BENEFIT................ 10,478 (1,389) 29,052
---------- ---------- ----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES................... 759,692 1,367,692 1,543,707
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES............................... 2,197,297 1,252,918 847,156
---------- ---------- ----------
NET INCOME.................................. $2,956,989 $2,620,610 $2,390,863
========== ========== ==========
F-20
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $2,956,989 $2,620,610 $2,390,863
Adjustments to reconcile net income to
net cash provided by operating
activities:
Change in operating assets and
liabilities:
Other assets......................... (10,478) 215,290 (64,502)
Other liabilities.................... 8,791 (242,200) 10,883
Equity in undistributed earnings of
subsidiaries.......................... (2,197,297) (1,252,918) (847,156)
---------- ---------- ----------
Net cash provided by operating
activities.......................... 758,005 1,340,782 1,490,088
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.. -- 13,500 11,501
Dividends paid........................... (764,400) (1,337,700) (1,523,737)
Purchase of treasury stock............... -- -- (94,920)
---------- ---------- ----------
Net cash flows used in financing
activities.......................... (764,400) (1,324,200) (1,607,156)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................... (6,395) 16,582 (117,068)
CASH AND CASH EQUIVALENTS:
Beginning of year........................ 83,059 66,477 183,545
---------- ---------- ----------
End of year.............................. $ 76,664 $ 83,059 $ 66,477
========== ========== ==========
18. SUBSEQUENT EVENT
On November 8, 2000, the Company entered into an Agreement and Plan of
Reorganization with Prosperity Bancshares, Inc., a Texas corporation, to
exchange all of the outstanding common stock of Commercial Bancshares, Inc.,
for common stock of Prosperity. The Agreement is subject to regulatory approval
and approval of the shareholders of Commercial and Prosperity and certain other
conditions set forth in the merger agreement.
F-21
________________________________________________
AGREEMENT AND PLAN OF REORGANIZATION
by and between
PROSPERITY BANCSHARES, INC.
and
COMMERCIAL BANCSHARES, INC.
Dated as of November 8, 2000
________________________________________________
TABLE OF CONTENTS
Page
INTRODUCTION........................................................................... 1
I. THE MERGER 2
Section 1.1. The Merger..................................................... 2
Section 1.2. Articles of Incorporation, Bylaws and Facilities of Continuing
Company........................................................ 2
Section 1.3. Effect of Merger............................................... 2
Section 1.4. Liabilities of Continuing Company.............................. 3
Section 1.5. Conversion of CBI Common Stock and CBI Stock Options........... 3
Section 1.6. Dissenting Shares.............................................. 4
Section 1.7. Surrender of CBI Stock Certificates............................ 4
Section 1.8. Ratification by Shareholders................................... 6
Section 1.9. Tax Consequences............................................... 6
II. REPRESENTATIONS AND WARRANTIES OF CBI............................................. 6
Section 2.1. Organization................................................... 7
Section 2.2. Capitalization................................................. 7
Section 2.3. Approvals; Authority........................................... 8
Section 2.4. No Conflict With Other Instruments............................. 8
Section 2.5. Financial Statements and Reports............................... 8
Section 2.6. Investments.................................................... 9
Section 2.7. Real Property Owned or Leased.................................. 9
Section 2.8. Personal Property.............................................. 10
Section 2.9. Environmental Laws............................................. 11
Section 2.10. Litigation and Other Proceedings............................... 12
Section 2.11. Taxes.......................................................... 12
Section 2.12. Contracts...................................................... 13
Section 2.13. Insurance...................................................... 14
Section 2.14. Compliance with Laws........................................... 14
Section 2.15. Absence of Certain Changes..................................... 14
Section 2.16. Allowance for Credit Losses.................................... 16
Section 2.17. Employment Relations........................................... 16
Section 2.18. ERISA.......................................................... 16
Section 2.19. Deferred Compensation Arrangements............................. 17
Section 2.20. Loans.......................................................... 17
Section 2.21. Accounting Records; Data Processing............................ 17
Section 2.22. Brokers and Finders............................................ 18
Section 2.23. Community Reinvestment Act..................................... 18
Section 2.24. Fair Housing Act, Home Mortgage Disclosure Act and
Equal Credit Opportunity Act................................... 18
i
Section 2.25. Usury Laws and Other Consumer Compliance Laws.................. 18
Section 2.26. Bank Secrecy Act............................................... 18
Section 2.27. Zoning and Related Laws........................................ 18
Section 2.28. Employment and Similar Agreements; Obligations Upon
Change in Control.............................................. 19
Section 2.29. Certain Interests.............................................. 19
Section 2.30. Prospectus/Proxy Statement and Regulatory Applications......... 20
Section 2.31. Intellectual Property Rights................................... 20
Section 2.32. Site Locations................................................. 21
Section 2.33. Interest Rate Risk Management Instruments...................... 21
III. REPRESENTATIONS AND WARRANTIES OF PROSPERITY..................................... 21
Section 3.1. Organization................................................... 22
Section 3.2. Capitalization................................................. 22
Section 3.3. Approvals; Authority........................................... 23
Section 3.4. No Conflict With Other Instruments............................. 23
Section 3.5. Financial Statements and Reports............................... 23
Section 3.6. Securities Exchange Commission Reporting Obligations........... 24
Section 3.7. Taxes.......................................................... 24
Section 3.8. Contracts...................................................... 24
Section 3.9. Absence of Certain Changes..................................... 25
Section 3.10. Environmental Laws............................................. 25
Section 3.11. Litigation and Other Proceedings............................... 26
Section 3.12. Loans.......................................................... 26
Section 3.13. Brokers and Finders............................................ 27
Section 3.14. Insurance...................................................... 27
Section 3.15. Compliance with Laws........................................... 27
Section 3.16. Allowance for Credit Losses.................................... 27
Section 3.17. Prospectus/Proxy Statement and Regulatory Applications......... 28
Section 3.18. [INTENTIONALLY OMITTED]........................................ 28
Section 3.19. Regulatory Approvals.......................................... 28
Section 3.20. Real Property Owned or Leased.................................. 28
Section 3.21. Personal Property.............................................. 29
Section 3.22. Employment Relations........................................... 29
Section 3.23. ERISA.......................................................... 29
Section 3.24. Accounting Records; Data Processing............................ 30
Section 3.25. Employment and Similar Agreements.............................. 30
Section 3.26. Community Reinvestment Act..................................... 31
Section 3.27. Fair Housing Act, Home Mortgage Disclosure Act and
Equal Credit Opportunity Act................................... 31
Section 3.28. Usury Laws and Other Consumer Compliance Laws.................. 31
Section 3.29. Bank Secrecy Act............................................... 31
Section 3.30. Zoning and Related Laws........................................ 31
ii
Section 3.31. Site Locations................................................. 32
Section 3.32. Interest Rate Risk Management Instruments...................... 32
IV. COVENANTS OF CBI.................................................................. 32
Section 4.1. Shareholder Approval and Best Efforts.......................... 32
Section 4.2. CBI Activities Pending Closing................................. 33
Section 4.3. Access to Properties and Records............................... 34
Section 4.4. Information for Regulatory Applications and SEC filings........ 35
Section 4.5. Attendance at Certain CBI Meetings............................. 35
Section 4.6. No Solicitation................................................ 36
Section 4.7. Termination Fee................................................ 37
Section 4.8. Affiliates' Letters............................................ 38
Section 4.9. Assumption of CBI Stock Options................................ 38
Section 4.10. Transactions with Affiliates and Insiders...................... 39
Section 4.11. Classifications of Loans....................................... 39
Section 4.12. Certain Accounting Adjustments................................. 39
Section 4.13. Environmental Investigation; Rights to Terminate Agreement..... 39
V. COVENANTS OF PROSPERITY............................................................ 40
Section 5.1. Shareholder Approval and Best Efforts.......................... 41
Section 5.2. Information for Applications and Proxy Solicitation............ 41
Section 5.3. Registration Statement......................................... 42
Section 5.4. Nasdaq Listing................................................. 42
Section 5.5. Issuance of Prosperity Common Stock............................ 42
Section 5.6. Rule 144 Compliance............................................ 42
Section 5.7. Indemnification; Insurance..................................... 42
Section 5.8. Publication of 30 Days of Post Combination Results............. 44
Section 5.9. Amendment of Bylaws............................................ 44
Section 5.10. Access to Properties and Records............................... 44
Section 5.11. Attendance at Certain Prosperity Meetings...................... 44
Section 5.12. Prosperity Activities Pending Closing.......................... 45
Section 5.13. Registration Rights............................................ 45
Section 5.14. Termination Fee................................................ 45
Section 5.15. Assumption of CBI Stock Options................................ 47
VI. COVENANTS OF CBI AND PROSPERITY................................................... 48
Section 6.1. Ongoing Financial Disclosure................................... 48
Section 6.2. Confidentiality................................................ 48
Section 6.3. No Inconsistent Actions; Pooling; Tax Treatment................ 49
Section 6.4. Plan Amendments and Participation in Plans..................... 49
Section 6.5. Name of Combined Entity........................................ 50
VII. CLOSING.......................................................................... 50
Section 7.1. Closing........................................................ 50
iii
Section 7.2. Effective Time................................................. 50
VIII. TERMINATION..................................................................... 51
Section 8.1. Termination.................................................... 51
Section 8.2. Effect of Termination.......................................... 55
IX. CONDITIONS TO OBLIGATIONS OF PROSPERITY........................................... 55
Section 9.1. Compliance with Representations and Covenants.................. 55
Section 9.2. Material Adverse Change........................................ 56
Section 9.3. Legal Opinion.................................................. 56
Section 9.4. Releases....................................................... 56
Section 9.5. Accounting Letters............................................. 56
Section 9.6. Affiliates' Letters............................................ 56
Section 9.7. Dissenters' Rights............................................. 56
Section 9.8. Tax Opinion.................................................... 56
Section 9.9. Opinion of Financial Advisor................................... 57
Section 9.10. Conversion of CBI Stock Options................................ 57
X. CONDITIONS TO OBLIGATIONS OF CBI................................................... 57
Section 10.1. Compliance with Representations and Covenants.................. 57
Section 10.2. Material Adverse Change........................................ 57
Section 10.3. Legal Opinion.................................................. 57
Section 10.4. Opinion of Financial Advisor................................... 57
Section 10.5. Tax Opinion.................................................... 57
Section 10.6. Releases....................................................... 58
Section 10.7. Accounting Letters............................................. 58
Section 10.8. Employment Agreement........................................... 58
XI. CONDITIONS TO RESPECTIVE OBLIGATIONS OF PROSPERITY AND CBI........................ 58
Section 11.1. Government Approvals........................................... 58
Section 11.2. Shareholder Approval........................................... 58
Section 11.3. Registration of Prosperity Common Stock........................ 59
Section 11.4. Listing of Prosperity Common Stock............................. 59
XII. MISCELLANEOUS.................................................................... 59
Section 12.1. Non-Survival of Representations and Warranties................. 59
Section 12.2. Amendments..................................................... 59
Section 12.3. Expenses....................................................... 59
Section 12.4. Notices........................................................ 59
Section 12.5. Controlling Law................................................ 61
Section 12.6. Headings....................................................... 61
Section 12.7. Modifications or Waiver........................................ 61
Section 12.8. Severability................................................... 61
iv
Section 12.9. Assignment..................................................... 61
Section 12.10. Entire Agreement............................................... 61
Section 12.11. Counterparts................................................... 61
Section 12.12. Binding on Successors.......................................... 61
Section 12.13. Gender......................................................... 61
Section 12.14. Disclosures.................................................... 62
Section 12.15. Publicity...................................................... 62
v
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization ("Agreement") dated as of
November 8, 2000 ("Execution Date"), is by and between Prosperity Bancshares,
Inc., a Texas corporation ("Prosperity") and Commercial Bancshares, Inc., a
Texas corporation ("CBI").
WHEREAS, CBI desires to affiliate with Prosperity and Prosperity desires to
affiliate with CBI in the manner provided in this Agreement; and
WHEREAS, Prosperity and CBI believe that the merger of CBI into Prosperity
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, Prosperity and CBI intend the Merger to qualify as a
reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations thereunder; and
WHEREAS, the respective Boards of Directors of Prosperity and CBI 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
A. This Agreement provides for the merger of CBI with and into Prosperity
with Prosperity as the survivor (the "Merger"), all pursuant to this Agreement
and a Plan of Merger by and between CBI and Prosperity, a copy of which is
attached hereto as Exhibit A and all of the terms of which are incorporated by
reference for all purposes. In connection with the Merger, Prosperity will
acquire all of the issued and outstanding shares of common stock, $.10 par
value, of CBI ("CBI Common Stock") for an aggregate consideration as set forth
in this Agreement.
B. Immediately after the Effective Time of the Merger and on the same
date as the Merger, Prosperity Holdings, Inc., a Delaware corporation and
wholly-owned subsidiary of Prosperity ("Delaware Company"), shall be merged with
and into Heritage Bancshares, Inc., a Delaware corporation and wholly-owned
subsidiary of CBI ("CBI Delaware") (the "Delaware Merger"), all pursuant to a
Plan of Merger by and between Delaware Company and CBI Delaware, a copy of which
is attached hereto as Exhibit B.
C. Immediately after the Effective Time of the Merger and on the same
date as the Merger, Heritage Bank, a Texas banking association and wholly-owned
subsidiary of CBI Delaware ("Heritage"), shall be merged with and into First
Prosperity Bank, a Texas banking association and
1
wholly-owned subsidiary of Delaware Company ("FPB") (the "Bank Merger"), all
pursuant to a Plan of Merger by and between Heritage Bank and FPB, a copy of
which is attached hereto as Exhibit C.
I. THE MERGER
Section 1.1. The Merger. CBI shall be merged with and into Prosperity
(which, as the surviving corporation, is hereinafter referred to as "Continuing
Company" whenever reference is made to it at or after the Effective Time (as
defined in Section 7.2 of this Agreement) under the charter and Articles of
Incorporation of Prosperity pursuant to the provisions of, and with the effect
provided in Article 5 of the Texas Business Corporation Act ("TBCA").
Section 1.2. Articles of Incorporation, Bylaws and Facilities of
Continuing Company. At the Effective Time and until thereafter amended in
accordance with applicable law, the Articles of Incorporation of Continuing
Company shall be the Articles of Incorporation of Prosperity as in effect at the
Effective Time. Until altered, amended or repealed as therein provided and in
the Articles of Incorporation of Continuing Company, the Bylaws of Continuing
Company shall be the Bylaws of Prosperity as in effect at the Effective Time.
The established offices and facilities of CBI immediately prior to the Merger
shall become established offices and facilities of the Continuing Company.
Unless and until changed by the Board of Directors of Continuing Company, the
main office of CBI as of the Effective Time shall become the main office of the
Continuing Company. Until thereafter changed in accordance with law or the
Articles of Incorporation or Bylaws of Continuing Company, all corporate acts,
plans, policies, contracts, approvals and authorizations of CBI and Prosperity
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
Company and shall be as effective and binding thereon as the same were with
respect to the CBI and Prosperity, respectively, as of the Effective Time.
Section 1.3. Effect of Merger. At the Effective Time, the corporate
existence of CBI and Prosperity shall, as provided in the provisions of law
heretofore mentioned, be merged and continued in Continuing Company, and
Continuing Company shall be deemed to be a continuation in entity and identity
of CBI and Prosperity. All rights, franchises and interests of CBI and
Prosperity, respectively, in and to any type of property and choses in action
shall be transferred to and vested in Continuing Company by virtue of such
Merger without any deed or other transfer. Continuing Company, 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 CBI and
Prosperity, respectively, as of the Effective Time.
2
Section 1.4. Liabilities of Continuing Company. At the Effective Time,
Continuing Company shall be liable for all liabilities of CBI and Prosperity.
All debts, liabilities, obligations and contracts of CBI and of Prosperity,
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 CBI or Prosperity, as the case may be, shall be
those of Continuing Company and shall not be released or impaired by the Merger.
All rights of creditors and other obligees and all liens on property of either
CBI or Prosperity shall be preserved unimpaired subsequent to the Merger.
Section 1.5. Conversion of CBI Common Stock and CBI Stock Options.
(a) Each share of the CBI Common Stock issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares (as
defined in Section 1.6 of the Agreement), shall, by virtue of the Merger and
without any action on the part of the holder thereof, be cancelled and converted
into and represent the right to receive, upon surrender of the certificate
representing such share, the consideration payable as set forth below (the
"Merger Consideration"), without interest thereon.
(b) Based on (i) 18,067 shares of CBI Common Stock issued and
outstanding as of the Execution Date and (ii) options to acquire 90 shares of
CBI Common Stock outstanding and unexercised as of the Execution Date, each
holder of CBI Common Stock shall receive Merger Consideration in the form of
shares of common stock, $1.00 par value, of Prosperity ("Prosperity Common
Stock") equal to 155 (the "Exchange Ratio") shares of Prosperity Common Stock
for each share of CBI Common Stock owned at the Effective Time.
(c) At the Effective Time, each option to acquire shares of CBI Common
Stock which is outstanding and unexercised immediately prior thereto ("CBI
Stock Option") pursuant to the Commercial Bancshares, Inc. Incentive Stock
Option Plan for Key Employees ("CBI Stock Option Plan") shall, in accordance
with its terms, be converted (automatically and without any action on the part
of the holder thereof) into an option to purchase shares of Prosperity Common
Stock in an amount and at an exercise price determined as provided below (and
otherwise subject to the terms of the CBI Stock Option Plan and agreements
evidencing the grants thereunder):
(i) The number of shares of Prosperity Common Stock to be
subject to the new option shall be equal to the number of shares of CBI
Common Stock subject to the original option multiplied by the Exchange
Ratio; and
(ii) The exercise price per share of Prosperity Common Stock
under the new option shall be equal to the exercise price per share of CBI
Common Stock under the original option divided by the Exchange Ratio.
The adjustment provided herein with respect to any options which are "incentive
stock options" as defined in Section 422 of the Internal Revenue Code, shall be
and is intended to be effected in a manner which is consistent with Section
424(a) of the Internal Revenue Code. The duration and
3
other terms of the new option shall be the same as the original option except
that all references to CBI shall be deemed to be references to Prosperity.
(d) The aggregate number of shares of Prosperity Common Stock to be
exchanged for each share of CBI Common Stock shall be adjusted appropriately to
reflect any change in the number of shares of Prosperity Common Stock by reason
of any stock dividends or splits, reclassification, recapitalization or
conversion with respect to Prosperity Common Stock, received or to be received
by holders of Prosperity Common Stock, when the record date or payment occurs
prior to the Effective Time.
(e) The Exchange Ratio may, at the option of Prosperity, be adjusted
pursuant to Section 8.1(e) hereof if the average closing price of a share of
Prosperity Common Stock as reported by The Nasdaq Stock Market, Inc. National
Market System ("Nasdaq National Market") during the period of the ten trading
days ending on the day immediately prior to the date of receipt of Federal
Reserve Board approval ("Price Determination Date") is less than $16.00 per
share.
Section 1.6. Dissenting Shares. Each share of CBI Common Stock issued
and outstanding immediately prior to the Effective Time, the holder of which has
not voted in favor of the Merger 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 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 1.5 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 9.7 of this Agreement, if the holders
of more than 10% of the CBI Common Stock shall have exercised their dissenters'
rights, Prosperity shall have no obligation to consummate the Merger.
Section 1.7. Surrender of CBI Stock Certificates.
(a) Prosperity shall deposit or cause to be deposited in trust with
Computershare Investor Services, Denver, Colorado (the "Exchange Agent") prior
to the Effective Time cash in an aggregate amount estimated to be sufficient to
make the appropriate cash payments, if any, to holders of Dissenting Shares
pursuant to Section 1.6 hereof (such amounts being hereinafter referred to as
the "Exchange Fund"). 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 ten (10) days prior to the Closing Date, CBI shall
deliver to Prosperity a list of CBI's shareholders which shall include each
shareholder's name, address and the number of shares of CBI Common Stock owned.
4
(c) On or before the 5th business day after the Effective Time, the
Exchange Agent shall mail to each record holder of an outstanding certificate or
certificates which as of the Effective Date represented shares of CBI 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. 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 number of
shares of Prosperity Common Stock provided in Section 1.5 hereof, and such
Certificate shall forthwith be cancelled. Prosperity shall provide the Exchange
Agent with certificates for Prosperity Common Stock, as requested by the
Exchange Agent, for the number of shares provided in Section 1.5 hereof. Until
surrendered in accordance with the provisions of this Section 1.7, each
Certificate (other than Certificates representing Dissenting Shares) shall
represent for all purposes the right to receive the Merger Consideration without
any interest thereon. Former shareholders of CBI shall be entitled to vote
after the Effective Time at any meeting of Prosperity's shareholders the number
of shares of Prosperity Common Stock into which their shares are converted,
regardless of whether such shareholders of CBI have surrendered their
Certificates in exchange therefor.
(d) No dividends or other distributions declared after the Effective
Time with respect to shares of Prosperity Common Stock and payable to the
holders thereof shall be paid to the holder of a Certificate until such holder
surrenders such Certificate to the Exchange Agent in accordance with this
Section 1.7. After the surrender of a Certificate in accordance with this
Section 1.7, the holder thereof shall be entitled to receive any such dividends
or other distributions, without interest thereon, which had become payable after
the Effective Time with respect to the shares of Prosperity Common Stock
represented by such Certificate.
(e) After the Effective Time, the stock transfer ledger of CBI shall
be closed and there shall be no transfers on the stock transfer books of CBI of
the shares of CBI Common Stock which were outstanding immediately prior to such
time of filing. If, after the Effective Time, Certificates are presented to
Prosperity, they shall be promptly presented to the Exchange Agent and exchanged
as provided in this Section 1.7.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the shareholders of CBI for six
months after the Effective Time shall be paid to Prosperity, and the holders of
shares of CBI Common Stock not theretofore presented to the Exchange Agent shall
look to Prosperity only, and not the Exchange Agent, for the payment of any
Merger Consideration in respect of such shares.
(g) If any certificate representing shares of Prosperity Common Stock
is to be issued in a name other than that in which the Certificate surrendered
in exchange therefor is registered, it shall be a condition of the issuance
thereof that the Certificate so surrendered shall be appropriately endorsed (or
accompanied by an appropriate instrument of transfer) and otherwise in proper
form (reasonably satisfactory to Prosperity) for transfer, and that the person
requesting such exchange shall pay to the Exchange Agent in advance any transfer
or other taxes required by reason
5
of the issuance of a certificate representing shares of Prosperity Common Stock
in any name other than that of the registered holder of the Certificate
surrendered, or required for any other reason, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or not payable.
(h) None of Prosperity, CBI, the Exchange Agent or any other person
shall be liable to any former holder of shares of CBI Common Stock for any
Prosperity Common Stock (or dividends or distributions with respect thereto) or
cash properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(i) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Prosperity,
the posting by such person of a bond in such amount as Prosperity may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Prosperity Common Stock deliverable in
respect thereof pursuant to this Agreement.
Section 1.8. Ratification by Shareholders. This Agreement shall be
submitted to the shareholders of CBI and the shareholders of Prosperity in
accordance with applicable provisions of law and the respective Articles of
Incorporation and Bylaws of CBI and Prosperity. CBI and Prosperity 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 Merger 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
Texas Department of Banking ("Banking Department").
Section 1.9. Tax Consequences. It is intended by the parties hereto
that the Merger shall constitute a reorganization within the meaning of Section
368(a) of the Code, and the parties hereto hereby adopt this Agreement as a
"plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-
3(a) of the United States Treasury Regulations.
II. REPRESENTATIONS AND WARRANTIES OF CBI
CBI represents and warrants to Prosperity, that each of the statements made
in this Article II are true and correct in all material respects. The Schedules
required pursuant to this Article II and elsewhere in this Agreement will be
delivered and made part of this Agreement no later than ten (10) business days
following the Execution Date. CBI agrees that, at the Closing (as defined in
Section 7.1 of this Agreement), it shall provide Prosperity 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.
6
Section 2.1. Organization. CBI, 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. CBI owns 100% of the issued and outstanding shares of
common stock, $.10 par value, of CBI Delaware ("CBI Delaware Stock"). CBI
Delaware, a Delaware corporation and a bank holding company registered under the
BHC Act, is duly organized, validly existing and in good standing under the laws
of the State of Delaware. CBI Delaware owns 100% of the issued and outstanding
shares of common stock, $5.00 par value, of Heritage ("Heritage Stock").
Heritage is a Texas banking association duly organized, validly existing and in
good standing under the laws of the State of Texas. CBI, CBI Delaware and
Heritage have full power and authority (including all licenses, franchises,
permits and other governmental authorizations which are legally required) to
own, lease and operate their properties, to engage in the business and
activities now conducted by them and to enter into this Agreement. Heritage (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 the Banking Department, and (ii) is
an insured bank as defined in the Federal Deposit Insurance Act. Heritage does
not conduct trust activities. True and complete copies of the Articles of
Incorporation and Bylaws of CBI, the Certificate of Incorporation and Bylaws of
CBI Delaware and the Articles of Association and Bylaws of Heritage, as amended
to date (collectively, "CBI Constituent Documents"), have been delivered or made
available to Prosperity. Except as otherwise disclosed in Schedule 2.1 hereof,
neither CBI, CBI Delaware nor Heritage, (a) has any subsidiaries or affiliates,
(b) is a general partner or material owner in any joint venture, general
partnership, limited partnership, trust or other non-corporate entity, and (c)
knows 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 CBI.
Section 2.2. Capitalization.
(a) The authorized capital stock of CBI consists of 40,000,000 shares
of CBI Common Stock, 18,067 of which are issued and outstanding and 90 shares of
CBI Common Stock reserved for issuance upon the exercise of stock options
granted pursuant to the CBI Stock Option Plan other than as set forth in
Schedule 2.2(a). The authorized capital stock of CBI Delaware consists of
100,000 shares of CBI Delaware Stock, 10,000 of which are issued and
outstanding. The authorized capital stock of Heritage consists of 150,000
shares of Heritage Stock, 1,000 of which are issued and outstanding. All of the
issued and outstanding shares of CBI Common Stock, CBI Delaware Stock and
Heritage 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. There are outstanding CBI Stock
Options to purchase 90 shares of CBI Common Stock. Schedule 2.2(a) will contain
a list of the exercise prices, vesting schedules, expiration dates, holders of
and numbers of shares subject to all such CBI Stock Options outstanding. All
CBI Stock Options have been duly authorized and , to CBI's knowledge, all CBI
Stock Options (i) were granted at a per share price which was not less than the
fair market value per share of CBI Common Stock at the date of grant and (ii)
all CBI Stock Options intended to qualify
7
as "incentive" stock options under Section 422(b) of the Internal Revenue Code
meet all requirements under the Internal Revenue Code for such qualification.
(b) Except for the CBI Stock Options and except as disclosed in
Schedule 2.2(b), there are no existing options, warrants, calls, convertible
securities or commitments of any kind obligating CBI, CBI Delaware or Heritage
to issue any authorized and unissued CBI Common Stock, CBI Delaware Stock or
Heritage Stock nor does CBI, CBI Delaware or Heritage have any outstanding
commitment or obligation to repurchase, reacquire or redeem any of their
outstanding capital stock. Except as disclosed in Schedule 2.2(b), there are no
voting trusts, voting agreements, buy-sell agreements or other similar
arrangements affecting the CBI Delaware Stock or the Heritage Stock, or to CBI's
knowledge, the CBI Common Stock. There are no fractional shares of CBI Common
Stock issued and outstanding.
Section 2.3. Approvals; Authority. The Board of Directors of CBI has
approved this Agreement and the transactions contemplated herein subject to the
approval thereof by the shareholders of CBI as required by law, and, other than
shareholder approval, no further corporate proceedings of CBI are needed to
execute and deliver this Agreement and consummate the Merger. This Agreement has
been duly executed and delivered by CBI and is a duly authorized, valid, legally
binding agreement of CBI enforceable against CBI 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. No Conflict With Other Instruments. Neither the execution
and delivery of this Agreement nor the consummation of the Merger contemplated
hereby, subject to obtaining all required shareholder consents, will conflict
with or result in a breach of any provision of the CBI Constituent Documents.
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
CBI, CBI Delaware or Heritage 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 CBI, CBI
Delaware or Heritage or upon the CBI Common Stock.
Section 2.5. Financial Statements and Reports.
(a) CBI has furnished or made available to Prosperity true and
complete copies of CBI's audited balance sheets as of December 31, 1999, 1998
and 1997, and the related statements of income and statements of changes in
shareholders' equity and cash flow for the periods then ended, together with the
notes thereto. CBI has also delivered to Prosperity a true and correct copy of
the Consolidated Reports of Condition and Income ("Call Reports") filed by
Heritage as of and for the nine months ended September 30, 2000. The audited
financial information and Call Reports referred to in this Section 2.5 are
collectively referred to in this Article II as the "CBI Financial Statements."
The CBI Financial Statements fairly present the financial position of CBI, CBI
8
Delaware and Heritage and the results of its operations at the dates and for the
periods indicated in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis, except for the Call Reports which are in
compliance with regulatory accounting principles. Except as set forth in
Schedule 2.5 hereof, as of the dates of the CBI Financial Statements referred to
above, neither CBI, CBI Delaware or Heritage had any liabilities, fixed or
contingent, which are material and are not fully shown or provided for in such
CBI Financial Statements or otherwise disclosed in this Agreement, or in any of
the documents delivered to Prosperity. Except as set forth in Schedule 2.15,
since September 30, 2000, there have been no material changes in the financial
condition, assets, liabilities or business of CBI, CBI Delaware or Heritage,
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 CBI, CBI Delaware and Heritage considered
as a consolidated whole.
(b) CBI, CBI Delaware and Heritage have filed all material documents
and reports required to be filed by them with the Federal Reserve Board, the
FDIC, the Banking Department and any other governmental authority under all
other Applicable Laws (as defined below) (the "Governmental Filings"). All such
Governmental Filings, as finally amended or corrected, complied in all material
respects at the time of filing and at the time of any amended or supplemented
filing with all requirements of their respective forms and with all Applicable
Laws.
"Applicable Laws" as used in this Agreement includes any applicable foreign
or domestic federal, state or local statute, law, ordinance, rule,
administrative interpretation, regulation, order, writ, injunction, directive,
decree or other requirement of any governmental authority.
(c) CBI has not changed its independent auditing firm since December
31, 1996, and there has been no disagreement (as such term is used in Item 304
of Regulation S-K under the Securities Act) between CBI and its independent
auditing firm since December 31, 1996 concerning any aspect of the manner in
which CBI maintains its books and records or the manner in which it has reported
upon its financial condition and results of operations during such period.
Section 2.6. Investments. Schedule 2.6 will contain a true, correct and
complete list, as of September 30, 2000, of all securities, including municipal
bonds, owned by CBI, CBI Delaware or Heritage (the "Securities Portfolio"). All
securities listed in Schedule 2.6 are owned by CBI, CBI Delaware or Heritage (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 2.6. Schedule 2.6 also discloses any entities in which the ownership
interest of CBI, CBI Delaware or Heritage 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 to which CBI, CBI Delaware or Heritage is
a party with respect to the voting of the securities listed in Schedule 2.6.
Section 2.7. Real Property Owned or Leased.
(a) Other than real property acquired through foreclosure or deed in
foreclosure, Schedule 2.7(a) contains a true, correct and complete list of all
real property owned or leased by CBI,
9
CBI Delaware and Heritage (the "CBI Real Property"). Schedule 2.7(a) will
contain true and complete copies of all of its deeds, leases and title insurance
policies in its possession for, or other documentation evidencing ownership of ,
the properties referred to in Schedule 2.7(a).
(b) Except as set forth in Schedule 2.7(b), no lease with respect to
any CBI Real Property and no deed with respect to any CBI Real Property contains
any restrictive covenant that materially restricts the use, transferability or
value of such CBI Real Property. To CBI's knowledge, each of such leases is a
legal, valid and binding obligation enforceable in accordance with its terms
(except as may be limited by bankruptcy, insolvency, moratorium, reorganization
or similar laws affecting the rights of creditors generally and the availability
of equitable remedies), and is in full force and effect; to CBI's knowledge,
there are no existing defaults by CBI, CBI Delaware and Heritage or the other
party thereunder; to CBI's knowledge, there are no allegations or assertions of
such by any party under such agreement or any events that with notice lapse of
time or the happening or occurrence of any other event would constitute a
default thereunder.
(c) Except as set forth in Schedule 2.7(b), to the knowledge of CBI,
none of the buildings and structures located on any CBI Real Property, nor any
appurtenances thereto or equipment therein, nor the operation or maintenance
thereof, violates in any material manner any restrictive covenants or encroaches
on any property owned by others, nor does any building or structure of third
parties encroach upon any CBI Real Property, except for those violations and
encroachments which in the aggregate could not reasonably be expected to cause a
material adverse effect on the financial condition, results of operation or
business of CBI, CBI Delaware or Heritage. To CBI's knowledge, no condemnation
proceeding is pending or, to CBI's knowledge, threatened, which would preclude
or materially impair the use of any CBI Real Property in the manner in which it
is currently being used.
(d) Except as set forth in Schedule 2.7(d), CBI, CBI Delaware and
Heritage have good and indefeasible title to, or a valid and enforceable
leasehold interest in, or a contract vendee's interest in, all CBI Real
Property, and such interest is free and clear of all liens, charges or other
encumbrances, except (i) statutory liens for amounts not yet delinquent or which
are being contested in good faith through proper proceedings and (ii) those
liens related to real property taxes, local improvement district assessments,
easements, covenants, restrictions and other matters of record which do not
individually or in the aggregate materially adversely affect the use and
enjoyment of the relevant real property.
(e) All buildings and other facilities used in the business of CBI,
CBI Delaware and Heritage are adequately maintained and, to CBI's knowledge, are
free from defects which could materially interfere with the current or future
use of such facilities.
Section 2.8. Personal Property. CBI, CBI Delaware and Heritage have good
title to, or a valid leasehold interest in, all personal property, whether
tangible or intangible, used in the conduct of their business (the "CBI
Personalty"), free and clear of all liens, charges or other encumbrances, except
(a) statutory liens for amounts not yet delinquent or which are being contested
in good faith through proper proceedings and (b) such other liens, charges,
encumbrances and imperfections of
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title as do not individually or in the aggregate materially adversely affect the
use and enjoyment of the relevant CBI Personalty. Subject to ordinary wear and
tear, the CBI Personalty is in good operating condition and repair and is
adequate for the uses to which it is being put.
Section 2.9. Environmental Laws. Except as set forth in Schedule 2.9,
to the knowledge of CBI, CBI, CBI Delaware and Heritage, and any properties or
business owned or operated by any of them, whether or not held in a fiduciary or
representative capacity, are in material compliance with all terms and
conditions of all applicable federal and state Environmental Laws (as defined
below) and permits thereunder. Except as set forth in Schedule 2.9, (a) neither
CBI, CBI Delaware nor Heritage has received written notice of or has knowledge
of any material violation of any Environmental Laws or of any placement,
disposal or release of any materials designated as Hazardous Materials (as
defined below) under the Environmental Laws in a manner that would result in a
material claim or lien against any of them under any Environmental Laws; (b) to
CBI's knowledge, during the term of ownership by CBI, CBI Delaware or Heritage
no real estate currently owned, operated, or leased (including any property
acquired by foreclosure or deeded in lieu thereof) by CBI, CBI Delaware or
Heritage, or owned, operated or leased by CBI, CBI Delaware or Heritage within
the five years preceding the date of this Agreement, has been designated by
applicable governmental authorities as requiring any environmental cleanup or
response action by CBI, CBI Delaware or Heritage to comply with Environmental
Laws, or has been the site of release of any Hazardous Materials for which CBI,
CBI Delaware or heritage would reasonably be expected to incur material costs of
cleanup; (c) to the knowledge of CBI, CBI Delaware and Heritage, no friable
asbestos was used in the construction of any portion of CBI's, CBI Delaware's or
Heritage's facilities except as disclosed in documents available under Section
4.13(d) hereof; and (d) to the knowledge of CBI, CBI Delaware and Heritage, no
real property currently owned by CBI, CBI Delaware or Heritage is, or has been a
landfill.
"Environmental Laws," as used in this Agreement, means any applicable
federal, state or local statute, law, rule, regulation, ordinance, code 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 pollution, the
protection of human health or safety, the environment, or emissions, discharges,
releases or threatened releases of Hazardous Materials or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
handling, or transport of Hazardous Materials, including without limitation the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. (S)(S) 9601, et seq.; The Hazardous Materials Transportation
Authorization Act, as amended, 49 U.S.C. (S)(S) 5101, et seq.; the Resource
Conservation and Recovery Act of 1976, as amended, 42 U.S.C. (S)(S) 6901, et
seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. (S)(S)
1201, et seq.; the Toxic Substances Control Act, 15 U.S.C. (S)(S) 2601, et seq.;
the Clean Air Act, 42 U.S.C. (S)(S) 7401, et seq.; and the Safe Drinking Water
Act, 42 U.S.C. (S)(S) 300f, et seq.
"Hazardous Materials," as used in this Agreement, includes, but is not
limited to, (a) any petroleum or petroleum products, natural gas, or natural gas
products, radioactive materials, friable asbestos, urea formaldehyde foam
insulation, transformers or other equipment that contains dielectric fluid
containing levels of polychlorinated biphenyls (PCBs) greater than 500 mg/l, and
radon gas in
11
levels above 4 picocures/liter; (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 as hazardous or toxic as of the date hereof by any
federal, state or local government authority, agency or instrumentality,
including mixtures thereof with other materials.
Section 2.10. Litigation and Other Proceedings. Except as otherwise
noted in Schedule 2.10 hereto, there are no legal, quasi-judicial, regulatory or
administrative proceedings of any kind or nature now pending or, to the
knowledge of CBI, CBI Delaware or Heritage, threatened before any court or
administrative body in any manner against CBI, CBI Delaware or Heritage, or any
of their properties or capital stock, which might have a material adverse effect
on CBI, CBI Delaware or Heritage, their financial condition, assets, operations
or earnings or the transactions proposed by this Agreement. Neither CBI, CBI
Delaware nor Heritage knows of any basis on which any litigation or proceeding
could be brought which is reasonably likely to have a materially adverse effect
on the financial condition of CBI, CBI Delaware or Heritage or which could
question the validity of any action taken or to be taken in connection with this
Agreement and the transactions contemplated hereby. Neither CBI, CBI Delaware
nor Heritage is in default with respect to any judgment, order, writ,
injunction, decree, award, rule or regulation of any court, arbitrator or
governmental agency or instrumentality.
Section 2.11. Taxes. Except as otherwise noted in Schedule 2.11 hereto
or as reserved on the CBI Financial Statements, CBI, CBI Delaware and Heritage
have filed with the appropriate federal, state and local governmental
authorities all material Tax Returns and reports required to be filed, and have
paid all Taxes and assessments shown or claimed to be due and payable thereon.
The Tax Returns as filed were correct in all material respects. Neither CBI, CBI
Delaware nor Heritage has executed or filed with the Internal Revenue Service
any agreement extending the period for assessment and collection of any federal
income Tax. None of CBI, CBI Delaware and Heritage is a party to any pending
action or proceeding by any governmental authority for assessment or collection
of Taxes, nor has any written claim for assessment or collection of Taxes been
asserted against CBI, CBI Delaware or Heritage. All Taxes which CBI, CBI
Delaware or Heritage is or was required by law to withhold or to collect have
been duly withheld and collected and have been paid over to the proper
governmental authorities to the extent due and payable, or segregated and set
aside for such payment and, if so segregated and set aside will be so paid by
CBI, CBI Delaware or Heritage, as required by law.
Schedule 2.11 will contain true and complete copies of the federal income
tax returns of CBI as filed with the Internal Revenue Service for the years
ended December 31, 1999, December 31, 1998, and December 31, 1997.
For purposes of this Agreement, "Taxes" shall mean any and all taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, gross receipts, excise, stamp, real or personal
property, ad valorem, withholding, social security (or similar),
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unemployment, occupation, use, production, service, service use, license, net
worth, payroll, franchise, severance, transfer, recording, employment, premium,
windfall profits, environmental (including taxes under Section 59A of the
Internal Revenue Code), customs duties, capital stock, profits, disability,
sales, registration, value added, alternative or add-on minimum, estimated or
other taxes, assessments or charges imposed by any federal, state, local or
foreign governmental entity and any interest, penalties, or additions to tax
attributable thereto. For purposes of this Agreement, "Tax Returns" shall mean
any return, report, form or similar statement required to be filed with respect
to any Tax (including any attached schedules), including, without limitation,
any information return, claim for refund, amended return or declaration of
estimated Tax.
Section 2.12. Contracts. Except as otherwise noted in Schedule 2.12
hereto, neither CBI, CBI Delaware nor Heritage is 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 CBI, CBI Delaware or Heritage
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
CBI, CBI Delaware or Heritage imposed by any bank regulatory authority having
supervisory jurisdiction over CBI, CBI Delaware or Heritage; (h) agreement,
contract or indenture related to the borrowing by CBI, CBI Delaware or Heritage
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 CBI, CBI Delaware or
Heritage or holder of more than ten percent (10%) of the issued and outstanding
CBI 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
CBI, CBI Delaware or Heritage to Prosperity. CBI, CBI Delaware and Heritage
have in all material respects performed all material obligations required to be
performed by them to date and are not in default under, and no event has
occurred which, with the lapse of time or action by a third party or both, could
result in default under any material indenture, mortgage, contract, lease or
other agreement to which CBI, CBI Delaware or Heritage is a party or by which
CBI, CBI Delaware or Heritage is bound or under any provision of the CBI
Constituent Documents.
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Section 2.13. Insurance.
(a) Schedule 2.13 will contain a true, correct and complete list of
all insurance policies owned or held by or on behalf of either CBI, CBI Delaware
or Heritage (other than credit-life policies), specifying the insurer, policy
numbers, amount of coverage, deductions, exclusions, type of insurance,
effective and termination dates and any pending claims thereunder involving more
than $50,000 of which CBI, CBI Delaware or Heritage has knowledge.
(b) All policies of general liability, theft, life, fire, workers'
compensation, health, directors and officers, and other forms of insurance owned
or held by CBI, CBI Delaware or Heritage (i) are in full force and effect and
all premiums that are due and payable with respect thereto are currently paid;
(ii) are sufficient for compliance with all requirements of Applicable Laws and
of all agreements to which CBI, CBI Delaware or Heritage is a party; (iii) are
adequate for the business conducted by CBI, CBI Delaware and Heritage in respect
of amounts, types and risks insured; (iv) are, to CBI's knowledge, valid,
outstanding and enforceable policies (except as may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the rights of
creditors generally and the availability of equitable remedies); and (v) to
CBI's knowledge will remain in full force and effect through the Closing Date.
No insurer under any such policy or bond has canceled or indicated an intention
to cancel or not to renew any such policy or bond effective at any time prior to
the Closing Date or generally disclaimed liability thereunder. Neither CBI, CBI
Delaware or Heritage is in default under any such policy or bond, and all
material claims thereunder have been filed in a timely fashion. Neither CBI,
CBI Delaware or Heritage has been denied or had revoked or rescinded any policy
of insurance during the last three fiscal years.
Section 2.14. Compliance with Laws. Except as otherwise set forth in
Schedule 2.14 hereto, the business of CBI, CBI Delaware and Heritage and any
advertising related to such business or otherwise conducted by or on their
behalf, including without limitation the business or originating, acquiring,
holding or disposing of assets and liabilities, is being conducted in material
compliance with all Applicable Laws. Except for approvals by regulatory
authorities having jurisdiction over CBI, CBI Delaware and Heritage and approval
by the holders of shares of CBI Common Stock, no prior consent, approval or
authorization of, or declaration, filing or registrations with, any person or
regulatory authority is required of CBI, CBI Delaware or Heritage in connection
with the execution, delivery and performance by CBI of this Agreement and the
transactions contemplated hereby or the resulting change of control of Heritage
except for certain instruments necessary to consummate the Merger contemplated
hereby. CBI, CBI Delaware and Heritage have filed all material reports,
registrations and statements, together with any amendments required to be made
thereto, that are required to be filed with the Federal Reserve Board, FDIC,
Banking Department or any other regulatory authority having jurisdiction over
CBI, CBI Delaware or Heritage, and such reports, registrations and statements
are, to the knowledge of CBI, CBI Delaware and Heritage, true and correct in all
material respects.
Section 2.15. Absence of Certain Changes. Except as disclosed in
Schedule 2.15 hereto, there has not been since September 30, 2000:
14
(a) any change in or effect on the business of CBI, CBI Delaware and
Heritage or any occurrence, development or event of any nature, that has had or
may reasonably be expected to have, together with all such other changes and
effects, a material adverse effect on the financial condition, results of
operations or business of CBI;
(b) any direct or indirect redemption, purchase or other acquisition
of shares of CBI Common Stock, convertible securities or securities exercisable
for CBI Common Stock or other capital stock of CBI, by CBI; any declaration,
setting aside or payment of any dividend by CBI other than its quarterly
dividend in the amount of $12.00 per share paid in October 2000; or any
alteration of any right attaching to any shares of capital stock of CBI; or any
combination or subdivision of any shares of capital stock of CBI;
(c) any issue or sale of, or any obligation to issue or sell, capital
stock of CBI, or any warrants, rights or options to acquire, or any securities
convertible into, any shares of its capital stock;
(d) any increase in the compensation or benefits payable or to become
payable by CBI, CBI Delaware or Heritage, including, without limitation,
compensation or benefits under any Plan (as defined in Section 2.18 hereof)
other than as set forth in Schedule 2.15(d), pursuant to Employee Agreements (as
defined in Section 2.29 hereof), as may be required to comply with Applicable
Laws or consistent with past practices;
(e) any amendment or termination of any agreement to which CBI, CBI
Delaware or Heritage is a party, other than (i) amendments or terminations which
do not and will not, individually or in the aggregate, have a material adverse
effect on the financial condition, results of operations or business of CBI, CBI
Delaware or Heritage or (ii) terminations in accordance with the terms of such
agreement;
(f) any adoption, assumption or entrance into any Plan or, except as
required by Applicable Law or the current provisions of any Plan, the amendment
or any other action including, but not limited to, acceleration of vesting and
waiver of performance criteria with respect to any Plan;
(g) any amendment to the CBI Constituent Documents;
(h) any change by CBI in accounting principles or methods, except as
required by the Financial Accounting Standards Board ("FASB") or the FDIC or
Federal Reserve Board regulations or as listed in Schedule 2.15(g);
(i) any loss, damage or destruction (whether or not covered by
insurance) affecting any of the tangible assets or business of CBI, CBI Delaware
and Heritage that may involve a loss of more than $100,000, individually, or
$300,000, in the aggregate (including deductibles), in excess of applicable
insurance coverage; or
15
(j) any sale, transfer or other disposition of any material properties
or assets of CBI, CBI Delaware or Heritage, except in the ordinary course of
business.
Section 2.16. Allowance for Credit Losses. The allowance for credit
losses of CBI and Heritage has been calculated in accordance with GAAP as
applied to banking institutions and in accordance with all applicable rules and
regulations in all material respects. To the knowledge of CBI, CBI Delaware and
Heritage, the allowance for credit losses shown on the CBI Financial Statements
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 September 30, 2000 and in accordance with the safety and soundness
standards administered by, and the practices and procedures of, the FDIC, as
such standards, practices and procedures may be amended from time to time. 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 Prosperity.
Section 2.17. Employment Relations. The relations of CBI, CBI Delaware
and Heritage with their employees are satisfactory, and neither CBI, CBI
Delaware nor Heritage has received any notice of any controversies with, or
organizational efforts or other pending actions by, representatives of employees
of CBI, CBI Delaware or Heritage. CBI, CBI Delaware and Heritage have
materially complied with all laws relating to the employment of labor with
respect to the employees of CBI, CBI Delaware and Heritage, including any
provisions thereof relating to wages, hours, collective bargaining and the
payment of worker's compensation insurance and social security and similar
taxes, and, except as disclosed in Schedule 2.17 hereto, no person has asserted
that CBI, CBI Delaware or Heritage is liable for any arrearages of wages,
worker's compensation insurance premiums or any taxes or penalties for failure
to comply with any of the foregoing.
Section 2.18. ERISA. The employee pension benefits plans and welfare
benefit plans (referred to collectively herein as the "Plans") in effect at CBI,
CBI Delaware and Heritage (all of which are included in Schedule 2.12 hereto)
have all been operated in all material respects in compliance with the Employee
Retirement Income Security Act of 1974, as amended ("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 CBI, CBI Delaware or Heritage), 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 CBI, CBI Delaware
and Heritage. CBI, CBI Delaware and Heritage will not have any material
liabilities with respect to employee pension benefits, whether vested or
unvested as of the Closing, for any of their 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.
16
Section 2.19. Deferred Compensation Arrangements. Schedule 2.19 will
contain a true, correct and complete list of all deferred compensation
arrangements of CBI, CBI Delaware and Heritage, 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 2.20. Loans. Except as set forth in Schedule 2.20, to CBI's
knowledge, all currently outstanding loans (individually, a "Loan" and
collectively, the "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 CBI, CBI Delaware and Heritage, 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 CBI, CBI Delaware or Heritage; and provided, further,
that no representation or warranty is made as to the collectibility of any Loan.
There are no oral modifications or amendments or additional agreements related
to the Loans that are not reflected in CBI's, CBI Delaware's or Heritage's
records, and, to CBI's knowledge, no claim of defense as to the enforcement of
any Loan has been asserted, and neither CBI, CBI Delaware nor Heritage has
knowledge 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 CBI, CBI Delaware
or Heritage.
Section 2.21. Accounting Records; Data Processing.
(a) CBI, CBI Delaware and Heritage maintain records that accurately,
validly and fairly reflect their transaction and dispositions of assets and
maintain a system of internal accounting controls, policies and procedures
sufficient to insure that (i) such transactions are executed in accordance with
their management's general or specific authorization, (ii) such transactions are
recorded in such a manner as to permit preparation of financial statements in
accordance with GAAP and any other criteria applicable to such statements and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals as determined by CBI, CBI Delaware and Heritage and
appropriate action is taken with respect to any differences and (v) records of
such transactions are retained, protected and duplicated in accordance with
prudent banking practices and applicable regulatory requirements.
(b) The data processing equipment, data transmission equipment,
related peripheral equipment and software used by CBI, CBI Delaware and Heritage
in the operation of their business to generate and retrieve such records
(whether owned or leased by CBI, CBI Delaware and Heritage, or provided under
any agreement or other arrangement with a third party for data processing
services) are adequate for the needs of CBI, CBI Delaware and Heritage.
17
Section 2.22. Brokers and Finders. Except as set forth in Schedule 2.22
hereto, neither CBI, CBI Delaware, Heritage nor any of their 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 Merger
contemplated herein.
Section 2.23. Community Reinvestment Act. Heritage is in material
compliance with the Community Reinvestment Act (12 U.S.C. (S) 2901 et seq.) and
all regulations promulgated thereunder. Heritage has a rating of "satisfactory"
as of its most recent CRA compliance examination and, except as set forth in
Schedule 2.23 hereto, 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, Banking Department 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 Heritage under the CRA.
Section 2.24. Fair Housing Act, Home Mortgage Disclosure Act and Equal
Credit Opportunity Act. Heritage is in material compliance with the Fair
Housing Act (42 U.S.C. (S) 3601 et seq.), the Home Mortgage Disclosure Act (12
U.S.C. (S) 2801 et seq. and the Equal Credit Opportunity Act (15 U.S.C. (S) 1691
et seq.) and all regulations promulgated thereunder. Neither CBI, CBI Delaware
nor Heritage has received any notices of any violation of said acts or any of
the regulations promulgated thereunder, and neither CBI, CBI Delaware nor
Heritage has any notice of, or knowledge of, any threatened administrative
inquiry, proceeding or investigation with respect to Heritage's compliance with
said acts.
Section 2.25. Usury Laws and Other Consumer Compliance Laws. All loans
of CBI, CBI Delaware and Heritage 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. (S) 226 et
seq.) issued by the Board of Governors of the Federal Reserve System, the
Federal Consumer Credit Protection Act (15 U.S.C. (S) 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 Texas banking associations. Each loan on the
books of CBI, CBI Delaware and Heritage was made in the ordinary course of
business of CBI, CBI Delaware or Heritage.
Section 2.26. Bank Secrecy Act. Heritage is in material compliance with
the Bank Secrecy Act (12 U.S.C. (S)(S) 1730(d) and 1829(b)) and all regulations
promulgated thereunder, and Heritage has properly certified all foreign deposit
accounts and has made all necessary tax withholdings on all of its deposit
accounts; furthermore, Heritage 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. To CBI's knowledge, all real
property owned by either CBI, CBI Delaware or Heritage and the use thereof
materially complies with all applicable
18
laws, ordinances, regulations, orders or requirements, including without
limitation, building, zoning and other laws.
Section 2.28. Employment and Similar Agreements; Obligations Upon Change
in Control. Except as set forth in Schedule 2.28 or Schedule 2.18, there are no
written or oral employment, consulting, non-competition, retirement, parachutes,
severance or indemnification agreements or other agreements of any nature
whatsoever (collectively, "Employee Agreements") between CBI, CBI Delaware or
Heritage, on the one hand, and any officer, director, employee or agent thereof,
or any of their respective family members, on the other hand, including, without
limitation, any such agreement concerning the continued employment or use of
such officer, director, employee, agent or family member after the consummation
of the transactions contemplated by this Agreement, or any other benefits to be
granted to any such officer, director, employee, agent or family member, upon,
after or in connection with the consummation of the transactions contemplated by
this Agreement. Except as set forth in Schedule 2.28, there are no such
Employee Agreements or any other agreements under which the transactions
contemplated by this Agreement (including, without limitation, the change in
control resulting from the Merger) (a) will require any payment by CBI, CBI
Delaware or Heritage to, or any consent or waiver from, any officer, director,
employee or agent thereof, or any other person, or (b) will result in a change
of any nature in the rights of any party under an agreement with any officer,
director, employee or agent of CBI, CBI Delaware or Heritage, or any other
person, including, without limitation, any acceleration or change in the award,
grant, vesting or determination of options, warrants, rights, severance
payments, or other contingent obligations of any nature whatsoever of CBI, CBI
Delaware or Heritage. Except as set forth in Schedule 2.28, neither CBI, CBI
Delaware nor Heritage has any agreements with any employee or officer that are
inconsistent with the status of all employees and officers thereof being "at-
will" employees. Each reference in this Agreement to "officer," "director,"
"employee" or "agent" of CBI, CBI Delaware or Heritage, unless otherwise
specified, shall include, without limitation, consultants of CBI, CBI Delaware
or Heritage. Schedule 2.28 will contain true, correct and complete copies of
all Employee Agreements.
Section 2.29. Certain Interests. Except as set forth in Schedule 2.29
hereto, to CBI's knowledge: (a) no officer, director, employee or agent of CBI,
CBI Delaware or Heritage, any of their respective family members, any
corporation or organization (other than CBI, CBI Delaware or Heritage) of which
any of the foregoing persons is an officer, director or beneficial owner of 10%
or more of any class of its equity securities, or any trust or other estate in
which any of the foregoing persons has a substantial beneficial interest or as
to which such person serves as a trustee or in a similar capacity, nor any
Affiliate (unless otherwise stated, when used in this Agreement, "Affiliate" has
the meaning given it in Rule 405 promulgated under Securities Act of 1933, as
amended ("Securities Act")) of CBI, CBI Delaware or Heritage, nor any current or
former beneficial owner of 5% or more of any of the outstanding stock of CBI has
any material interest in any property, real or personal, tangible or intangible,
used in or pertaining to the business of CBI, CBI Delaware or Heritage or in any
transaction or series of similar transactions to which CBI, CBI Delaware or
Heritage is a party; (b) no such person included in clause (a) hereto is
indebted to CBI, CBI Delaware or Heritage except for (i) normal business expense
advances and (ii) loans that have been entered into in the ordinary course of
business on terms no less favorable to such person, or the
19
lender, as the case shall be, than if the loan had been entered into on an arm's
length basis pursuant to normal commercial terms and conditions and in
compliance with Applicable Law; (c) neither CBI, CBI Delaware or Heritage is
indebted to any such person except for amounts due under normal salary or
reimbursement or ordinary business expenses; and (d) no such person is a party
to an agreement (other than a Plan) with CBI, CBI Delaware or Heritage. Except
as set forth in Schedule 2.29, to CBI's knowledge, none of the persons or
entities described in clause (a) hereto has any other relationship or has
engaged or proposes to engage in any other transaction or series of transactions
that would be required to be disclosed pursuant to Item 404 of Regulation S-K
under the Securities Act.
Section 2.30. Prospectus/Proxy Statement and Regulatory Applications.
(a) When the Prospectus/Proxy Statement referred to in Section 5.3
hereof, or any amendment or supplement thereto, shall be mailed to the
shareholders of CBI and Prosperity, and at all times subsequent to such mailing
up to and including the date of the shareholders' meetings for each of CBI and
Prosperity (i) such Prospectus/Proxy Statement and all amendments or supplements
thereto, with respect to all information set forth therein provided by CBI, CBI
Delaware or Heritage, will comply in all material respects with the provisions
(to the extent applicable) of the Securities Act and the Securities Exchange Act
of 1934, as amended ("Exchange Act"), and the rules and regulations of the
Securities and Exchange Commission ("SEC") thereunder and (ii) the information
set forth in the Prospectus/Proxy Statement with respect to CBI, CBI Delaware or
Heritage will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
(b) When the applications for the regulatory approvals of the
transactions contemplated herein are filed with the Federal Reserve Board, FDIC
and Banking Department ("Regulatory Approvals"), or amended or supplemented,
information that is provided to Prosperity by CBI for inclusion in applications
for such Regulatory Approvals shall comply in all material respects with all
Applicable Laws and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
Section 2.31. Intellectual Property Rights. Schedule 2.31 hereto will
contain a true, correct and complete list of all registered trademarks,
registered service marks, trademark and service mark applications, trade names
and registered copyrights presently owned or held by CBI, CBI Delaware or
Heritage or used under license by them in the conduct of their business (the
"Intellectual Property"). CBI, CBI Delaware or Heritage own or have the right
to use and continue to use the Intellectual Property in the operation of their
business. Except as set forth in Schedule 2.31, neither CBI, CBI Delaware or
Heritage is infringing or violating any patent, copyright, trademark, service
mark, label filing or trade name owned or otherwise held by any other party, nor
has CBI, CBI Delaware or Heritage used any confidential information or any trade
secrets owned or otherwise held by any other party, without holding a valid
license for such use.
20
Neither CBI, CBI Delaware nor Heritage is engaging, nor has any been
charged with engaging, in any kind of unfair or unlawful competition. Neither
the execution, delivery and performance of this Agreement nor the consummation
of the transactions contemplated hereby will in any way impair the right of CBI,
CBI Delaware or Heritage or the Continuing Company to use, sell, license or
dispose of, or to bring any action for the infringement of, the Intellectual
Property.
Section 2.32. Site Locations.
(a) Schedule 2.32(a) hereto will contain a true, correct and complete
list of all locations of offices in which CBI, CBI Delaware or Heritage are
doing business as of the date hereof, including, without limitation, any branch,
loan production and agency offices. Except as disclosed in Schedule 2.32(a),
none of CBI, CBI Delaware or Heritage has applied for or received permission to
open any additional offices at any such location or any other locations.
(b) None of CBI, CBI Delaware or Heritage have filed any application,
made any agreement or taken any other action to discontinue operations at any
existing branch or agency, commence operations at any new branch or agency, or
relocate any existing branch or agency, except for such applications, agreements
or other actions as are set forth in Schedule 2.32(b).
Section 2.33. Interest Rate Risk Management Instruments.
(a) Schedule 2.33 hereto will contain a true, correct and complete
list of all interest rate swaps, caps, floors, and option agreements and other
interest rate risk management arrangements or financial derivative products to
which CBI, CBI Delaware or Heritage is a party or by which any of their
properties or assets may be bound.
(b) All interest rate swaps, caps, floors and option agreements and
other interest rate risk management arrangements to which CBI, CBI Delaware or
Heritage is a party or by which any of their properties or assets may be bound
were entered into in the ordinary course of business and, to CBI's knowledge, in
accordance with prudent banking practice and in all material respects all
applicable rules, regulations and policies of applicable governmental
authorities with counterparties believed to be financially responsible at the
time and are legal, valid and binding obligations enforceable in accordance with
their terms (except as may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting the rights of creditors generally and
the availability of equitable remedies), and are in full force and effect. CBI,
CBI Delaware or Heritage have duly performed in all material respects all of
their obligations thereunder to the extent that such obligations to perform have
accrued; and to CBI's knowledge, there are no breaches, violations or defaults
or allegations or assertions of such by any party thereunder.
III. REPRESENTATIONS AND WARRANTIES OF PROSPERITY
Prosperity represents and warrants to CBI that the statements contained in
this Article III are true and correct in all material respects. The Schedules
required pursuant to this Article III and elsewhere in this Agreement will be
delivered and made part of this Agreement no later than ten (10)
21
business days following the Execution Date. Prosperity agrees that, at the
Closing, it shall provide CBI with supplemental schedules reflecting any
material 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 3.1. Organization. Prosperity 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 BHC Act subject to all laws,
rules and regulations applicable to bank holding companies. Prosperity owns 100%
of the issued and outstanding shares of common stock, $1.00 par value, of
Delaware Company ("Delaware Stock"). Delaware Company, a Delaware corporation
and a bank holding company registered under the BHC Act, is duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Delaware Company owns 100% of the issued and outstanding shares of common stock,
$4.00 par value, of FPB ("FPB Stock"). FPB is a Texas banking association duly
organized, validly existing and in good standing under the laws of the State of
Texas. Prosperity, Delaware Company and FPB have full power and authority
(including all licenses, franchises, permits and other governmental
authorizations which are legally required) to own, lease and operate their
properties, to engage in the business and activities now conducted by them and
to enter into this Agreement. FPB (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 the Banking Department, and (ii) is an insured bank as defined in the
Federal Deposit Insurance Act. FPB conducts trust activities. Except as
otherwise disclosed in Schedule 3.1 hereto, neither Prosperity, Delaware Company
nor FPB (a) has any subsidiaries or affiliates, (b) is a general partner or
material owner in any joint venture, general partnership, limited partnership,
trust or other non-corporate entity, and (c) knows 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 Prosperity. True and complete copies of the Articles of
Incorporation and Bylaws of Prosperity, as amended to date, have been delivered
and made available to CBI.
Section 3.2. Capitalization. The authorized capital stock of Prosperity
consists of 50,000,000 shares of Prosperity Common Stock, 5,255,101 of which are
issued and 5,251,525 of which are outstanding and 20,000,000 shares of preferred
stock, $1.00 par value, none of which is issued and outstanding. The authorized
capital stock of Delaware Company consists of 10,000 shares of Delaware Stock,
1,000 of which are issued and outstanding. The authorized capital stock of FPB
consists of 130,000 shares of FPB Stock, 130,000 of which are issued and
outstanding. All of the issued and outstanding shares of Prosperity Common
Stock, Delaware Stock and FPB 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. The shares
of Prosperity Common Stock to be issued to CBI shareholders pursuant to the
provisions of this Agreement have been duly authorized, will be validly issued,
fully paid and nonassessable and will not be issued in violation of the
preemptive rights of any person. There are no voting trusts, voting agreements
or other similar arrangements affecting the Delaware Company Stock or the FPB
Stock, or to Prosperity's knowledge, the Prosperity Common Stock.
22
Section 3.3. Approvals; Authority. The Board of Directors of Prosperity
has approved this Agreement and the transactions contemplated herein subject to
the approval thereof by the shareholders of Prosperity as required by law, and,
other than shareholder approval, no further corporate proceedings of Prosperity
are needed to execute and deliver this Agreement and consummate the Merger.
This Agreement has been duly executed and delivered by Prosperity and is a duly
authorized, valid, legally binding agreement of Prosperity enforceable against
Prosperity 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 3.4. No Conflict With Other Instruments. Neither the execution
and delivery of this Agreement nor the consummation of the Merger contemplated
hereby, subject to obtaining all required shareholder consents, will conflict
with or result in a breach of any provision of the Articles of Incorporation and
Bylaws of Prosperity, the Certificate of Incorporation and Bylaws of Delaware
Company and the Articles of Association and Bylaws of FPB, as amended to date
(collectively, "Prosperity Constituent Documents"). 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 Prosperity 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 Prosperity, Delaware Company or FPB or upon the Prosperity Common
Stock.
Section 3.5. Financial Statements and Reports.
(a) Prosperity has furnished or made available to CBI true and
complete copies of its (i) Annual Report on Form 10-K for the year ended
December 31, 1999 ("Annual Report"), as filed with the SEC, which contains
Prosperity's audited balance sheet as of December 31, 1999 and 1998, and the
related statements of income and statements of changes in shareholders' equity
and cash flow for the years ended December 31, 1999, 1998 and 1997 and (ii)
Quarterly Report on Form 10-Q for the nine months ended September 30, 2000
("Quarterly Report"), as filed with the SEC, which contains the unaudited
balance sheets and related statements of income and statements of changes in
shareholders' equity and cash flows for the nine month periods ended September
30, 2000 and 1999. The Annual Report and Quarterly Report are referred to
herein as the "Prosperity Financial Statements." The Prosperity Financial
Statements fairly present the financial position of Prosperity, Delaware Company
and FPB and the results of their operations at the dates and for the periods
indicated in conformity with GAAP applied on a consistent basis. As of the
dates of the Prosperity Financial Statements referred to above, neither
Prosperity, Delaware Company nor FPB had any liabilities, fixed or contingent,
which are material and are not fully shown or provided for in such Prosperity
Financial Statements or otherwise disclosed in this Agreement, or in any of the
documents delivered to CBI. Since September 30, 2000, there have been no
material changes in the financial condition, assets, liabilities or business of
Prosperity, Delaware Company or FPB, other than changes in the ordinary course
of business, which individually or in the aggregate have
23
materially and adversely affected the financial condition, results of operations
or business of Prosperity, Delaware Company and FPB considered as a consolidated
whole.
(b) Prosperity, Delaware Company or FPB have filed all required
Governmental Filings. All such Governmental Filings, as finally amended or
corrected, complied in all material respects at the time of filing and at the
time of any amended or supplemented filing with all requirements of their
respective forms and with all Applicable Laws.
Section 3.6. Securities Exchange Commission Reporting Obligations.
Prosperity has filed all material reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with the SEC. As of their respective dates, each of such reports and
statements, as amended, were true and correct and complied in all material
respects with the relevant statutes, rules and regulations enforced or
promulgated by the SEC and none of the information contained in such reports and
statements is false or misleading with respect to any material fact, or omits to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Section 3.7. Taxes. Prosperity, Delaware Company and FPB have filed
with the appropriate federal, state and local governmental authorities all
material Tax Returns and reports required to be filed, and have paid all Taxes
and assessments shown to be due and payable thereon. The Tax Returns as filed
were correct in all material respects. Neither Prosperity, Delaware Company nor
FPB has executed or filed with the Internal Revenue Service any agreement
extending the period for assessment and collection of any federal income Tax.
None of Prosperity, Delaware Company and FPB a party to any pending action or
proceeding by any governmental authority for assessment or collection of Taxes,
nor has any written claim for assessment or collection of Taxes been asserted
against Prosperity, Delaware Company or FPB. All Taxes which Prosperity,
Delaware Company or FPB is or was required by law to withhold or to collect have
been duly withheld and collected and have been paid over to the proper
authorities to the extent due and payable, or segre gated and set aside for such
payment and, if so segregated and set aside will be so paid by Prosperity,
Delaware Company or FPB, as required by law.
Section 3.8. Contracts. Except for those contracts which have been
filed with the SEC and those listed in Schedule 3.8, as of September 30, 2000,
neither Prosperity, Delaware Company nor FPB is a party or subject to any of the
following (whether written or oral, express or implied):
(i) any labor contract or agreement with any labor union;
(ii) any contract not made in the ordinary course of business
containing covenants which materially limit the ability of Prosperity,
Delaware Company or FPB to compete in any line of business or with any
person or which involve any material restriction of the geographical
area in which, or method by which, Prosperity, Delaware Company or FPB
may carry on its business (other than as may be required by law or
applicable regulatory authorities); or
24
(iii) any other contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K.
Section 3.9. Absence of Certain Changes. Except as disclosed in
Schedule 3.9, there has not been since September 30, 2000:
(a) any change in or effect on the business of Prosperity, Delaware
Company or FPB or any occurrence, development or event of any nature, that has
had or may reasonably be expected to have, together with all such other changes
and effects, a material adverse effect on the financial condition, results of
operations or business of Prosperity;
(b) any direct or indirect redemption, purchase or other acquisition
of shares of Prosperity Common Stock, convertible securities or securities
exercisable for Prosperity Common Stock or other capital stock of Prosperity by
Prosperity, any declaration, setting aside or payment of any dividend by
Prosperity other than its quarterly dividend in the amount of $.09 per share
paid in October 2000, any alteration of any right attaching to any shares of
capital stock of Prosperity; or any combination or subdivision of any shares of
capital stock of Prosperity;
(c) any amendment or termination of any agreement to which Prosperity,
Delaware Company or FPB is a party, other than (i) amendments or terminations
which do not and will not, individually or in the aggregate, have a material
adverse effect on the financial condition, results of operations or business of
Prosperity, Delaware Company or FPB or (ii) terminations in accordance with the
terms of such agreement;
(d) any amendment to the Prosperity Constituent Documents;
(e) any change by Prosperity in accounting principles or methods,
except as required by FASB or the FDIC or Federal Reserve Board regulations or
as listed in Schedule 3.9(e);
(f) any loss, damage or destruction (whether or not covered by
insurance) affecting any of the tangible assets or business of Prosperity,
Delaware Company or FPB that may involve a loss of more than $300,000,
individually, or $900,000, in the aggregate (including deductibles), in excess
of applicable insurance coverage; or
(g) any sale, transfer or other disposition of any material properties
or assets of Prosperity, Delaware Company or FPB, except in the ordinary course
of business.
Section 3.10. Environmental Laws. To the knowledge of Prosperity,
Prosperity, Delaware Company and FPB, and any properties or business owned or
operated by any of them, whether or not held in a fiduciary or representative
capacity, are in material compliance with all terms and conditions of all
applicable federal and state Environmental Laws (as defined below) and permits
thereunder. Except as set forth in Schedule 3.10, (a) neither Prosperity,
Delaware Company nor FPB has received written notice of or has knowledge of any
material violation of any Environmental Laws or of any placement, disposal or
release of any materials designated as Hazardous Materials
25
(as defined below) under the Environmental Laws in a manner that would result in
a material claim or lien against any of them under any Environmental Laws; (b)
to Prosperity's knowledge, during the term of ownership by Prosperity, Delaware
Company and FPB no real estate currently owned, operated, or leased (including
any property acquired by foreclosure or deeded in lieu thereof) by Prosperity,
Delaware Company and FPB, or owned, operated or leased by Prosperity, Delaware
Company and FPB within the five years preceding the date of this Agreement, has
been designated by applicable governmental authorities as requiring any
environmental cleanup or response action by Prosperity, Delaware Company and FPB
to comply with Environmental Laws, or has been the site of release of any
Hazardous Materials for which Prosperity, Delaware Company and FPB would
reasonably be expected to incur material costs of cleanup; (c) to the knowledge
of Prosperity, Delaware Company and FPB, no friable asbestos was used in the
construction of any portion of Prosperity's, Delaware Company's or FPB's
facilities except as disclosed in documents available under Section 5.10 hereof;
and (d) to the knowledge of Prosperity, Delaware Company and FPB, no real
property currently owned by Prosperity, Delaware Company or FPB is, or has been
a landfill. The representations contained in this Section 3.10 are subject to
the same definitions and qualifications set forth in Section 2.9 hereof.
Section 3.11. Litigation and Other Proceedings. As of the date of this
Agreement there are no legal, quasi-judicial, regulatory or administrative
proceedings of any kind or nature now pending or, to the knowledge of
Prosperity, Delaware Company or FPB threatened before any court or
administrative body in any manner against Prosperity, Delaware Company or FPB,
or any of their properties or capital stock, which might have a material adverse
effect on Prosperity, Delaware Company or FPB, their financial condition,
assets, operations or earnings or the transactions proposed by this Agreement.
Neither Prosperity, Delaware Company nor FPB knows of any basis on which any
litigation or proceeding could be brought which is reasonably likely to have a
materially adverse effect on the financial condition of Prosperity, Delaware
Company or FPB or which could question the validity of any action taken or to be
taken in connection with this Agreement and the transactions contemplated
hereby. Neither Prosperity, Delaware Company nor FPB is in default with respect
to any judgment, order, writ, injunction, decree, award, rule or regulation of
any court, arbitrator or governmental agency or instrumentality.
Section 3.12. Loans. Except as set forth in Schedule 3.12, to
Prosperity's knowledge, all currently outstanding loans (individually, a "Loan"
and collectively, the "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 Prosperity, Delaware Company and FPB, 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 Prosperity, Delaware Company or FPB; and provided,
further, that no representation or warranty is made as to the collectibility of
any Loan. There are no oral modifications or amendments or additional
agreements related to the Loans that are not reflected in Prosperity's, Delaware
Company's and FPB's records, and, to Prosperity's knowledge, no claim of defense
as to the enforcement of any
26
Loan has been asserted, and neither Prosperity, Delaware Company nor FPB has
knowledge 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 Prosperity,
Delaware Company or FPB.
Section 3.13. Brokers and Finders. Except as set forth in Schedule 3.13
hereto, neither Prosperity, Delaware Company, FPB nor any of their 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 Merger contemplated herein.
Section 3.14. Insurance. Prosperity, Delaware Company and FPB is
presently insured or self-insured, and during each of the past five calendar
years (or during such lesser period of time as Prosperity has owned Delaware
Company and FPB) has been insured or self-insured, for reasonable amounts with
financially sound and reputable insurance companies against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured and has maintained all insurance required by
applicable law and regulation.
Section 3.15. Compliance with Laws. The business of Prosperity,
Delaware Company and FPB and any advertising related to such business or
otherwise conducted by or on their behalf, including without limitation the
business or originating, acquiring, holding or disposing of assets and
liabilities, is being conducted in material compliance with all Applicable Laws.
Except for approvals by regulatory authorities having jurisdiction over
Prosperity, Delaware Company and FPB and approval by the holders of shares of
Prosperity, Delaware Company and FPB, no prior consent, approval or
authorization of, or declaration, filing or registrations with, any person or
regulatory authority is required of Prosperity, Delaware Company of FPB in
connection with the execution, delivery and performance by Prosperity of this
Agreement and the transactions contemplated hereby except for certain
instruments necessary to consummate the Merger contemplated hereby. Prosperity,
Delaware Company and FPB have filed all material reports, registrations and
statements, together with any amendments required to be made thereto, that are
required to be filed with the Federal Reserve Board, FDIC, Banking Department or
any other regulatory authority having jurisdiction over Prosperity, Delaware
Company or FPB, and such reports, registrations and statements are, to the
knowledge of Prosperity, Delaware Company and FPB, true and correct in all
material respects.
Section 3.16. Allowance for Credit Losses. The allowance for credit
losses of Prosperity and FPB has been calculated in accordance with GAAP as
applied to banking institutions and in accordance with all applicable rules and
regulations in all material respects. To Prosperity's knowledge, the allowance
for credit losses of FPB 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 September 30, 2000 and is in accordance with the
safety and soundness standards administered by, and the practices and procedures
of, the FDIC, as such standards, practices and procedures are amended from time
to time. 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
CBI.
27
Section 3.1. Prospectus/Proxy Statement and Regulatory Applications.
(a) When the Proxy Statement/Prospectus referred to in Section 5.3
hereof, or any amendment or supplement thereto, shall be mailed to the
shareholders of CBI and Prosperity, and at all times subsequent to such mailing
up to and including the date of the shareholders' meetings for each of CBI and
Prosperity (i) such Prospectus/Proxy Statement and all amendments or supplements
thereto, with respect to all information set forth therein provided by
Prosperity, Delaware Company and FPB will comply in all material respects with
the provisions (to the extent applicable) of the Securities Act and the Exchange
Act and the rules and regulations of the SEC thereunder and (ii) the information
set forth in the Prospectus/Proxy Statement with respect to Prosperity, Delaware
Company and FPB will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
(b) When the applications for the Regulatory Approvals are filed or
amended or supplemented, information relating to Prosperity and Prosperity
Delaware and FPB or to this Agreement that is provided by Prosperity, Prosperity
Delaware or FPB shall comply in all material respects with all Applicable Laws
and will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading.
Section 3.18. [INTENTIONALLY OMITTED]
Section 3.19. Regulatory Approvals. Prosperity has no reason to
believe that it will not be able to obtain all requisite regulatory approvals
necessary to consummate the transactions set forth in this Agreement.
Section 3.20. Real Property Owned or Leased.
(a) Other than real property acquired through foreclosure or deed in
foreclosure, Schedule 3.20 will contain a true, correct and complete list of all
real property owned or leased by Prosperity, Delaware Company and FPB (the
"Prosperity Real Property").
(b) No lease with respect to any Prosperity Real Property and no deed
with respect to any Prosperity Real Property contains any restrictive covenant
that materially restricts the use, transferability or value of such Prosperity
Real Property. To Prosperity's knowledge, each of such leases is a legal, valid
and binding obligation enforceable in accordance with its terms (except as may
be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the rights of creditors generally and the availability of equitable
remedies), and is in full force and effect; to Prosperity's knowledge, there are
no existing defaults by Prosperity, Delaware Company and FPB or the other party
thereunder; to Prosperity's knowledge, there are no allegations or assertions of
such by any party under such agreement or any events that with notice lapse of
time or the happening or occurrence of any other event would constitute a
default thereunder.
28
(c) To the knowledge of Prosperity, none of the buildings and
structures located on any Prosperity Real Property, nor any appurtenances
thereto or equipment therein, nor the operation or maintenance thereof, violates
in any material manner any restrictive covenants or encroaches on any property
owned by others, nor does any building or structure of third parties encroach
upon any Prosperity Real Property, except for those violations and encroachments
which in the aggregate could not reasonably be expected to cause a material
adverse effect on the financial condition, results of operation or business of
Prosperity, Delaware Company or FPB. To Prosperity's knowledge, no condemnation
proceeding is pending or, to Prosperity's knowledge, threatened, which would
preclude or materially impair the use of any Prosperity Real Property in the
manner in which it is currently being used.
(d) Prosperity, Delaware Company and FPB have good and indefeasible
title to, or a valid and enforceable leasehold interest in, or a contract
vendee's interest in, all Prosperity Real Property, and such interest is free
and clear of all liens, charges or other encumbrances, except (i) statutory
liens for amounts not yet delinquent or which are being contested in good faith
through proper proceedings and (ii) those liens related to real property taxes,
local improvement district assessments, easements, covenants, restrictions and
other matters of record which do not individually or in the aggregate materially
adversely affect the use and enjoyment of the relevant real property.
(e) All buildings and other facilities used in the business of
Prosperity, Delaware Company and FPB are adequately maintained and, to
Prosperity's knowledge, are free from defects which could materially interfere
with the current or future use of such facilities.
Section 3.21. Personal Property. Prosperity, Delaware Company and FPB
have good title to, or a valid leasehold interest in, all personal property,
whether tangible or intangible, used in the conduct of their business (the
"Prosperity Personalty"), free and clear of all liens, charges or other
encumbrances, except (a) statutory liens for amounts not yet delinquent or which
are being contested in good faith through proper proceedings and (b) such other
liens, charges, encumbrances and imperfections of title as do not individually
or in the aggregate materially adversely affect the use and enjoyment of the
relevant Prosperity Personalty. Subject to ordinary wear and tear, the
Prosperity Personalty is in good operating condition and repair and is adequate
for the uses to which it is being put.
Section 3.22. Employment Relations. The relations of Prosperity,
Delaware Company and FPB with their employees are satisfactory, and neither
Prosperity, Delaware Company and FPB has received any notice of any
controversies with, or organizational efforts or other pending actions by,
representatives of employees of Prosperity, Delaware Company and FPB.
Prosperity, Delaware Company and FPB have materially complied with all laws
relating to the employment of labor with respect to the employees of Prosperity,
Delaware Company and FPB, including any provisions thereof relating to wages,
hours, collective bargaining and the payment of worker's compensation insurance
and social security and similar taxes.
Section 3.23. ERISA. The employee pension benefits plans and welfare
benefit plans (referred to collectively herein as the "Prosperity Plans") in
effect at Prosperity, Delaware Company
29
and FPB have all been operated in all material respects in compliance with
ERISA, since ERISA became applicable with respect thereto. None of the
Prosperity Plans nor any of their respective related trusts have been terminated
(except the termination of any Prosperity Plan which is in compliance with the
requirements of ERISA and which will not result in any additional liability to
Prosperity, Delaware Company and Heritage), 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 Prosperity 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 Prosperity
Plans are the only employee pension benefit plans covering employees of
Prosperity, Delaware Company and Heritage. Prosperity, Delaware Company and FPB
will not have any material liabilities with respect to employee pension
benefits, whether vested or unvested as of the Closing, for any of their
employees other than under the Prosperity Plans, and as of the date hereof the
actuarial present value of Prosperity Plan assets of each Prosperity 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 3.24. Accounting Records; Data Processing.
(a) Prosperity, Delaware Company and FPB maintain records that
accurately, validly and fairly reflect their transaction and dispositions of
assets and maintain a system of internal accounting controls, policies and
procedures sufficient to insure that (i) such transactions are executed in
accordance with their management's general or specific authorization, (ii) such
transactions are recorded in such a manner as to permit preparation of financial
statements in accordance with GAAP and any other criteria applicable to such
statements and to maintain accountability for assets, (iii) access to assets is
permitted only in accordance with management's general or specific
authorization, (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals as determined by Prosperity, Delaware
Company and FPB and appropriate action is taken with respect to any differences
and (v) records of such transactions are retained, protected and duplicated in
accordance with prudent banking practices and applicable regulatory
requirements.
(b) The data processing equipment, data transmission equipment,
related peripheral equipment and software used by Prosperity, Delaware Company
and FPB in the operation of their business to generate and retrieve such records
(whether owned or leased by Prosperity, Delaware Company and FPB, or provided
under any agreement or other arrangement with a third party for data processing
services) are adequate for the needs of Prosperity, Delaware Company and FPB.
Section 3.25. Employment and Similar Agreements. Except as set forth in
Schedule 3.25, there are no written or oral employment, consulting, non-
competition, retirement, parachutes, severance or indemnification agreements or
other agreements of any nature whatsoever (collectively, "Employee Agreements")
between Prosperity, Delaware Company or FPB, on the one hand, and any officer,
director, employee or agent thereof, or any of their respective family members,
on the other
30
hand, including, without limitation, any such agreement concerning the continued
employment or use of such officer, director, employee, agent or family member
after the consummation of the transactions contemplated by this Agreement, or
any other benefits to be granted to any such officer, director, employee, agent
or family member, upon, after or in connection with the consummation of the
transactions contemplated by this Agreement.
Section 3.26. Community Reinvestment Act. FPB is in material compliance
with the Community Reinvestment Act (12 U.S.C. (S) 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, Banking Department 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.
Section 3.27. Fair Housing Act, Home Mortgage Disclosure Act and Equal
Credit Opportunity Act. FPB is in material compliance with the Fair Housing Act
(42 U.S.C. (S) 3601 et seq.), the Home Mortgage Disclosure Act (12 U.S.C. (S)
2801 et seq. and the Equal Credit Opportunity Act (15 U.S.C. (S) 1691 et seq.)
and all regulations promulgated thereunder. Neither CBI, CBI Delaware nor
Heritage has received any notices of any violation of said acts or any of the
regulations promulgated thereunder, and neither Prosperity, Delaware Company nor
FPB has any notice of, or knowledge of, any threatened administrative inquiry,
proceeding or investigation with respect to FPB's compliance with said acts.
Section 3.28. Usury Laws and Other Consumer Compliance Laws. All loans
of Prosperity, Delaware Company and FPB 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. (S)
226 et seq.) issued by the Board of Governors of the Federal Reserve System, the
Federal Consumer Credit Protection Act (15 U.S.C. (S) 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 Texas banking associations. Each loan on the
books of Prosperity, Delaware Company and FPB was made in the ordinary course of
business of Prosperity, Delaware Company and FPB.
Section 3.29. Bank Secrecy Act. FPB is in material compliance with the
Bank Secrecy Act (12 U.S.C. (S)(S) 1730(d) and 1829(b)) and all regulations
promulgated thereunder, and FPB has properly certified all foreign deposit
accounts and has made all necessary tax withholdings on all of its deposit
accounts; furthermore, FPB 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 3.30. Zoning and Related Laws. To Prosperity's knowledge, all
real property owned by either Prosperity, Delaware Company or FPB and the use
thereof materially complies with all
31
applicable laws, ordinances, regulations, orders or requirements, including
without limitation, building, zoning and other laws.
Section 3.31. Site Locations.
(a) Except as disclosed in Schedule 3.31(a), none of Prosperity,
Delaware Company or FPB has applied for or received permission to open any
additional offices at any such location or any other locations.
(b) None of Prosperity, Delaware Company or FPB have filed any
application, made any agreement or taken any other action to discontinue
operations at any existing branch or agency, commence operations at any new
branch or agency, or relocate any existing branch or agency, except for such
applications, agreements or other actions as are set forth in Schedule 3.31(b).
Section 3.32. Interest Rate Risk Management Instruments. All interest
rate swaps, caps, floors and option agreements and other interest rate risk
management arrangements to which Prosperity, Delaware Company or FPB is a party
or by which any of their properties or assets may be bound were entered into in
the ordinary course of business and, to Prosperity's knowledge, in accordance
with prudent banking practice and in all material respects all applicable rules,
regulations and policies of applicable governmental authorities with
counterparties believed to be financially responsible at the time and are legal,
valid and binding obligations enforceable in accordance with their terms (except
as may be limited by bankruptcy, insolvency, moratorium, reorganization or
similar laws affecting the rights of creditors generally and the availability of
equitable remedies), and are in full force and effect. Prosperity, Delaware
Company or FPB have duly performed in all material respects all of their
obligations thereunder to the extent that such obligations to perform have
accrued; and to Prosperity's knowledge, there are no breaches, violations or
defaults or allegations or assertions of such by any party thereunder.
IV. COVENANTS OF CBI
CBI covenants and agrees with Prosperity as follows:
Section 4.1. Shareholder Approval and Best Efforts.
(a) CBI shall duly call a meeting of its shareholders ("CBI
Shareholders' Meeting") for the purpose of considering the Agreement and all
other matters necessary to consummate the transactions contemplated by the
Agreement, which meeting shall be held not earlier than 20 nor later than 30
business days following the date upon which the notice of the CBI Shareholder's
Meeting is mailed to the CBI shareholders. If the transaction is approved by
the CBI shareholders, CBI shall take all reasonable action to aid and assist in
the consummation of the Merger, 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
Prosperity reasonably considers necessary, proper or advisable in connection
with filing
32
applications and registration statements with, or obtaining approvals from, all
regulatory authorities having jurisdiction over the transactions contemplated by
this Agreement.
(b) In obtaining the approval of shareholders referred to in this
Section 4.1, CBI will comply, and will use reasonable efforts to cause its
officers, directors and 5% or more shareholders to comply, with applicable
provisions of the Securities Act, Exchange Act and any other applicable law.
Section 4.2. CBI Activities Pending Closing. Except as otherwise
specifically provided in this Agreement and subject to Applicable Laws, from the
date hereof to and including the Effective Time, CBI, CBI Delaware or Heritage
shall, as long as this Agreement remains in effect or unless Prosperity
otherwise consents in writing (which consent shall not be unreasonably
withheld):
(a) conduct its affairs (including, without limitation, the making of
or agreeing to make any loans or other extensions of credit) only in the
ordinary course of business consistent with prudent banking practice and in
accordance with Applicable Laws and their compliance, loan and other policies,
including, without limitation, using its best efforts to make all changes
required upon completion of any regulatory examination, and use all reasonable
efforts to preserve intact their present business organizations, keep available
the services of their present officers, directors, key employees and agents and
preserve their relationships and goodwill with all persons having business
dealings with them, provided that CBI, CBI Delaware or Heritage shall not make
or agree to make any loans or other extensions of credit to any borrower in
excess of $2,000,000 (except (i) pursuant to commitments made prior to the date
of this Agreement, (ii) loans fully secured by a certificate of deposit at
Heritage and (iii) renewals, extensions and consolidations of any loans other
than those loans listed in Schedule 4.2(a)) without the prior consent of
Prosperity (which consent shall not be unreasonably withheld); provided,
however, that if Prosperity does not disapprove in writing any loan requiring
Prosperity's prior approval within two business days following its receipt of a
request for approval, such loan shall be deemed approved by Prosperity.
(b) refrain from issuing or selling or obligating itself to issue or
sell any shares of its capital stock or any warrants, rights or options to
acquire, or any securities convertible into, any shares of its capital stock,
except for shares of CBI Common Stock issuable upon the exercise of options
which are outstanding and unexercised as of the Execution Date and except as
otherwise set forth in Schedule 4.2;
(c) except as set forth in Schedule 2.32, refrain from opening or
closing any branch office, or acquiring or selling or agreeing to acquire or
sell, any branch office or any deposit liabilities, and otherwise consult with
and seek the advice of Prosperity with respect to basic policies relating to
branching, site location and relocation;
(d) not enter into, amend or terminate any agreement of the type that
would be required to be disclosed in Schedule 2.12, or any other material
agreement, or acquire or dispose of
33
any material amount of assets or liabilities, except in the ordinary course of
business consistent with prudent banking practices;
(e) not grant any severance or termination pay (other than pursuant to
CBI's policies in effect on the date hereof) to, or enter into any employment,
consulting, noncompetition, retirement, parachute, severance or indemnification
agreement with, any officer, director, employee or agent of CBI, CBI Delaware or
Heritage, either individually or as part of a class of similarly situated
persons;
(f) not cause or allow any of the things listed in Section 2.15 to
occur (except with respect to Section 2.15(a) and (i), CBI, CBI Delaware or
Heritage shall use their best efforts to not cause or allow any of the things
listed therein to occur), except that CBI may pay its regular quarterly
dividends of $12.00 per share, CBI may issue shares of CBI Common Stock upon the
exercise of options to acquire shares of CBI Common Stock which are outstanding
and unexercised as of the Execution Date and except as otherwise set forth in
Schedule 4.2;
(g) not foreclose upon or otherwise acquire any real property
described in Section 2.7 hereof or any non-residential property prior to receipt
and approval by Prosperity of a Phase I environmental review therefor;
(h) not change its deposit account interest rate pricing policies or
its loan pricing policies except in response to changes in the applicable
market;
(i) not establish any new subsidiary;
(j) not voluntarily make any material change in the interest rate risk
profile of Heritage from that as of September 30, 2000;
(k) not materially deviate from policies and procedures existing as of
the date of this Agreement with respect to (i) classification of assets, (ii)
the allowance for credit losses and (iii) accrual of interest on assets, except
as otherwise required by the provisions of this Agreement; and
(l) not make or agree to make any overdrafts in excess of $100,000 per
account, unless an overdraft line of credit is in place consistent with
Heritage's ordinary course of business and policies and applicable laws.
Section 4.3. Access to Properties and Records. To the extent permitted
by Applicable Laws and any applicable contractual obligations, CBI will afford
the executive officers and authorized representatives (including legal counsel,
accountants and consultants) of Prosperity full access upon reasonable notice to
the properties, books and records of CBI in order that Prosperity may have full
opportunity to make such reasonable investigation as it shall desire to make of
the affairs of CBI, and the officers of CBI will furnish Prosperity with such
additional financial and operating data and other information as to the business
and properties of CBI as Prosperity shall, from time to time, request. As soon
as practicable after they become available, CBI will deliver or
34
make available to Prosperity all unaudited quarterly financial statements
prepared for the internal use of management of CBI and all Call Reports filed by
Heritage with the appropriate federal regulatory authority after the date of
this Agreement. All such financial statements shall be prepared in accordance
with GAAP applied on a consistent basis with previous accounting periods. In the
event of the termination of this Agreement, Prosperity will return to CBI 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 and SEC filings.
To the extent permitted by law, CBI will furnish Prosperity with all information
concerning CBI required for inclusion in (i) any application, statement or
document to be made or filed by Prosperity, Delaware Company or FPB 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 (ii) any filings with the SEC, including a Registration Statement
on Form S-4, and any applicable state securities authorities. CBI 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. CBI will indemnify and hold harmless Prosperity,
Delaware Company and FPB from and against any and all losses, claims, damages,
expenses or liabilities to which any of them may become subject under applicable
laws, rules and regulations and will reimburse Prosperity, Delaware Company and
FPB for any legal or other expenses reasonably incurred by any of them 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 upon any untrue statement of a material fact
contained in any such application 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 any such statement or omission was made in reliance upon and
in conformity with information furnished in writing by CBI expressly for use
therein. CBI agrees at any time, upon the request of Prosperity, to furnish to
Prosperity a written letter or statement confirming the accuracy of the
information with respect to CBI contained in any report or other application or
statement referred to in this Agreement, and confirming that the information
with respect to CBI contained in such document or draft was furnished by CBI
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 CBI expressly for use therein.
Section 4.5. Attendance at Certain CBI Meetings. In order to facilitate
the continuing interaction of Prosperity with CBI, and in order to keep
Prosperity fully advised of all ongoing activities of CBI, CBI agrees to allow
Prosperity to designate two representatives (who shall be officers of
Prosperity), each 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 CBI, CBI Delaware and
Heritage (including, but not limited to, meetings of the officers' loan
committee of Heritage). CBI shall promptly give Prosperity 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 CBI, CBI
35
Delaware or Heritage is required or obligated to maintain as confidential under
applicable laws or regulations, or (c) pending or threatened litigation or
investigations if, in the opinion of counsel to CBI, 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 Prosperity 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 CBI made in this Agreement.
Prosperity agrees that, until the Closing, it and its representatives will hold
in strict confidence all information so obtained from CBI, CBI Delaware and
Heritage and, if the transactions provided for herein are not consummated,
Prosperity will, within five (5) days after a request of CBI, return or cause to
be returned to CBI all written information and documents obtained from CBI, CBI
Delaware and Heritage concerning CBI, CBI Delaware and Heritage then in its
possession. Furthermore, if the transactions contemplated by this Agreement are
disapproved by any regulatory authority whose approval is required, then
Prosperity's designees will no longer be entitled to notice of and permission to
attend such meetings.
Section 4.6. No Solicitation.
(a) CBI agrees that it will immediately cease and cause to be
terminated any existing activities, discussions, or negotiations with any
parties regarding any Acquisition Proposal (as defined below). From the
Execution Date until the Effective Time or the termination of this Agreement
pursuant to its terms, CBI agrees that it will not and will not permit any of
CBI Delaware or Heritage, or any of its or their officers, directors, employees,
representatives, agents, or affiliates, including, without limitation, any
investment banker, financial advisor, attorney, accountant or consultant
retained by CBI, CBI Delaware or Heritage (collectively, "Representatives") to,
directly or indirectly, (i) initiate, solicit, encourage or otherwise facilitate
(including by way of furnishing information), any inquiries or the making of any
proposal or offer that constitutes, or may reasonably be expected to lead to an
Acquisition Proposal, or (ii) enter into or maintain or continue discussions or
negotiate with any person in furtherance of such inquiries or to obtain an
Acquisition Proposal, or (iii) agree to, approve, recommend, or endorse any
Acquisition Proposal, or authorize or permit any of its or their Representatives
to take any such action and CBI shall notify Prosperity orally (within one
business day) and in writing (as promptly as practicable) of any such inquiries
and proposals received by CBI, CBI Delaware or Heritage or their
Representatives, relating to any of such matters; provided, however, that
nothing contained in this Agreement shall prohibit the Board of Directors of CBI
from (A) furnishing information to, or engaging in discussions or negotiations
with, any person in response to an unsolicited bona fide written Acquisition
Proposal; or (B) recommending such an unsolicited bona fide written Acquisition
Proposal to the shareholders of CBI, if and only to the extent that (w) the
Board of Directors of CBI concludes in good faith (after consultation with its
financial advisors) that such Acquisition Proposal would constitute a Superior
Proposal (as defined below), and (x) the Board of Directors of CBI determines in
good faith (on the basis of a legal opinion from outside legal counsel) that the
failure to take such action would result in a breach by the Board of Directors
of CBI of its fiduciary duties to CBI's shareholders under Applicable Laws, and
(y) prior to furnishing such information to, or entering into discussions or
negotiations with, such person CBI provides prompt written notice to Prosperity
to the effect that it is furnishing information to, or entering into discussions
or negotiations with, such person (which
36
notice shall identify the nature and material terms of the proposal), and (z)
prior to providing any information or data to any person in connection with an
Acquisition Proposal by any such person, the Board of Directors of CBI receives
from such person an executed confidentiality agreement. CBI agrees to keep
Prosperity fully and timely informed of the status of any discussions,
negotiations, furnishing of non-public information, or other activities relating
to an Acquisition Proposal.
(b) For purposes of this Agreement, "Acquisition Proposal" means a
written offer or proposal which contains a fixed price per share or a
mathematically ascertainable formula for calculating a price per share for the
CBI Common Stock regarding any of the following (other than the transactions
contemplated by this Agreement) involving CBI, CBI Delaware or Heritage: (i)
any merger, reorganization, consolidation, share exchange, recapitalization,
business combination, liquidation, dissolution or other similar transaction
involving any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of, all or any significant portion of the assets or equity
securities or deposits of, CBI, CBI Delaware or Heritage, in a single
transaction or series of related transactions which could reasonably be expected
to impede, interfere with, prevent or materially delay the completion of the
Merger; (ii) any tender offer or exchange offer for 50% or more of the
outstanding shares of capital stock of CBI or the filing of a registration
statement under the Securities Act in connection therewith; or (iii) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing.
(c) For purposes of this Agreement, "Superior Proposal" means a bona
fide Acquisition Proposal made by a third person that the Board of Directors of
CBI determines in its good faith judgment to be more favorable to CBI's
shareholders than the Merger (taking into account, in good faith, the written
opinion, with only customary qualifications, of CBI's independent financial
advisor that the value of the consideration to CBI's shareholders provided for
in such proposal exceeds the value of the consideration to CBI's shareholders
provided for in the Merger) and for which financing, to the extent required, is
then committed or which, in the good faith judgment of the Board of Directors of
CBI (taking into account, in good faith, the written advice of CBI's independent
financial advisor), is reasonably capable of being obtained by such third
person.
(d) Nothing contained in this Section 4.6 shall prohibit CBI from
making any disclosure to CBI's shareholders which, in the good faith judgment of
the Board of Directors of CBI taking into account, in good faith, the advice of
outside counsel, is required under applicable law; provided that CBI does not
withdraw or modify, or propose to withdraw or modify, its position with respect
to the Merger or approve or recommend, or propose to approve or recommend, an
Acquisition Proposal unless CBI and its Board of Directors has complied with all
provisions of this Section 4.6.
Section 4.7. Termination Fee. To compensate Prosperity for entering
into this Agreement, taking actions to consummate the transactions contemplated
hereunder and incurring the costs and expenses related thereto and other losses
and expenses, including foregoing the pursuit of other opportunities by
Prosperity, CBI and Prosperity agree as follows:
37
(a) Provided that Prosperity shall not be in material breach of its
obligations under this Agreement (which breach has not been cured promptly
following receipt of written notice thereof by CBI as set forth in Section
8.1(b) hereof), CBI shall pay to Prosperity the sum of $2,500,000 (the
"Termination Fee") if this Agreement is terminated (i) by CBI under the
provisions of Section 8.1(k), (ii) by either Prosperity or CBI under the
provisions of Section 8.1(j) due to the failure of CBI's shareholders to approve
and adopt this Agreement and the Merger, if at the time of such failure to so
approve and adopt this Agreement and the Merger there shall exist an Acquisition
Proposal with respect to CBI and, within nine months of the termination of this
Agreement, CBI enters into a definitive agreement with any third party with
respect to any Acquisition Proposal with respect to CBI or (iii) by Prosperity
under the provisions of Section 8.1(l).
(b) Any payment required by paragraph (a) of this Section 4.7 shall
become payable within two (2) business days after termination of this Agreement.
(c) CBI acknowledges that the agreements contained in this Section 4.7
are an integral part of the transactions contemplated in this Agreement, and
that, without these agreements, Prosperity would not enter into this Agreement;
accordingly, if CBI fails to promptly pay the Termination Fee when due, CBI
shall in addition thereto pay to Prosperity all costs and expenses (including
fees and disbursements of counsel) incurred in collecting such Termination Fee
together with interest on the amount of the Termination Fee (or any unpaid
portion thereof) from the date such payment was required to be made until the
date such payment is received by Prosperity at the prime rate as reported in The
Wall Street Journal as in effect from time to time during such period.
Section 4.8. Affiliates' Letters. No later than the 15th day following
the Execution Date, CBI shall deliver to Prosperity, after consultation with
legal counsel, a list of names and addresses of those persons who are
"Affiliates" of CBI with respect to the Merger within the meaning of Rule 144
under the Securities Act. There shall be added to such list the names and
addresses of any other person (within the meaning of such Rule) which Prosperity
identifies (by written notice to CBI within three business days after receipt of
such list) as possibly being a person who may be deemed to be an "Affiliate" of
CBI within the meaning of Rule 144. CBI shall use all reasonable efforts to
deliver, or cause to be delivered, to Prosperity, not later than the 30th day
following the Execution Date from each of the "Affiliates" of CBI identified as
aforesaid, a letter dated as of the date of delivery thereof in the form of
Exhibit D attached hereto.
Section 4.9. Assumption of CBI Stock Options. CBI acknowledges that
each of the holders of CBI Stock Options as of the Execution Date shall execute
and deliver to Prosperity, at least ten (10) days prior to the Closing Date, an
acknowledgment that such holder's CBI Stock Option shall be converted, in
accordance with its terms, into an option to purchase a number of shares of
Prosperity Common Stock equal to the number of shares of CBI Common Stock
subject to the original option multiplied by the Exchange Ratio, at an exercise
price per share equal to the exercise price per share of the original option
divided by the Exchange Ratio, consistent with the provisions of Section 1.5
hereof.
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Section 4.10. Transactions with Affiliates and Insiders. From the date
hereof until the Effective Time, CBI shall not, without the prior written
consent of Prosperity, make, or allow CBI Delaware or Heritage to make, any loan
(other than renewals, extensions and consolidations of loans) or establish any
relationship, of the type or engage or propose to engage in any transactions of
the type that would be required to be disclosed in Schedule 2.29 had such loan
been made, relationship been established or transaction been entered into or
proposed as of the date hereof.
Section 4.11. Classifications of Loans. From the date hereof until the
Effective Time, CBI (i) to the extent permitted by Applicable Law, shall
promptly inform Prosperity of the amounts and categories of any of its or
Heritage's loans, leases or other extensions of credit that are classified by
any governmental agency which has regulatory authority over CBI, CBI Delaware or
Heritage as "Other Assets Especially Mentioned", "Substandard", "Doubtful",
"Loss" or any comparable classification; (ii) shall classify all assets in
accordance with Regulatory Standards and its own internal classification system;
and (iii) shall apply the standards regarding accrual of interest set forth in
the then most recent Call Report instructions.
Section 4.12. Certain Accounting Adjustments. After the approval of the
shareholders and all of the Regulatory Approvals have been obtained, CBI shall,
if requested by Prosperity, make such accounting entries prior to the Effective
Time as Prosperity may reasonably request in order to conform the accounting
records of CBI to the accounting policies and practices of Prosperity, Delaware
Company and FPB, subject to compliance with GAAP applied on a consistent basis
and all appropriate regulatory requirements, such adjustments to be effective
immediately prior to the Effective Time. No such adjustment shall of itself
constitute or be deemed to be a breach, violation or failure to satisfy any
representation, warranty, covenant, condition or other provision or constitute
grounds for termination of this Agreement or be an acknowledgment by CBI (i) of
any adverse circumstances for purposes of determining whether the conditions to
Prosperity's obligations under this Agreement have been satisfied, or (ii) that
such adjustment is required for purposes of determining satisfaction of the
condition to Prosperity's obligations under this Agreement set forth in Section
9.1 hereof or (iii) that such adjustment has any bearing on the number of shares
of Prosperity Common Stock issuable hereunder. No adjustment required by
Prosperity shall (a) require any prior filing with any governmental agency or
regulatory authority or (b) violate any law, rule or regulation applicable to
CBI.
Section 4.13. Environmental Investigation; Rights to Terminate
Agreement.
(a) Prosperity and its consultants, agents and representatives shall have
the right to the same extent that CBI, CBI Delaware or Heritage has such right,
but not the obligation or responsibility, to inspect any property, including,
without limitation, conducting asbestos surveys and sampling, environmental
assessments and investigation, and other non-invasive or non-destructive
environmental surveys and analyses including soil and ground sampling
("Environmental Inspections") at any time on or prior to thirty (30) days after
the date of this Agreement. If, as a result of any such Environmental
Inspection, further investigation ("secondary investigation") including, without
limitation, test borings, soil, water, asbestos or other sampling, is deemed
desirable by Prosperity, Prosperity shall (i) notify CBI of any property for
which it intends to
39
conduct such a secondary investigation and the reasons for such secondary
investigation, and (ii) conclude such secondary investigation, on or prior to
sixty (60) days after the date of this Agreement Prosperity shall give
reasonable notice to CBI of such secondary investigations, and CBI may place
reasonable time and place restrictions on such secondary investigations.
(b) CBI agrees to indemnify and hold harmless Prosperity for any claims for
damage to property, or injury or death to persons, made as a result of any
Environmental Inspection or secondary investigation conducted by Prosperity or
its agents, or to the extent such damage or injury is attributable to the
negligent actions or negligent omissions of CBI or their respective agents.
Prosperity agrees to indemnify and hold harmless CBI for any claims for damage
to property, or injury or death to persons, to the extent attributable to the
negligent actions or omissions of Prosperity or its agents in performing any
Environmental Inspection or secondary investigation. Prosperity shall not have
any liability or responsibility of any nature whatsoever for the results,
conclusions or other findings related to any Environmental Inspection, secondary
investigation or other environmental survey. If this Agreement is terminated,
then except as otherwise required by law, reports to any governmental authority
of the results of any Environmental Inspection, secondary investigation or other
environmental survey shall be made by CBI and not by Prosperity. Prosperity
shall make no such report prior to Closing unless required to do so by law, and
in such case will give CBI reasonable prior notice of Prosperity's intentions.
(c) Prosperity shall have the right to terminate this Agreement if (i) the
results of such Environmental Inspection, secondary investigation or other
environmental survey are disapproved by Prosperity because the Environmental
Inspection, secondary investigation or other environmental survey identifies
violations or potential violations of Environmental Laws or any past or present
event, condition or circumstance that would require remedial or cleanup action
under Environmental Laws involving an expenditure in excess of $1,000,000 or
result in Material Adverse Change (as defined in Section 8.1(c) hereof) in the
financial condition, results of operation or business of CBI; or (ii) CBI, CBI
Delaware or Heritage has refused to allow Prosperity to conduct an Environmental
Inspection or secondary investigation in a manner that Prosperity reasonably
considers necessary.
(d) CBI agrees to make available upon request to Prosperity and its
consultants, agents and representatives all documents and other material
relating to environmental conditions of any property including, without
limitation, the results of other environmental inspections and surveys to the
extent such documents are in the actual possession of CBI. CBI also agrees that
all engineers and consultants who prepared or furnished such reports may discuss
such reports and information with Prosperity and, at Prosperity's cost, shall be
entitled to certify the same in favor of Prosperity and its consultants, agents
and representatives and make all other data available to Prosperity and its
consultants, agents and representatives.
V. COVENANTS OF PROSPERITY
Prosperity covenants and agrees with CBI as follows:
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Section 5.1. Shareholder Approval and Best Efforts.
(a) Prosperity shall duly call a meeting of its shareholders
("Prosperity Shareholders' Meeting") for the purpose of considering the
Agreement and all other matters necessary to consummate the transactions
contemplated by the Agreement, which meeting shall be held not earlier than 20
nor later than 30 business days following the date upon which the notice of the
Prosperity Shareholder's Meeting is mailed to the Prosperity shareholders. If
the transaction is approved by the Prosperity shareholders, Prosperity shall
take all reasonable action to aid and assist in the consummation of the Merger,
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 it 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.
(b) In obtaining the approval of shareholders referred to in this
Section 5.1, Prosperity will comply, and will use reasonable efforts to cause
its officers, directors and 5% or more shareholders to comply, with applicable
provisions of the Securities Act, Exchange Act and any other Applicable Laws.
Section 5.2. Information for Applications and Proxy Solicitation. To
the extent permitted by law, Prosperity will furnish CBI with all information
concerning Prosperity, Delaware Company and FPB required for inclusion in (a)
any application, statement or document to be made or filed by CBI 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 CBI
in connection with their consideration of the Merger. Prosperity, Delaware
Company and FPB represent and warrant that all information so furnished for such
statements and applications 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. Prosperity will indemnify
and hold harmless CBI from and against any and all losses, claims, damages,
expenses or liabilities to which CBI may become subject under applicable laws,
rules and regulations and will reimburse CBI for any legal or other expenses
reasonably incurred by CBI 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 Prosperity
expressly for use therein. Prosperity agrees, upon the request of CBI, to
furnish to CBI a written letter or statement confirming to the best of its
knowledge the accuracy of the information with respect to Prosperity, Delaware
Company 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 Prosperity contained in such document or draft was
furnished expressly for use therein or, if such is not the case, indicating the
41
inaccuracies contained in such document or indicating the information not
furnished by Prosperity expressly for use therein.
Section 5.3. Registration Statement. As promptly as practicable after
the execution of this Agreement, Prosperity will prepare and file with the SEC a
Registration Statement on Form S-4 under the Securities Act and any other
applicable documents, relating to the shares of Prosperity Common Stock to be
delivered to the shareholders of CBI pursuant to this Agreement, and will use
its best efforts to cause the Registration Statement to become effective. At
the time the Registration Statement becomes effective, the Registration
Statement will comply in all material respects with the provisions of the
Securities Act and the published rules and regulations thereunder, and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
false or misleading, and at the time of mailing thereof to CBI's shareholders
and Prosperity's shareholders, at the time of each of the CBI Shareholders'
Meeting and the Prosperity Shareholders' Meeting held to approve the Merger and
at the Effective Time of the Merger, the prospectus included as part of the
Registration Statement, as amended or supplemented by any amendment or
supplement filed by Prosperity (the "Prospectus/Proxy Statement"), will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not false or misleading; provided,
however, that none of the provisions of this subparagraph shall apply to
statements in or omissions from the Registration Statement or the Prospectus
made in reliance upon and in conformity with information furnished by CBI for
use in the Registration Statement or the Prospectus.
Section 5.4. Nasdaq Listing. Prosperity will file all documents
required to be filed to list the Prosperity Common Stock to be issued pursuant
to the Agreement on the Nasdaq National Market and use its best efforts to
effect said listing.
Section 5.5. Issuance of Prosperity Common Stock. The shares of
Prosperity Common Stock to be issued by Prosperity to the shareholders of CBI
pursuant to this Agreement will, on the issuance and delivery to such
shareholders pursuant to this Agreement, be duly authorized, validly issued,
fully paid and nonassessable. The shares of Prosperity Common Stock to be
delivered to the shareholders of CBI pursuant to this Agreement are and will be
free of any preemptive rights of the shareholders of Prosperity.
Section 5.6. Rule 144 Compliance. From and after the Effective Time of
the Merger, Prosperity shall file all reports with the SEC necessary to permit
the shareholders of CBI who may be deemed "underwriters" (within the meaning of
the Rule 145 under the Securities Act) of CBI Common Stock to sell Prosperity
Common Stock received by them in connection with the Merger pursuant to Rules
144 and 145(d) under the Securities Act if they would otherwise be so entitled;
provided, however, that Prosperity is otherwise obligated to file such reports
with the SEC.
Section 5.7. Indemnification; Insurance.
(a) For a period of six (6) years from and after the Effective Time,
Prosperity (the "Indemnifying Party") shall indemnify and hold harmless each
present and former director, officer
42
and employee of CBI, CBI Delaware and Heritage determined as of the Effective
Time (the "Indemnified Parties") against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities (collectively, "Costs") incurred in connection with any claim,
action, suit, proceeding or investigation whether civil or criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time to the fullest extent to which such Indemnified Parties
were entitled under the CBI Constituent Documents. The indemnification
provisions currently contained in the CBI Constituent Documents shall not be
amended after the date of this Agreement.
(b) Any Indemnified Party wishing to claim indemnification under this
section, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Indemnifying Party, but the failure to
so notify shall not relieve the Indemnifying Party of any liability it may have
to such Indemnified Party if such failure does not materially prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding
or investigation (whether arising before or after the Effective Time), (i) the
Indemnifying Party shall have the right to assume the defense thereof and the
Indemnifying Party shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that if the
Indemnifying Party elects not to assume such defense or counsel for the
Indemnified Party and the Indemnified Parties, the Indemnified Parties may
retain counsel which is reasonably satisfactory to the Indemnifying Party, and
the Indemnifying Party shall pay, promptly as statements therefor are received,
the reasonable fees and expenses of such counsel for the Indemnified Parties
(which may not exceed one firm in any jurisdiction unless the use of one counsel
for such Indemnified Parties would present such counsel with a conflict of
interest), (ii) the Indemnified Parties will cooperate in the defense of any
such matter and (iii) the Indemnifying Party shall not be liable for any
settlement effected without its prior written consent.
(c) Prosperity shall maintain its existing policy of directors and
officers liability insurance (or comparable coverage) for a period of not less
than three (3) years after the Effective Time; which policy shall be amended,
however, to include the directors and officers of CBI, CBI Delaware and Heritage
currently covered under the policy held by CBI, CBI Delaware and Heritage, and
which shall be a "claims made" policy providing coverage for (among other
things) acts or omissions occurring prior to the Effective Time.
(d) In the event that Prosperity or any of its respective successors
or assigns (i) consolidates with or merges into any other person and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then, and in each such case, the successors and assigns of such
entity shall assume the obligations set forth in this Agreement, which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each director and officer covered hereby.
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Section 5.8. Publication of 30 Days of Post Combination Results.
Prosperity shall publish at the earliest opportunity following the first full
calendar month after the Effective Time combined financial results of Prosperity
and CBI covering 30 days of post combination operations; provided, however, that
Prosperity shall not be required to so publish financial results if the
Effective Time occurs in the second month of any calendar quarter.
Section 5.9. Amendment of Bylaws. Prosperity shall amend its bylaws
prior to the Effective Time to revise the position descriptions for its officers
and make certain other changes as set forth in the form of Amended and Restated
Bylaws attached hereto as Exhibit E.
Section 5.10. Access to Properties and Records. To the extent permitted
by Applicable Laws and any applicable contractual obligations, Prosperity will
afford the executive officers and authorized representatives (including legal
counsel, accountants and consultants) of CBI full access upon reasonable notice
to the properties, books and records of Prosperity in order that CBI may have
full opportunity to make such reasonable investigation as it shall desire to
make of the affairs of Prosperity, and the officers of Prosperity will furnish
CBI with such additional financial and operating data and other information as
to the business and properties of Prosperity as CBI shall, from time to time,
request. As soon as practicable after they become available, Prosperity will
deliver or make available to CBI all unaudited quarterly financial statements
prepared for the internal use of management of Prosperity and all Call Reports
filed by FPB with the appropriate federal regulatory authority after the date of
this Agreement. All such financial statements shall be prepared in accordance
with GAAP applied on a consistent basis with previous accounting periods. In
the event of the termination of this Agreement, CBI will return to Prosperity
all documents and other information obtained pursuant hereto and will keep
confidential any information obtained pursuant to this Agreement.
Section 5.11. Attendance at Certain Prosperity Meetings. In order to
facilitate the continuing interaction of Prosperity with CBI, and in order to
keep CBI fully advised of all ongoing activities of Prosperity, Prosperity
agrees to allow CBI to designate two representatives (who shall be officers of
CBI), each 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 Prosperity, Delaware
Company and FPB (including, but not limited to, meetings of the officers' loan
committee of FPB). Prosperity shall promptly give CBI 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 Prosperity, Delaware Company
or FPB is required or obligated to maintain as confidential under Applicable
Laws or regulations, or (c) pending or threatened litigation or investigations
if, in the opinion of counsel to Prosperity, 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
CBI at board meetings under this Section 5.11 or knowledge gained or deemed to
have been gained by virtue of such attendance will affect any of the
representations and warranties of Prosperity made in this Agreement. CBI agrees
that, until the Closing, it and its representatives will hold in strict
confidence all information so obtained from Prosperity, Delaware Company and
44
FPB and, if the transactions provided for herein are not consummated, CBI will,
within five (5) days after a request of Prosperity, return or cause to be
returned to Prosperity all written information and documents obtained from
Prosperity, Delaware Company and FPB concerning Prosperity, Delaware Company and
FPB then in its possession. Furthermore, if the transactions contemplated by
this Agreement are disapproved by any regulatory authority whose approval is
required, then CBI's designees will no longer be entitled to notice of and
permission to attend such meetings.
Section 5.12. Prosperity Activities Pending Closing. Except as
otherwise specifically provided in this Agreement and subject to Applicable
Laws, from the date hereof to and including the Effective Time, Prosperity,
Delaware Company or FPB shall, as long as this Agreement remains in effect or
unless CBI otherwise consents in writing (which consent shall not be
unreasonably withheld):
(a) conduct its affairs in the ordinary course of business consistent
with prudent banking practice, in accordance with all Applicable Laws and
substantially in the same manner as is presently being conducted;
(b) provide prior notice to CBI of any changes in the classification
of any loan; and
(c) except with respect to the amendment of the Prosperity Bylaws
required pursuant to Section 5.9 hereof, refrain from making any amendment to
the Prosperity Constituent Documents.
Section 5.13. Registration Rights. Prosperity hereby grants to Ned S.
Holmes ("Shareholder") the right to request that Prosperity prepare and file
with the SEC, at Prosperity's expense (including, without limitation all NASD
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws, listing fees, printing expenses, messenger and delivery expenses,
all fees and disbursements of counsel, independent certified public accountants,
consultants, advisors and experts for Prosperity, and all other expenses of the
type ordinarily incurred to register securities, but not including underwriting
discounts or commissions, or expenses of the Shareholder or underwriters), a
continuous or "shelf" registration statement on Form S-3 pursuant to Rule 415
under the Securities Act of 1933, as amended, or such other replacement
registration form, for registration of the resale by Shareholder of the shares
of Prosperity Common Stock which were issued to the Shareholder in connection
with the transactions contemplated hereby and over which the Shareholder had
voting or investment control at the Effective Time, and shall maintain the
effectiveness of such registration statement for a period of two (2) years;
provided, however, that such registration right shall not be effective until the
earliest to occur of (a) the date on which Shareholder no longer serves as
either an officer or a director of Prosperity, Delaware Company or FPB or (b)
three (3) years from the Closing Date.
Section 5.14. Termination Fee.
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(a) In the event Prosperity receives an inquiry or a Non-Inclusive
Acquisition Proposal (as defined below), which proposal specifically excludes
CBI, CBI Delaware and Heritage, Prosperity shall notify CBI orally (within one
business day) and in writing (as promptly as practicable), in reasonable detail,
as to any such inquiries and proposals; provided, however, that following the
receipt of a Non-Inclusive Acquisition Proposal, Prosperity's Board of
Directors may withdraw or modify its approval of the transaction referred to in
Section 3.3, but only to the extent that (i) Prosperity's Board of Directors
concludes in good faith (after consultation with its financial advisor) that
such Non-Inclusive Acquisition Proposal would constitute a Prosperity Superior
Proposal (as defined below) and (ii) Prosperity's Board of Directors concludes
in good faith (on the basis of a legal opinion from outside counsel) that the
failure to take such action would result in a breach by Prosperity's Board of
Directors of its fiduciary duties to Prosperity's shareholders under Applicable
Laws; provided, further, that Prosperity's Board of Directors shall not take the
foregoing action until after reasonable notice to and consultation with CBI with
respect to such action and that Prosperity's Board of Directors shall continue
to consult with CBI after taking such action.
(b) As used in this Agreement, the term "Non-Inclusive Acquisition
Proposal" means a written offer or proposal relating to: (x) any acquisition or
purchase of a significant amount of the assets of Prosperity, Delaware Company
and FPB on a consolidated basis, or any equity interest in Prosperity, Delaware
Company or FPB or any take-over bid or tender offer (including an issuer bid or
self-tender offer) or exchange offer, merger, plan of arrangement,
reorganization, consolidation, business combination, sale of substantially all
of the assets, sale of securities, recapitalization, liquidation, dissolution or
similar transaction involving Prosperity, Delaware Company or FPB (other than
the transactions contemplated by this Agreement) or any other transaction the
consummation of which would or could reasonably be expected to impede, interfere
with, prevent or materially delay the consummation of the Merger or which would
or could reasonably be expected to materially dilute the benefits to CBI of the
transactions contemplated hereby; provided, however, that each of the foregoing
events must specifically exclude CBI, CBI Delaware and Heritage from such
proposal, plan or other arrangement; or (y) any proposal, plan or intention to
do any of the foregoing either publicly announced or communicated to Prosperity
or any agreement to engage in any of the foregoing.
(c) For purposes of this Agreement, "Prosperity Superior Proposal"
means a bona fide Non-Inclusive Acquisition Proposal made by a third person that
the Board of Directors of Prosperity determines in its good faith judgment to be
more favorable to Prosperity's shareholders than the Merger (taking into
account, in good faith, the written opinion, with only customary qualifications,
of Prosperity's independent financial advisor that the transaction is more
favorable to Prosperity's shareholders than the Merger) and for which financing,
to the extent required, is then committed or which, in the good faith judgment
of the Board of Directors of Prosperity (taking into account, in good faith, the
written advice of Prosperity's independent financial advisor), is reasonably
capable of being obtained by such third person.
(d) To compensate CBI for entering into this Agreement, taking actions
to consummate the transactions contemplated hereunder and incurring the costs
and expenses related
46
thereto and other losses and expenses, including foregoing the pursuit of other
opportunities by CBI, CBI and Prosperity agree as follows:
(i) Provided that CBI shall not be in material breach of its
obligations under this Agreement (which breach has not been cured promptly
following receipt of written notice thereof by Prosperity as set forth in
Section 8.1(c) hereof), Prosperity shall pay to CBI the sum of $2,500,000 (the
"Termination Fee") if this Agreement is terminated (i) by CBI under the
provisions of Section 8.1(m), (ii) by either Prosperity or CBI under the
provisions of Section 8.1(j) due to the failure of Prosperity's shareholders to
approve and adopt this Agreement and the Merger, if at the time of such failure
to so approve and adopt this Agreement and the Merger there shall exist a Non-
Inclusive Acquisition Proposal and, within nine months of the termination of
this Agreement, Prosperity enters into a definitive agreement with any third
party with respect to any Non-Inclusive Acquisition Proposal or (iii) by CBI
under the provisions of Section 8.1(n).
(ii) Any payment required by paragraph (a) of this Section 5.14
shall become payable within two (2) business days after termination of this
Agreement.
(iii) Prosperity acknowledges that the agreements contained in this
Section 5.14 are an integral part of the transactions contemplated in this
Agreement, and that, without these agreements, CBI would not enter into this
Agreement; accordingly, if Prosperity fails to promptly pay the Termination Fee
when due, Prosperity shall in addition thereto pay to CBI all costs and expenses
(including fees and disbursements of counsel) incurred in collecting such
Termination Fee together with interest on the amount of the Termination Fee (or
any unpaid portion thereof) from the date such payment was required to be made
until the date such payment is received by CBI at the prime rate as reported in
The Wall Street Journal as in effect from time to time during such period.
Section 5.15. Assumption of CBI Stock Options.
(a) At the Effective Time, each outstanding and unexercised CBI Stock
Option shall be assumed by Prosperity as provided in Section 1.5 hereof.
(b) Prosperity shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Prosperity Common Stock for
delivery upon exercise of CBI Stock Options assumed by Prosperity in accordance
with Section 1.5 hereof. As soon as practicable after the Effective Time,
Prosperity shall file a registration statement on Form S-8 (or any successor or
other appropriate form) with respect to the shares of Prosperity Common Stock
subject to such options and shall use its best efforts to maintain the
effectiveness of the registration statement (and maintain the current status of
the prospectus contained therein) for so long as such options remain
outstanding. With respect to those individuals who subsequent to the Merger
will be subject to the reporting requirements under Section 16(a) of the
Exchange Act, where applicable, Prosperity shall administer the CBI Stock Option
Plan in a manner that complies with Rule 16b-3 promulgated under the Exchange
Act to the extent the CBI Stock Option Plan complied with such rule prior to the
Merger.
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VI. COVENANTS OF CBI AND PROSPERITY
Section 6.1. Ongoing Financial Disclosure. CBI shall provide to
Prosperity as soon as practicable but in no event later than twenty (20) days
following the end of each calendar month, from the date hereof through the
Closing Date, copies of all financial statements and other written information
provided to the Boards of Directors of CBI, CBI Delaware or Heritage (other than
information relating to this Agreement and the transactions relating to this
Agreement, or where such information relates to litigation and counsel for CBI
has advised CBI that such disclosure may jeopardize the attorney-client
privilege), and, to the extent permitted by applicable law, all material reports
filed by CBI, CBI Delaware or Heritage with federal or state regulatory
agencies. Prosperity shall send to CBI, promptly after they become publicly
available, copies of all Prosperity filings from and after the date hereof made
under Sections 13(a) and 14 of the Exchange Act and copies of all news releases
made by Prosperity from and after the date hereof. Prosperity shall provide to
a single designee of CBI copies of all non-public financial and other written
information provided to the Boards of Directors of Prosperity and FPB, and, to
the extent permitted by Applicable Laws, all material reports filed by the
Prosperity or FPB with federal or state regulatory agencies. Such designee shall
not copy or circulate any such information to anyone without the prior written
consent of Prosperity, which consent shall not be unreasonably withheld, and CBI
hereby acknowledges its obligations under the federal securities laws with
respect to maintaining the confidentiality of such information and insider
trading matters.
Section 6.2. Confidentiality. Except as contemplated by this Agreement
or as necessary to carry out the transactions contemplated herein, all
information or documents furnished hereunder by any party hereto or any other
party shall be kept confidential by the party to whom it is furnished (and such
party shall use reasonable efforts to cause its agents and representatives to
maintain the confidentiality of such documents) and in the event such
transactions are not consummated, each shall return to the other or destroy all
information furnished hereunder and shall not thereafter use the same for any
purpose until such time as such information becomes publicly available, except
to the extent (i) it was known by such other party prior to being received other
than through the violation or breach of such party or any other person of any
duty of confidentiality, (ii) it is or thereafter becomes lawfully obtainable
from other sources, (iii) it is necessary or appropriate to disclose the same to
any Governmental Authority having jurisdiction over the parties or their
subsidiaries or as otherwise may be required by Applicable Laws (to the extent
permitted by law, the party intending to make disclosure in such circumstances
shall give the other party hereto prompt notice prior to making such disclosures
so that such other parties may seek a protective order or other appropriate
remedy prior to such disclosure), or (iv) such duty of confidentiality is waived
in writing by the other party, and that none of this information shall be used
for competitive purposes. Notwithstanding the foregoing, information and
documents furnished by or on behalf of CBI hereunder may be disclosed by
Prosperity or FPB to the Federal Reserve Board, the FDIC, the Banking Department
and any other Governmental Authority whose approval, consent, authorization or
other action is necessary for the consummation of the Merger and the
transactions contemplated hereby.
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Section 6.3. No Inconsistent Actions; Pooling; Tax Treatment. None of
the parties hereto will voluntarily take or omit to take any action, the effect
of the taking or omission of which would reasonably be expected to cause any of
its representations and warranties herein to be inaccurate in any material
respect at the Closing or at any time prior to the Closing as if such
representation and warranty were restated at such time. Each party hereto shall
use all reasonable efforts to cause the Merger to be treated for financial
accounting purposes as a "pooling of interests," and shall not take, and shall
use all reasonable efforts to prevent any Affiliate of such party from taking,
any actions which could prevent the Merger from being treated as such for
financial accounting purposes. Each party hereto shall use all reasonable
efforts to cause the Merger and the Bank Merger to qualify, and shall not take,
and shall use all reasonable efforts to prevent any Affiliate of such party from
taking, any actions which could prevent the Merger, the Delaware Merger or the
Bank Merger from qualifying, as a tax-free reorganization under the provisions
of Section 368(a) of the Code.
Section 6.4. Plan Amendments and Participation in Plans. CBI shall
execute and deliver such instruments and take such other actions as Prosperity
may reasonably require in order to cause the amendment or termination of any
Plan on terms satisfactory to Prosperity and in accordance with applicable law
and effective as of the Effective Time. Prosperity agrees that the employees of
CBI, CBI Delaware or Heritage who continue their employment after the Effective
Time (the "CBI Employees") will be entitled to participate as newly hired
employees in the employee benefit plans and programs (including any severance
plan) maintained for employees of Prosperity and FPB, in accordance with the
respective terms of such plans and programs, and Prosperity shall take all
actions necessary or appropriate to facilitate coverage of the CBI Employees in
such plans and programs from and after the Effective Time, subject to the
following:
(a) Each CBI Employee will be entitled to credit for prior service
with CBI, CBI Delaware or Heritage for all purposes under the employee welfare
benefit plans and other employee benefit plans and programs (other than stock
option plans), sponsored by Prosperity and FPB to the extent CBI, CBI Delaware
or Heritage sponsored a similar type of plan in which the CBI Employees
participated immediately prior to the Effective Time. Any pre-existing
condition exclusion applicable to such plans and programs shall be waived with
respect to each CBI Employee. For purposes of determining CBI Employee's
benefit for the calendar year in which the Merger occurs under Prosperity's
vacation program, any vacation taken by the CBI Employee immediately preceding
the Effective Time for the calendar year in which the Merger occurs will be
deducted from the total Prosperity vacation benefit available to such CBI
Employee for such calendar year. Prosperity further agrees to credit each CBI
Employee for the year during which coverage under Prosperity's group health plan
begins, with any deductibles already incurred during such year, under CBI's
group health plan.
(b) Each CBI Employee shall be entitled to credit for past service
with CBI, CBI Delaware or Heritage for the purpose of satisfying any eligibility
or vesting periods applicable to the Prosperity employee benefit plans which are
subject to Sections 401(a) and 501(a) of the Code (including, without
limitation, Prosperity's 401(k) Profit Sharing Plan).
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Section 6.5. Name of Combined Entity. At the Effective Time, the
surviving corporation shall be operated under the name Prosperity Bancshares,
Inc. and the surviving banking association shall be operated under the name
First Prosperity Bank; provided, however, the parties hereto shall, within 60
days of the Execution Date, meet to review the names of each entity and are open
to operating the surviving corporation and the surviving banking association
under the Heritage name, or operating both the surviving corporation and the
surviving banking association under a new name.
VII. CLOSING
Section 7.1. Closing. Subject to the other provisions of this Article
VII, on a mutually acceptable date ("Closing Date") as soon as practicable
within a thirty (30) day period commencing with the latest of the following
dates:
(a) the receipt of all requisite shareholder approvals 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 Merger; or
(b) if the transactions contemplated by this Agreement are being
contested in any legal proceeding and Prosperity or CBI, pursuant to Section
11.1 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 Prosperity and CBI, to the consummation of the transactions contemplated
herein, or such prior date as each of Prosperity and CBI 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 7.2. Effective Time. Prosperity and CBI shall, in accordance
with Section 5.04 of the TBCA, file Articles of Merger with the Secretary of
State regarding the Merger. The Merger shall become effective as of the close
of business on the date on which such filing has been completed and the
Secretary of State of Texas has issued a Certificate of Merger with respect to
the Merger (the "Effective Time"). The parties hereto shall take all such other
and further actions as may be required by applicable law to make the Merger, the
Delaware Merger and the Bank Merger effective on the same date.
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VII TERMINATION
Section 8.1. Termination.
(a) This Agreement may be terminated by action of the Board of
Directors of Prosperity or CBI 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 Merger 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 Merger shall not have become effective on or before
June 30, 2001 or such later date as shall have been approved in
writing by the Boards of Directors of Prosperity and CBI; provided,
however, that the right to terminate under this Section 8.1(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 Merger to become effective on or
before such date.
(b) This Agreement may be terminated by CBI upon the expiration of 15
days from the date that CBI has given notice to Prosperity that:
(i) Prosperity has failed to comply in any material respect with
any of its covenants or agreements contained in this Agreement, or
that any of the representations or warranties of Prosperity contained
herein shall be defective in any material respect; provided that
"material" for purposes of this Section 8.1(b) and Section 10.1 hereof
shall be any such noncompliance or defect or a combination thereof,
which in the aggregate adversely effects, or will effect when
accounted for, the financial condition or results of operation of
Prosperity by $2,000,000 or more; or
(ii) there has been a change after September 30, 2000 in the
assets, properties, business or financial condition of Prosperity
which individually or in the aggregate have materially and adversely
affected the financial condition, results of operation or business
("Material Adverse Change") of Prosperity considered as a consolidated
whole; provided, however, that a Material Adverse Change as defined in
this Agreement with respect to Prosperity, Delaware Company and FPB
does not include a change with respect to, or effect on, Prosperity,
Delaware Company and FPB considered as a consolidated whole resulting
from a change in any law, rule,
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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
Prosperity, Delaware Company and FPB considered as a consolidated
whole more adversely than other similarly situated financial
institutions;
provided, however, that no termination under this Section 8.1(b) shall take
effect if Prosperity shall have fully and completely corrected the grounds for
termination as specified in the aforementioned notice within the earlier to
occur of (x) 15 days after the date of receipt of such notice and (y) the date
specified in Section 8.1(a)(iii).
(c) This Agreement may be terminated by Prosperity upon the expiration
of 15 days from the date that Prosperity has given notice to CBI that:
(i) CBI has failed to comply in any material respect with any
of its covenants or agreements contained in this Agreement, or that
any of the representations or warranties of CBI contained herein shall
be defective in any material respect; provided that "material" for
purposes of this Section 8.1(c) and Section 9.1 hereof shall be any
such noncompliance or defect or combination thereof, which in the
aggregate adversely effects, or will effect when accounted for, the
financial condition or results of operation of CBI by $1,000,000 or
more; or
(ii) there has been a Material Adverse Change after
September 30, 2000 in the assets, properties, business or financial
condition of CBI individually or in the aggregate; provided, however,
that a Material Adverse Change as defined in this Agreement with
respect to CBI, CBI Delaware and Heritage does not include a change
with respect to, or effect on, CBI, CBI Delaware and Heritage
considered as a consolidated whole resulting from any adjustment
requested by Prosperity pursuant to Section 4.12 of this Agreement or
a change in any 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 CBI, CBI Delaware and Heritage considered as a
consolidated whole more adversely than other similarly situated
financial institutions; or
(iii) the Board of Directors of Prosperity reasonably concludes,
after consulting with counsel, that Prosperity will be unable to
obtain any regulatory approval required in order to consummate the
Merger or any such approval is accompanied by terms or conditions
which materially and adversely impact the financial consequences of
the Merger to Prosperity; provided, however, that any divestiture
required by any governmental agency shall not be deemed to materially
and adversely impact the financial consequences of the Merger to
Prosperity.
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No termination under this Section 8.1(c) because of an alleged breach,
inaccuracy or change as provided in (i) or (ii) above shall take effect if CBI
shall have fully and completely corrected the grounds for termination as
specified in the aforementioned notice within the earlier to occur of (x) 15
days after the date of receipt of such notice and (y) the date specified in
Section 8.1(a)(iii).
(d) This Agreement may be terminated at any time prior to the
Effective Time with the mutual written consent of Prosperity and CBI and the
approval of such action by their respective Boards of Directors.
(e) This Agreement may be terminated by CBI if the average closing
price of a share of Prosperity Common Stock as reported by Nasdaq during the
period of the ten trading days ending on the day immediately prior to the date
of receipt of Federal Reserve Board approval ("Price Determination Date") is
less than $16.00 per share (the average closing price during such time being the
"Termination Price"). To terminate this Agreement pursuant to this Section
8.1(e), CBI must provide to Prosperity written notice of its intent to terminate
within two business days following the Price Determination Date ("Termination
Notice"). For a period of five business days from the date of receipt of the
Termination Notice, Prosperity shall have the option, but not the obligation, to
increase the aggregate number of shares of Prosperity Common Stock into which
shares of CBI Common Stock will be converted at the Effective Time to a number
of shares which, based on the Termination Price as of the Price Determination
Date, would have an aggregate value of $45,000,000 ("Walkaway Counter Offer").
In the event that Prosperity elects to make the Walkaway Counter Offer, the
Termination Notice previously sent by CBI shall be null and void and of no
effect, and CBI shall no longer have the right to terminate the Agreement
pursuant to this Section 8.1(e). If Prosperity does not elect to make the
Walkaway Counter Offer, this Agreement shall terminate.
(f) This Agreement may be terminated by Prosperity on or before
fifteen (15) business days from the Execution Date if the Schedules to be
delivered by CBI on or before ten (10) business days pursuant to Article II of
this Agreement are not acceptable to Prosperity.
(g) This Agreement may be terminated by CBI on or before fifteen (15)
business days from the Execution Date if the Schedules to be delivered by
Prosperity on or before ten (10) business days pursuant to Article III of this
Agreement are not acceptable to CBI.
(h) This Agreement may be terminated by Prosperity on or before
fifteen (15) business days from the Execution Date if it determines, in its sole
discretion, after a review and examination of CBI's books, records and
properties, that the transaction would no longer be in the best interests of
Prosperity or its shareholders.
(i) This Agreement may be terminated by CBI on or before fifteen (15)
business days from the Execution Date if it determines, in its sole discretion,
after a review and examination of Prosperity's books, records and properties,
that the transaction would no longer be in the best interests of CBI or its
shareholders.
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(j) This Agreement may be terminated by either Prosperity or CBI if
the Merger and this Agreement shall fail to receive the requisite vote for
approval and adoption at either the CBI Shareholders' Meeting or the Prosperity
Shareholders' Meeting.
(k) This Agreement may be terminated by CBI if (i) there shall not
have been a breach of any covenant or agreement on the part of CBI, CBI Delaware
or Heritage under this Agreement and (ii) prior to the Effective Time, CBI shall
have received a bona fide Acquisition Proposal and the CBI Board of Directors
determines in its good faith judgment and in the exercise of its fiduciary
duties, based as to legal matters on the written opinion of independent legal
counsel and as to financial matters on the written opinion of an investment
banking firm of national reputation, that such alternative Acquisition Proposal
(if consummated pursuant to its terms) is a Superior Proposal and that the
failure to terminate this Agreement and accept such Superior Proposal would be a
breach of such fiduciary duties; provided, however, that termination under this
clause (ii) shall not be deemed effective until payment of the Termination Fee
required by Section 4.7.
(l) This Agreement may be terminated by Prosperity if the CBI Board of
Directors shall have (i) resolved to accept a Superior Proposal, or (ii)
recommended to the shareholders of CBI that they tender their shares in a tender
or exchange offer commenced by a third party or (iii) withdrawn or modified, in
any manner that is adverse to Prosperity, Delaware Company or FPB, its approval
of this Agreement or the Merger or recommended to the CBI shareholders
acceptance or approval of any alternative Acquisition Proposal, or shall have
resolved to the foregoing.
(m) This Agreement may be terminated by Prosperity if (i) there shall
not have been a breach of any covenant or agreement on the part of Prosperity,
Delaware Company or FPB under this Agreement and (ii) prior to the Effective
Time, Prosperity shall have received a bona fide Non-Inclusive Acquisition
Proposal and the Prosperity Board of Directors determines in its good faith
judgment and in the exercise of its fiduciary duties, based as to legal matters
on the written opinion of independent legal counsel and as to financial matters
on the written opinion of an investment banking firm of national reputation,
that such Non-Inclusive Acquisition Proposal (if consummated pursuant to its
terms) is a Prosperity Superior Proposal and that the failure to terminate this
Agreement and accept such Non-Inclusive Acquisition Proposal would be a breach
of such fiduciary duties; provided, however, that termination under this clause
(ii) shall not be deemed effective until payment of the Termination Fee required
by Section 5.14.
(n) This Agreement may be terminated by CBI if the Prosperity Board of
Directors shall have (i) resolved to accept a Prosperity Superior Proposal, or
(ii) recommended to the shareholders of Prosperity that they tender their shares
in a tender or exchange offer commenced by a third party or (iii) withdrawn or
modified, in any manner that is adverse to CBI, CBI Delaware or Heritage, its
approval of this Agreement or the Merger or recommended to the Prosperity
shareholders acceptance or approval of any Non-Inclusive Acquisition Proposal,
or shall have resolved to the foregoing.
54
(o) This Agreement may be terminated by CBI if the Prosperity executes
a definitive agreement related to a transaction in which Prosperity will acquire
all or substantially all of the assets of another entity through a merger,
reorganization, consolidation, share exchange, business combination or other
similar transaction, and pursuant to such definitive agreement Prosperity will
issue shares of Prosperity Common Stock as consideration ("New Acquisition").
Prior to holding a meeting of its Board of Directors to approve a definitive
agreement related to on such New Acquisition, Prosperity shall notify CBI of
such New Acquisition (which notice shall identify the nature and material terms
of the proposal). CBI shall notify Prosperity within two (2) business days from
receipt of notice from Prosperity of whether it consents to the New Acquisition.
If CBI does not consent to the New Acquisition and Prosperity executes a
definitive agreement related to the New Acquisition, CBI may elect to terminate
this Agreement pursuant to this Section 8.1(k), without any liability on the
part of Prosperity.
Section 8.2. Effect of Termination.
(a) In the event of termination of this Agreement and the abandonment
of the Merger under Section 8.1 hereof, this Agreement shall become void and
have no effect, without any liability, except as specifically contemplated in
Section 8.1, on the part of any party or its directors, officers, agents,
representatives or shareholders.
(b) In the event the Merger and the transactions contemplated by this
Agreement are consummated, notwithstanding a breach of this Agreement by a party
hereto, there shall be no liability on the part of such breaching party or its
directors, officers, agents, representatives or shareholders.
(c) If this Agreement is terminated by a party hereto for any reason
other than as provided in Section 8.1, then the terminating party shall pay to
the non-terminating party a break-up fee in an amount equal to $2.5 million.
Such payment shall be made within two (2) business days following termination of
this Agreement.
IX. CONDITIONS TO OBLIGATIONS OF PROSPERITY
The obligations of Prosperity under this Agreement are subject to the
satisfaction, at or prior to the Closing Date of all of the following
conditions, which may be waived by Prosperity in its sole discretion:
Section 9.1. Compliance with Representations and Covenants. The
representations and warranties made by CBI in this Agreement must have been true
in all material respects (as defined in Section 8.1(c) hereof) 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 CBI shall have performed or complied in all material
respects with all covenants and conditions required by this Agreement to be
performed and complied with prior to or at the
55
Closing. Prosperity shall have been furnished with a certificate, executed by an
executive officer of CBI 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 CBI, CBI Delaware and Heritage considered as a
consolidated whole, 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 CBI, CBI Delaware and Heritage considered
as a consolidated whole in the reasonable judgment of the Board of Directors of
Prosperity. Prosperity shall have received a certificate to the foregoing
effect executed by an executive officer of CBI and dated as of the Closing Date.
Section 9.3. Legal Opinion. Prosperity shall have received an opinion of
counsel to CBI, dated as of the Closing Date, in form and substance satisfactory
to counsel for Prosperity, to the effect set forth in Schedule 9.3 hereto.
Section 9.4. Releases. Each of the executive officers and directors of
CBI, CBI Delaware and Heritage shall have delivered to Prosperity an instrument
in the form of Exhibit F attached hereto dated the Effective Time releasing
Prosperity from any and all claims of such executive officers and directors
(except as to their deposits and accounts at Heritage, and as to their rights
under any benefit plans of CBI, CBI Delaware or Heritage and any rights of
indemnification pursuant to any applicable law, this Agreement and the CBI
Constituent Documents, which shall survive the Merger).
Section 9.5. Accounting Letters. Prosperity shall have received a letter
from Deloitte & Touche LLP, on or before thirty days (30) after the Execution
Date and dated as of the Effective Time, to the effect that the Merger will
qualify for pooling of interests accounting treatment if consummated in
accordance with the Agreement.
Section 9.6. Affiliates' Letters. Each Affiliate of CBI shall have
delivered to Prosperity an executed copy of the Affiliate Letter contemplated by
Section 4.8 hereof.
Section 9.7. Dissenters' Rights. The holders of no more than 10% of the
issued and outstanding CBI Common Stock shall have demanded or shall be entitled
to demand payment of the fair value of their shares as dissenting shareholders.
Section 9.8. Tax Opinion. Prosperity shall have received an opinion of
counsel satisfactory to Prosperity to the effect that on the basis of certain
facts, representations and opinions set forth in such opinion that the Merger
will qualify as a reorganization under Section 368(a) of the Internal Revenue
Code. In rendering such opinion, such counsel may require and rely upon and may
incorporate by reference representations and covenants, including those
contained in certificates of officers and/or directors of Prosperity, CBI and
others.
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Section 9.9. Opinion of Financial Advisor. Prosperity shall have
received a written opinion from First Capital Group, LLC dated as of the date of
this Agreement and reaffirmed as of the date of the Prospectus/Proxy Statement
that the Merger Consideration is fair to the Prosperity shareholders from a
financial point of view.
Section 9.10. Conversion of CBI Stock Options. Each of the holders of
CBI Stock Options shall have executed and delivered to Prosperity the
acknowledgment contemplated by Section 4.9 hereof.
X. CONDITIONS TO OBLIGATIONS OF CBI
The obligations of CBI under this Agreement are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions,
which may be waived by CBI in its sole discretion:
Section 10.1. Compliance with Representations and Covenants. The
representations and warranties made by Prosperity in this Agreement must have
been true in all material respects (as defined in Section 8.1(b) hereof) 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 Prosperity 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 Prosperity prior to or at the Closing. CBI
shall be furnished with a certificate, executed by an executive officer of
Prosperity and dated as of the Closing Date, to the foregoing effect.
Section 10.2. 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 Prosperity, Delaware Company and FPB considered as a
consolidated whole, 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 Prosperity, Delaware Company and FPB
considered as a consolidated whole in the reasonable judgment of the Board of
Directors of CBI. CBI shall have received a certificate to the foregoing effect
executed by an executive officer of Prosperity and dated as of the Closing Date.
Section 10.3. Legal Opinion. CBI shall have received an opinion of
counsel to Prosperity, dated as of the Closing Date and in form and substance
satisfactory to counsel for CBI, to the effect set forth in Schedule 10.3
hereto.
Section 10.4. Opinion of Financial Advisor. CBI shall have received a
written opinion from a financial advisor dated as of the date of the
Prospectus/Proxy Statement that the Merger Consideration is fair to the CBI
shareholders from a financial point of view.
Section 10.5. Tax Opinion. CBI shall have received an opinion of counsel
satisfactory to CBI to the effect that on the basis of certain facts,
representations and opinions set forth in such opinion that the Merger will
qualify as a reorganization under Section 368(a) of the Internal Revenue Code.
In rendering such opinion, such counsel may require and rely upon and may
incorporate by
57
reference representations and covenants, including those contained in
certificates of officers and/or directors of CBI, Prosperity and others.
Section 10.6. Releases. Each of the executive officers and directors of
CBI, CBI Delaware and Heritage shall have received an instrument in the form of
Exhibit G attached hereto dated the Effective Time releasing such persons from
any and all claims of CBI, CBI Delaware and Heritage, (except as to indebtedness
and other contractual liabilities or if such claim results from a violation of a
fiduciary duty or gross negligence); provided, however, that such releases shall
not release an action against such directors and officers by CBI, CBI Delaware
and Heritage in connection with the transactions contemplated by this Agreement.
Section 10.7. Accounting Letters. CBI shall have received a letter from
Deloitte & Touche, LLP, on or before thirty days (30) after the Execution Date
and dated as of the Effective Time, to the effect that the Merger will qualify
for pooling of interests accounting treatment if consummated in accordance with
the Agreement.
Section 10.8. Employment Agreement. H. E. Timanus, Jr. shall have
entered into an employment agreement with FPB substantially in the form of
Exhibit H.
XI. CONDITIONS TO RESPECTIVE OBLIGATIONS OF
PROSPERITY AND CBI
The respective obligations of Prosperity and CBI under this Agreement are
subject to the satisfaction of the following conditions which may be waived by
Prosperity and CBI, respectively, in their sole discretion:
Section 11.1. Government Approvals. Prosperity and CBI 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, the FDIC, the Banking Department and any other
regulatory agency whose approval must be received in order to consummate the
Merger, which approvals shall not impose any restrictions on the operations of
the Continuing Company which are unacceptable to Prosperity; provided, however,
that any branch divestiture required by any governmental agency shall not be
deemed to impose unacceptable restrictions on the operations of Prosperity, 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, Prosperity
or CBI may, but shall not be obligated to, answer and defend such contest or
otherwise pursue the Merger over such objection.
Section 11.2. Shareholder Approval.
(a) The holders of at least 66 2/3% of the outstanding shares of CBI
Common Stock entitled to vote at the CBI Shareholders' Meeting shall have
approved this Agreement and the
58
transactions contemplated by this Agreement and the holders of no more than 10%
of the CBI Common Stock shall have exercised their dissenters' rights in
accordance with the applicable laws, rules and regulations as provided in
Section 1.6 of this Agreement.
(b) The holders of at least 50% of the outstanding shares of
Prosperity Common Stock entitled to vote at the Prosperity Shareholders' Meeting
shall have approved this Agreement and the transactions contemplated by this
Agreement.
Section 11.3. Registration of Prosperity Common Stock. The Registration
Statement covering the Prosperity Common Stock to be issued in the Merger shall
have become effective under the Securities Act and any applicable state
securities or "blue sky" acts and no stop orders suspending the effectiveness of
such registration statement shall be in effect, and no action, suit, proceeding
or investigation by the SEC to suspend the effectiveness of the Registration
Statement shall have been initiated or continuing, or have been threatened and
be unresolved.
Section 11.4. Listing of Prosperity Common Stock. The shares of
Prosperity Common Stock to be delivered to the shareholders of CBI pursuant to
this Agreement shall have been authorized for listing on the Nasdaq National
Market.
XII MISCELLANEOUS
Section 12.1. Non-Survival of Representations and Warranties. The
representations and warranties of Prosperity and CBI contained in this Agreement
shall terminate at the Closing Date.
Section 12.2. Amendments. This Agreement may be amended only by a
writing signed by Prosperity and CBI at any time prior to the Closing Date with
respect to any of the terms contained herein; provided, however, that the Merger
Consideration to be received by the shareholders of CBI 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 12.3. 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 fees incurred by Prosperity with respect to First Capital Group,
LLC, Prosperity and CBI 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.
Section 12.4. Notices. Any notice or communication required or
permitted hereunder shall be in writing and shall be delivered in person or
mailed by first class mail, postage prepaid or sent
59
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 Prosperity:
Prosperity Bancshares, Inc.
1301 N. Mechanic
El Campo, Texas 77438
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 CBI:
Commercial Bancshares, Inc.
55 Waugh Drive, Suite 1111
Houston, Texas 77007
Attention: Mr. Ned S. Holmes
With a copy to:
Locke Liddell & Sapp LLP
3400 Chase Tower
600 Travis
Houston, Texas 77002
Attention: Mr. Donald E. Wood
All notices sent by mail as provided above shall be deemed delivered five (5)
days after deposited in the mail. All notices sent by courier as provided above
shall be deemed delivered one day after being sent and all notices sent by
facsimile shall be deemed delivered upon confirmation of receipt. All other
notices, including notices of changes of address, 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.
60
Section 12.5. 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, without taking into account provisions regarding choice of
law.
Section 12.6. 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 12.7. 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 12.8. 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 12.9. 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 hereto without the prior written
consent of the other parties.
Section 12.10. Entire Agreement. 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 Merger.
Section 12.11. 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 12.12. 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 12.13. Gender. Any pronoun used herein shall refer to any
gender, either masculine, feminine or neuter, as the context requires.
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Section 12.14. 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 12.15. 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 Merger will occur upon, and be determined
by, the mutual consent of Prosperity and CBI; provided, however, that this shall
not include notices required to be published pursuant to the regulatory
application process. The parties agree that they will make a good faith effort
to reach agreement expeditiously on such announcements, press releases or other
public statements.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
PROSPERITY BANCSHARES, INC.
By: /s/ DAVID ZALMAN
______________________________________
Name: David Zalman
Title: President
COMMERCIAL BANCSHARES, INC.
By: /s/ NED S. HOLMES
______________________________________
Name: Ned S. Holmes
Title: Chairman of the Board
ATTEST:
By: /s/ H.E. TIMANUS, JR.
______________________
63
EXHIBIT A
PLAN OF MERGER
BETWEEN
COMMERCIAL BANCSHARES, INC.
AND
PROSPERITY BANCSHARES, INC.
THIS PLAN OF MERGER (the "Plan") is dated as of the _____ day of
__________, _____, by and between Commercial Bancshares, Inc., a Texas
corporation ("CBI"), and Prosperity Bancshares, Inc., a Texas corporation
("Prosperity").
W I T N E S S E T H:
WHEREAS, pursuant to the Agreement and Plan of Reorganization (the
"Agreement") dated as of ____________, 2000, by and between Prosperity and CBI,
CBI will merge with and into Prosperity;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, CBI and Prosperity hereby agree
that, subject to the terms and conditions hereinafter set forth, and in
accordance with all applicable laws and regulations, CBI shall be merged with
and into Prosperity at the Effective Time (as hereinafter defined). The parties
hereto do hereby agree and covenant as follows:
ARTICLE 1.
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth below
shall have the following meanings:
Section 1.1 "Effective Time" shall mean the date and time at which the
Merger contemplated by this Plan of Merger becomes effective as determined by
the certificate approving the Merger to be issued by the Secretary of State of
Texas.
Section 1.2 "Prosperity Common Stock" shall mean the common stock, par
value $1.00 per share, of Prosperity.
Section 1.3 "CBI Common Stock" shall mean the common stock, par value
$.10 per share, of CBI.
Section 1.4 "Merger" shall refer to the merger of CBI with and into
Prosperity as provided in Section 2.1 of this Plan.
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Section 1.5 "Continuing Corp" shall refer to Prosperity as the
corporation surviving the Merger.
ARTICLE 2.
TERMS OF THE MERGER
Section 2.1 Merger. Subject to the terms and conditions set forth in
the Agreement, at the Effective Time, CBI shall be merged with and into
Prosperity, with Prosperity as the Continuing Corp, under the charter and
Articles of Incorporation of Prosperity, pursuant to the provisions of, and with
the effect provided in Article 5 of the Texas Business Corporation Act ("TBCA"),
and each of the outstanding shares of common stock of CBI shall and without any
action on the part of the holder thereof, be canceled and be converted into
shares of common stock of the Prosperity.
Section 2.2 Articles of Incorporation, Bylaws and Facilities of
Continuing Corp. At the Effective Time (as defined herein) and until thereafter
amended in accordance with law, the Articles of Incorporation of Continuing Corp
shall be the Articles of Incorporation of Prosperity as in effect at the
Effective Time. Until altered, amended or repealed as therein provided and in
the Articles of Incorporation of Continuing Corp, the Bylaws of Continuing Corp
shall be the Bylaws of Prosperity as in effect at the Effective Time. The
established offices and facilities of CBI immediately prior to the Merger shall
become established offices and facilities of the Continuing Corp. Unless and
until changed by the Board of Directors of Continuing Corp, the main office of
CBI at the Effective Time shall become the main office of Continuing Corp.
Until thereafter changed in accordance with the law or the Articles of
Incorporation or Bylaws of Continuing Corp, all corporate acts, plans, policies,
contracts, approvals and authorizations of CBI and Prosperity 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 Corp and shall
be as effective and binding thereon as the same were with respect to CBI and
Prosperity, respectively, at the Effective Time.
Section 2.3 Board of Directors and Officers of Continuing Corp. At the
Effective Time and until thereafter changed in accordance with the law or the
Articles of Incorporation or Bylaws of Continuing Corp, the eight members of the
Board of Directors of Prosperity and the four members of the Board of Directors
of CBI, each as in effect at the Effective Time, shall become the Board of
Directors of Continuing Corp. At the Effective Time and until thereafter
changed in accordance with the law or the Articles of Incorporation or Bylaws of
Continuing Corp, the executive officers of Continuing Corp shall be designated
as follows: (a) Ned S. Holmes shall serve as Chairman of the Board, (b) David
Zalman shall serve as President and Chief Executive Officer, (c) H.E. Timanus,
Jr. shall serve as Executive Vice President and Chief Operating Officer and (d)
David Hollaway shall serve as Chief Financial Officer.
Section 2.4 Effect of Merger. At the Effective Time, the corporate
existence of the CBI and Prosperity shall, as provided by law, be merged into
and continued in Continuing Corp, and
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Continuing Corp shall be deemed to be a continuation in entity and identity of
CBI and Prosperity. All rights, franchises and interests of CBI and Prosperity,
respectively, in and to any type of property and choses in action shall be
transferred to and vested in Continuing Corp by virtue of such Merger without
any deed or other transfer. Continuing Corp, 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 CBI and Prosperity,
respectively, at the Effective Time.
Section 2.5 Liabilities of Continuing Corp. At the Effective Time,
Continuing Corp shall be liable for all liabilities of CBI and Prosperity. All
debts, liabilities, obligations and contracts of CBI and of Prosperity,
respectively, matured or unmatured, whether accrued, absolute, contingent or
otherwise, and whether or not reflected or reversed against on balance sheets,
books of account, or records of the CBI or Prosperity shall be those of
Continuing Corp and shall not be released or impaired by the Merger. All rights
of creditors and other obligees and all liens on property of either CBI or
Prosperity shall be preserved unimpaired subsequent to the Merger.
Section 2.6 Effective Time. The Merger shall become effective at the
date and time at which the Merger becomes effective as determined by the
certificate approving the Merger to be issued by the Secretary of State of
Texas. A closing shall take place at or prior to the Effective Time following
the receipt of all necessary regulatory and governmental approvals and consents
and the expiration of all statutory waiting periods in respect thereof and the
satisfaction or waiver of the conditions to the consummation of the Merger
specified in Articles IX, X and XI of the Agreement.
ARTICLE 3.
CONVERSION OF SHARES
Section 3.1 Conversion of CBI Common Stock and CBI Stock Options.
(a) Each share of the CBI Common Stock issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares (as
defined in Section 1.6 of the Agreement), shall, by virtue of the Merger and
without any action on the part of the holder thereof, be cancelled and converted
into and represent the right to receive, upon surrender of the certificate
representing such share, the consideration payable as set forth below (the
"Merger Consideration"), without interest thereon.
(b) Based on (i) 18,067 shares of CBI Common Stock issued and
outstanding as of the Execution Date and (ii) options to acquire 90 shares of
CBI Common Stock outstanding and unexercised as of the Execution Date, each
holder of CBI Common Stock shall receive Merger Consideration in the form of
shares of common stock, $1.00 par value, of Prosperity ("Prosperity
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Common Stock") equal to 155 (the "Exchange Ratio") shares of Prosperity Common
Stock for each share of CBI Common Stock owned at the Effective Time.
(c) At the Effective Time, each option to acquire shares of CBI Common
Stock which is outstanding and unexercised immediately prior thereto ("CBI
Stock Option") pursuant to the Commercial Bancshares, Inc. Incentive Stock
Option Plan for Key Employees ("CBI Stock Option Plan") shall, in accordance
with its terms, be converted (automatically and without any action on the part
of the holder thereof) into an option to purchase shares of Prosperity Common
Stock in an amount and at an exercise price determined as provided below (and
otherwise subject to the terms of the CBI Stock Option Plan and agreements
evidencing the grants thereunder):
(i) The number of shares of Prosperity Common Stock to be
subject to the new option shall be equal to the number of shares of CBI
Common Stock subject to the original option multiplied by the Exchange
Ratio; and
(ii) The exercise price per share of Prosperity Common Stock
under the new option shall be equal to the exercise price per share of CBI
Common Stock under the original option divided by the Exchange Ratio.
The adjustment provided herein with respect to any options which are "incentive
stock options" as defined in Section 422 of the Internal Revenue Code, shall be
and is intended to be effected in a manner which is consistent with Section
424(a) of the Internal Revenue Code. The duration and other terms of the new
option shall be the same as the original option except that all references to
CBI shall be deemed to be references to Prosperity.
(d) The aggregate number of shares of Prosperity Common Stock to be
exchanged for each share of CBI Common Stock shall be adjusted appropriately to
reflect any change in the number of shares of Prosperity Common Stock by reason
of any stock dividends or splits, reclassification, recapitalization or
conversion with respect to Prosperity Common Stock, received or to be received
by holders of Prosperity Common Stock, when the record date or payment occurs
prior to the Effective Time.
(e) The Exchange Ratio may, at the option of Prosperity, be adjusted
pursuant to Section 8.1(e) hereof if the average closing price of a share of
Prosperity Common Stock as reported by The Nasdaq Stock Market, Inc. National
Market System ("Nasdaq National Market") during the period of the ten trading
days ending on the day immediately prior to the date of receipt of Federal
Reserve Board approval ("Price Determination Date") is less than $16.00 per
share.
Section 3.2 Dissenting Shares. Each share of CBI Common Stock issued
and outstanding immediately prior to the Effective Time, the holder of which has
not voted in favor of the Merger 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 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 3.1 of the Plan unless and
until such holder shall have failed to
A-4
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.
Section 3.3 Surrender of CBI Stock Certificates.
(a) Prosperity shall deposit or cause to be deposited in trust with
Computershare Investor Services, Denver, Colorado (the "Exchange Agent") prior
to the Effective Time cash in an aggregate amount estimated to be sufficient to
make the appropriate cash payments, if any, to holders of Dissenting Shares
pursuant to Section 3.2 hereof (such amounts being hereinafter referred to as
the "Exchange Fund"). 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 ten (10) days prior to the Closing Date, CBI shall
deliver to Prosperity a list of CBI's shareholders which shall include each
shareholder's name, address and the number of shares of CBI Common Stock owned.
(c) On or before the 5th business day after the Effective Time, the
Exchange Agent shall mail to each record holder of an outstanding certificate or
certificates which as of the Effective Date represented shares of CBI 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. 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
and number of shares of Prosperity Common Stock provided in Section 3.3 hereof,
and such Certificate shall forthwith be cancelled. Prosperity shall provide the
Exchange Agent with certificates for Prosperity Common Stock, as requested by
the Exchange Agent, for the number of shares provided in Section 3.1 hereof.
Until surrendered in accordance with the provisions of this Section 3.3, each
Certificate (other than Certificates representing Dissenting Shares) shall
represent for all purposes the right to receive the Merger Consideration without
any interest thereon. Former shareholders of CBI shall be entitled to vote
after the Effective Time at any meeting of Prosperity's shareholders the number
of shares of Prosperity Common Stock into which their shares are converted,
regardless of whether such shareholders of CBI have surrendered their
Certificates in exchange therefor.
(d) No dividends or other distributions declared after the Effective
Time with respect to shares of Prosperity Common Stock and payable to the
holders thereof shall be paid to the holder of a Certificate until such holder
surrenders such Certificate to the Exchange Agent in accordance with this
Section 3.3. After the surrender of a Certificate in accordance with this
Section 3.3, the holder thereof shall be entitled to receive any such dividends
or other distributions, without
A-5
interest thereon, which had become payable after the Effective Time with respect
to the shares of Prosperity Common Stock represented by such Certificate.
(e) After the Effective Time, the stock transfer ledger of CBI shall
be closed and there shall be no transfers on the stock transfer books of CBI of
the shares of CBI Common Stock which were outstanding immediately prior to such
time of filing. If, after the Effective Time, Certificates are presented to
Prosperity, they shall be promptly presented to the Exchange Agent and exchanged
as provided in this Section 3.3.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the shareholders of CBI for six
months after the Effective Time shall be paid to Prosperity, and the holders of
shares of CBI Common Stock not theretofore presented to the Exchange Agent shall
look to Prosperity only, and not the Exchange Agent, for the payment of any
Merger Consideration in respect of such shares.
(g) If any certificate representing shares of Prosperity Common Stock
is to be issued in a name other than that in which the Certificate surrendered
in exchange therefor is registered, it shall be a condition of the issuance
thereof that the Certificate so surrendered shall be appropriately endorsed (or
accompanied by an appropriate instrument of transfer) and otherwise in proper
form (reasonably satisfactory to Prosperity) for transfer, and that the person
requesting such exchange shall pay to the Exchange Agent in advance any transfer
or other taxes required by reason of the issuance of a certificate representing
shares of Prosperity Common Stock in any name other than that of the registered
holder of the Certificate surrendered, or required for any other reason, or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or not payable.
(h) None of Prosperity, CBI, the Exchange Agent or any other person
shall be liable to any former holder of shares of CBI Common Stock for any
Prosperity Common Stock (or dividends or distributions with respect thereto) or
cash properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(i) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Prosperity,
the posting by such person of a bond in such amount as Prosperity may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Prosperity Common Stock deliverable in
respect thereof pursuant to this Agreement.
ARTICLE 4.
MISCELLANEOUS
Section 4.1 Conditions Precedent. The respective obligations of each
party under this Plan shall be subject to the satisfaction, or waiver by the
party permitted to do so, of the conditions set forth in Articles IX, X and XI
of the Agreement.
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Section 4.2 Termination. This Plan shall be terminated upon the
termination of the Agreement in accordance with Article VIII thereof; provided,
that any such termination of this Plan shall not relieve any party hereto from
liability on account of a breach of such party of any of the terms hereof or
thereof.
Section 4.3 Amendments. To the extent permitted by law, this Plan may
be amended by a subsequent writing signed by all of the parties hereto upon the
approval of the Board of Directors of each of the parties.
Section 4.4 Successors. This Plan shall be binding on the successors of
CBI and Prosperity.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, CBI and Prosperity have caused this Plan to be executed
by their duly authorized officers as of the date first above written.
COMMERCIAL BANCSHARES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
PROSPERITY BANCSHARES, INC.
By:
--------------------------------
David Zalman
President
A-8
EXHIBIT B
AGREEMENT OF MERGER
BETWEEN
HERITAGE BANCSHARES, INC.
AND
PROSPERITY HOLDINGS, INC.
AGREEMENT OF MERGER, effective as of the _____ day of ____________, _____
(the "Agreement"), pursuant to Section 251 of the General Corporation Law of
Delaware, between Heritage Bancshares, Inc., a Delaware corporation, and
Prosperity Holdings Inc., a Delaware corporation.
WITNESSETH that:
WHEREAS, the parties to this Agreement, in consideration of the mutual
agreements of each corporation as set forth hereinafter, deem it advisable and
generally for the welfare of said corporations, that Heritage Bancshares, Inc.
(the "Merged Corporation") merge into Prosperity Holdings Inc. (the "Surviving
Corporation") under and pursuant to the terms and conditions hereinafter set
forth (the "Merger"); and
WHEREAS, the registered office of the Surviving Corporation in the State of
Delaware is located at 1209 Orange Street, in the city of Wilmington, County of
Newcastle, and the name of its registered agent at such address is CT
Corporation; and the registered office of the Merged Corporation in the State of
Delaware is located at __________________ in the City of __________, County of
__________, and the name of its registered agent at such address is
_______________.
NOW THEREFORE, the corporations, parties to this Agreement, by and between
their respective Boards of Directors, in consideration of the mutual covenants,
agreements and provisions hereinafter contained do hereby agree upon and
prescribe the terms and conditions of the Merger, the mode of carrying them into
effect, and the manner and basis of converting the shares of the constituent
corporations into the shares of the Surviving Corporation of the Merger, as
follows:
FIRST: The Merged Corporation shall be merged into the Surviving
Corporation.
SECOND: The Certificate of Incorporation of the Surviving Corporation, as
in effect on the date of the Merger provided for in this Agreement, shall
continue in full force and effect as the Certificate of Incorporation of the
corporation surviving this merger.
B-1
THIRD: The manner of converting the outstanding shares of the capital stock
of each of the constituent corporations into the shares or other securities of
the Surviving Corporation shall be as follows:
(a) Each share of common stock of the Merged Corporation which shall be
outstanding on the effective date of this Merger and all rights in respect
thereof, shall forthwith be canceled as of such effective date and no
consideration shall be paid in respect thereof.
(b) After the effective date of this Merger, each holder of an outstanding
certificate representing shares of common stock of the Merged Corporation shall
surrender the same to the Surviving Corporation.
(c) Each share of common stock of the Surviving Corporation which shall be
outstanding on the effective date of the Merger, and all rights in respect
thereof, shall remain outstanding.
FOURTH: The terms and conditions of the Merger are as follows:
(a) The bylaws of the Surviving Corporation as they shall exist on the
effective date of this Merger shall be and remain the bylaws of the Surviving
Corporation until the same shall be altered, amended or repealed as therein
provided.
(b) The eight directors of Prosperity Bancshares, Inc. and the four
directors of Commercial Bancshares, Inc., each as in effect on the date of the
Merger, shall be the directors of the Surviving Corporation and shall continue
in office until the next annual meeting of stockholders and until their
successors shall have been elected and qualified.
(c) The officers of the Surviving Corporation shall continue in office
until the next annual meeting of stockholders and until their successors shall
have been elected and qualified.
(d) This Merger shall become effective at ______ a.m. on __________, _____.
(e) Upon the Merger becoming effective, the separate existence of the
Merged Corporation shall cease and all the property, rights, privileges,
licenses, registrations and other assets of every kind and description of the
Merged Corporation shall be transferred to, vested in and devolve upon the
Surviving Corporation without further act or deed. All property, rights, and
every other interest of the Surviving Corporation and the Merged Corporation
shall be as effectively the
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property of the Surviving Corporation as they were of the Surviving Corporation
and the Merged Corporation respectively.
(f) All rights of creditors and all liens upon the property of either of
the corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Merged Corporation shall thenceforth attach to the Surviving
Corporation and may be enforced against it to the same extent as if such debts,
liabilities and duties had been incurred or contracted by it.
(g) The Merger shall not become effective unless and until all terms and
conditions to the effectiveness of the Merger contained in the Agreement and
Plan of Reorganization by and between Prosperity Bancshares, Inc. and Commercial
Bancshares, Inc. dated ____________, 2000, which conditions are incorporated
herein by reference, shall have been satisfied or waived.
IN WITNESS WHEREOF, the parties to this Agreement, pursuant to the approval
and authority duly given by resolutions adopted by their respective Boards of
Directors and that fact having been certified on said Agreement of Merger by the
Secretary of each corporate party thereto, have caused these presents to be
executed by the authorized officer of each party hereto as the respective act,
deed and agreement of each of said corporations, effective on the _____ day of
____________, _____.
HERITAGE BANCSHARES, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
PROSPERITY HOLDINGS, INC.
By:
-----------------------------
Name: David Zalman
Title: President
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I, David Zalman, Secretary of Prosperity Holdings, Inc., a corporation
organized and existing under the laws of the State of Delaware, hereby certify,
as such Secretary, that the Agreement of Merger to which this Certificate is
attached, after having been first duly signed on behalf of the said corporation
and having been signed on behalf of Heritage Bancshares, Inc., a corporation of
the State of Delaware, was duly adopted pursuant to Section 251(f) of the
General Corporation of Delaware and the conditions of such subsection have been
satisfied.
WITNESS my hand on this _____ day of ____________, _____.
-----------------------
Secretary
I, ________________, Secretary of Heritage Bancshares, Inc., a corporation
organized and existing under the laws of the State of Delaware, hereby certify,
as such Secretary, that the Agreement of Merger to which this Certificate is
attached, after having been first duly signed on behalf of the said corporation
and having been signed on behalf of Prosperity Holdings, Inc., a corporation of
the State of Delaware, was duly adopted pursuant to Section 228 of the General
Corporation Law of Delaware by the unanimous written consent of the stockholders
holding all of the shares of the capital stock of the corporation, same being
all of the shares issued and outstanding having voting power, which Agreement of
Merger was thereby adopted as the act of the stockholders of said Heritage
Bancshares, Inc. and the duly adopted agreement and act of the said corporation.
WITNESS my hand on this _____ day of ____________, _____.
-----------------------
Secretary
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EXHIBIT C
PLAN OF MERGER
BETWEEN
HERITAGE BANK
AND
FIRST PROSPERITY BANK
THIS PLAN OF MERGER (the "Plan") is dated as of the ____ day of _________,
_____, by and between Heritage Bank, a Texas banking association ("Heritage"),
and First Prosperity Bank, a Texas banking association ("FPB").
W I T N E S S E T H:
WHEREAS, pursuant to the Agreement and Plan of Reorganization (the
"Agreement") dated as of _____________, 2000, by and between Prosperity
Bancshares, Inc. ("Bancshares") and Commercial Bancshares, Inc. ("CBI"),
pursuant to which CBI will merge with and into Bancshares with Bancshares as the
survivor (the "Merger"), with the result that Heritage will become a wholly-
owned subsidiary of Bancshares; and
WHEREAS, the Agreement provides that immediately after the effective time
of the Merger, Heritage will be merged with and into FPB;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Heritage and FPB hereby agree that,
subject to the terms and conditions hereinafter set forth, and in accordance
with all applicable laws and regulations, Heritage shall be merged with and into
FPB at the Effective Time (as hereinafter defined) (the "Bank Merger"). The
parties hereto do hereby agree and covenant as follows:
1. Conditions of Approval. The Bank Merger shall not become effective
unless and until all terms and conditions to the effectiveness of the Merger
contained in the Agreement, which conditions are incorporated herein by
reference, shall have been satisfied or waived.
2. Identity of Resulting Bank. The resulting bank as a result of the
Bank Merger (the "Continuing Bank") shall be FPB.
3. Articles of Association, Bylaws and Facilities of Continuing Bank. At
the Effective Time and until thereafter amended in accordance with 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
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and until changed by the Board of Directors of Continuing Bank, the main office
of Continuing Bank shall be the main office of FPB at the Effective Time. The
established offices and facilities of Heritage immediately prior to the Bank
Merger shall become established offices and facilities of the Continuing Bank.
Until thereafter changed in accordance with the law or the Articles of
Association or Bylaws of Continuing Bank, all corporate acts, plans, policies,
contracts, approvals and authorizations of Heritage 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 Heritage and FPB,
respectively, at the Effective Time.
4. Board of Directors and Officers of Continuing Bank. At the Effective
Time and until thereafter changed in accordance with the law or the Articles of
Association or Bylaws of Continuing Bank, the nine (9) members of the Board of
Directors of FPB and the ______ non-employee members of the Board of Directors
of Heritage, each as in effect at the Effective Time, shall become the Board of
Directors of Continuing Bank. At the Effective time and until thereafter
changed in accordance with the law or the Articles of Association or Bylaws of
Continuing Bank, the executive officers of Continuing Bank shall be designated
as follows: (a) David Zalman shall serve as Chairman of the Board and Chief
Executive Officer, and (b) H. E. Timanus, Jr. shall serve as President and Chief
Operating Officer.
5. Effect of Bank Merger. At the Effective Time, the corporate existence
of Heritage and FPB shall, as provided by law, be consolidated into and
continued in Continuing Bank, and Continuing Bank shall be deemed to be a
continuation in entity and identity of Heritage and FPB. All rights, franchises
and interests of Heritage 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 Bank 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
Heritage and FPB, respectively, at the Effective Time.
6. Liabilities of Continuing Bank. At the Effective Time of the Bank
Merger, Continuing Bank shall be liable for all liabilities of Heritage and FPB.
All deposits, debts, liabilities, obligations and contracts of Heritage and of
FPB, respectively, matured or unmatured, whether accrued, absolute, contingent
or otherwise, and whether or not reflected or reversed against on balance
sheets, books of account, or records of Heritage or FPB shall be those of
Continuing Bank and shall not be released or impaired by the Bank Merger. All
rights of creditors and other obligees and all liens on property of either
Heritage or FPB shall be preserved unimpaired subsequent to the Bank Merger.
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7. Effective Time. The Bank Merger shall become effective upon the
approval of the Articles of Merger regarding the Bank Merger by the Texas
Department of Banking. The term "Effective Time" shall mean the date and time
provided for in the Articles of Merger regarding the Bank Merger. A closing
shall take place at or prior to the Effective Time following the receipt of all
necessary regulatory and governmental approvals and consents and the expiration
of all statutory waiting periods in respect thereof and the satisfaction or
waiver of the conditions to the consummation of the Merger specified in Articles
IX, X and XI of the Agreement.
8. Cancellation of Stock. At the Effective Time, all of the outstanding
shares of capital stock of Heritage, all of which shares shall be owned by
Bancshares, shall be canceled and shall not be deemed to be authorized, issued
or outstanding for any purpose, and no cash, property, rights or securities
shall be delivered with respect to said shares.
9. Conditions Precedent. The respective obligations of each party under
this Plan shall be subject to the satisfaction, or waiver by the party permitted
to do so, of the conditions set forth in Articles IX, X and XI of the Agreement.
10. Termination. This Plan shall be terminated upon the termination of
the Agreement in accordance with Article VIII thereof; provided, that any such
termination of this Plan shall not relieve any party hereto from liability on
account of a breach of such party of any of the terms hereof or thereof.
11. Amendments. To the extent permitted by law, this Plan may be amended
by a subsequent writing signed by all of the parties hereto upon the approval of
the Board of Directors of each of the parties.
12. Successors. This Plan shall be binding on the successors of Heritage
and FPB.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Heritage and FPB have caused this Plan to be executed
by their duly authorized officers as of the date first above written.
HERITAGE BANK
ATTEST:
- ------------------------------ By:
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
FIRST PROSPERITY BANK
ATTEST:
- ------------------------------ By:
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
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EXHIBIT D
________________, 2000
Prosperity Bancshares, Inc.
3040 Post Oak Boulevard
Houston, Texas 77056
Attn: Secretary
Gentlemen:
I have been advised that I might be considered to be an "affiliate," as
that term is defined for purposes of paragraphs (c) and (d) of Rule 145 ("Rule
145") promulgated by the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), of
Commercial Bancshares, Inc., a Texas corporation (the "Company").
Pursuant to an Agreement and Plan of Reorganization, dated as of November
__, 2000 (the "Reorganization Agreement") between the Company and Prosperity
Bancshares Inc., a Texas corporation ("Prosperity"), it is contemplated that the
Company will merge with and into Prosperity (the "Merger"). As a result of the
Merger, I will receive in exchange for each share of common stock, par value
$.10 per share, of the Company (the "Company Common Stock") owned by me
immediately prior to the Effective Time (as defined in the Reorganization
Agreement), a number of shares of common stock, par value $1.00 per share, of
Prosperity ("Prosperity Common Stock"), as more specifically set forth in the
Reorganization Agreement.
I hereby agree as follows:
1. I will not offer to sell, sell, transfer or otherwise dispose of any
of the shares of Prosperity Common Stock issued to me pursuant to the Merger
(the "Stock") until such time as financial results covering at least 30 days of
post-Merger combined operations of Prosperity have been published and I have
been so notified by Prosperity, and then only (a) in compliance with the
applicable provisions of Rule 145, (b) in a transaction that is otherwise exempt
from the registration requirements of the Securities Act or (c) in an offering
registered under the Securities Act.
2. I consent to the endorsement of the Stock issued to me pursuant to the
Merger with a restrictive legend that will read substantially as follows:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of 1933,
as amended (the "Act"), applies and may be sold or otherwise transferred
only in compliance with the limitations of such
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Rule 145, or upon receipt by Prosperity Bancshares, Inc. of an opinion of
counsel reasonably satisfactory to it that some other exemption from
registration under the Act is available, or pursuant to a registration
statement under the Act."
3. Prosperity's transfer agent for the Prosperity Common Stock shall be
given an appropriate stop transfer order and shall not be required to register
any attempted transfer of the shares of the Stock, unless the transfer has been
effected in compliance with the terms of this letter agreement.
4. It is understood and agreed that this letter agreement shall terminate
and be of no further force and effect and the restrictive legend set forth above
shall be removed by delivery of substitute certificates without such legend, and
the related stop transfer restrictions shall be lifted forthwith, if (i) any
such shares of Stock shall have been registered under the Securities Act for
sale, transfer or other disposition by me or on my behalf and are sold,
transferred or otherwise disposed of, or (ii) any such shares of Stock are sold
in accordance with the provisions of paragraphs (c), (e), (f) and (g) of Rule
144 promulgated under the Securities Act, or (iii) I am not at the time an
affiliate of Prosperity and have been the beneficial owner of the Stock for at
least one year (or such other period as may be prescribed thereunder) and
Prosperity has filed with the Commission all of the reports it is required to
file under the Securities Exchange Act of 1934, as amended, during the preceding
twelve months, or (iv) I am not and have not been for at least three months an
affiliate of Prosperity and have been the beneficial owner of the Stock for at
least two years (or such other period as may be prescribed by the Securities
Act, and the rules and regulations promulgated thereunder), or (v) Prosperity
shall have received an opinion of counsel acceptable to Prosperity to the effect
that the stock transfer restrictions and the legend are not required.
I have carefully read this letter agreement and the Reorganization
Agreement and have discussed their requirements and other applicable limitations
upon my ability to offer to sell, transfer or otherwise dispose of shares of the
Stock, to the extent I felt necessary, with my counsel or counsel for the
Company.
Sincerely,
-------------------------------------
Name:
--------------------------------
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EXHIBIT E
AMENDED AND RESTATED BYLAWS
OF
PROSPERITY BANCSHARES, INC.
A Texas Corporation
Date of Adoption
______________, 2000
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..................................... 7
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
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.................... 11
Section 5.2. Powers and Duties of the Chairman of the Board....... 11
Section 5.3. Powers and Duties of the President and Chief
Executive Officer................................... 11
Section 5.4. Vice Presidents...................................... 11
Section 5.5. Secretary............................................ 12
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........................................... 13
Article 6
Capital Stock
Section 6.1. Certificates of Stock................................ 13
Section 6.2. Transfer of Shares................................... 13
Section 6.3. Ownership of Shares.................................. 14
Section 6.4. Regulations Regarding Certificates................... 14
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
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........................................... 18
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 and Chief Executive Officer, by a majority of the Board of
Directors, 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
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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 the Chairman of the Board or 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
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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
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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 and Chief Executive Officer, or, if the
President and Chief Executive Officer 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;
5
(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.
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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 and Chief Executive Officer, or in the President and Chief Executive
Officer'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 and Chief Executive Officer, or in the
7
President and Chief Executive Officer'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 and Chief
Executive Officer, or, on the written request by three or more members of the
Board, 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.
8
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 shall, by
resolution passed by a majority of the whole board, designate an audit
committee, a nominating committee and a compensation committee and may designate
one or more other committees, with each such committee to consist of three (3)
or more of the directors of the Corporation, unless otherwise stated in these
Bylaws. 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
9
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.
The audit committee shall consist of not less than three members who shall
each (i) meet the membership requirements set forth in the Corporation's Audit
Committee Charter and (ii) be an independent director as determined in
accordance with the rules of The Nasdaq Stock Market, Inc. or any other exchange
or automated quotation system on which the Corporation's common stock is then
listed or quoted, and the rules of the Securities and Exchange Commission
("SEC").
The compensation committee shall consist solely of three or more "Non-
Employee Directors" within the meaning of Rule 16b-3 promulgated by the SEC
under the Securities Exchange Act of 1934, as amended.
The nominating committee shall consist of the Chairman of the Board, the
President and Chief Executive Officer and one other member of the Board of
Directors of the Corporation. The Chairman of the Board shall nominate the
Directors to serve on committees of the Board of Directors, and such nominations
shall be subject to approval by a majority of the Board.
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.
10
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 and Chief Executive
Officer, 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 preside at all meetings of the shareholders and of
the Board of Directors and generally manage the affairs of the Board of
Directors. In addition, the Chairman of the Board 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 may sign all certificates
for shares of capital stock of the Corporation; and shall have such other
powers and duties as may from time to time be prescribed by the Board of
Directors.
Section 5.3. Powers and Duties of the President and Chief Executive
Officer. Unless the Board of Directors otherwise determines, the President and
Chief Executive Officer shall have general and active 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, unless the Board of Directors otherwise
determines, the President and Chief Executive Officer 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 and Chief Executive Officer 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 and Chief Executive Officer 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 and Chief Executive Officer 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 and Chief Executive Officer.
11
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 Chief Executive Officer; 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 and Chief Executive
Officer.
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 and Chief Executive Officer 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 and Chief Executive Officer. 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 Chief Executive Officer; 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 and Chief Executive Officer, 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 and Chief Executive Officer, together with the Secretary or any
Assistant Secretary shall have power to vote and
12
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 and Chief
Executive Officer 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.
13
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
14
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;
15
(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.
16
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.
17
EXHIBIT F
RELEASE OF CLAIMS
THIS RELEASE OF CLAIMS ("Release") dated the _____ day of ___________,
2000, is executed and delivered by the undersigned individual to Commercial
Bancshares, Inc. ("CBI"), Heritage Bancshares, Inc. ("CBI Delaware") and
Heritage Bank ("Heritage").
WHEREAS, pursuant to that certain Agreement and Plan of Reorganization
dated as of November __, 2000 by and between Prosperity Bancshares, Inc.
("Prosperity") and CBI (the "Agreement"), it is contemplated that CBI will merge
with and into Prosperity (the "Merger"); and
WHEREAS, Prosperity has required as a condition of the Merger that the
undersigned execute and deliver this Release to confirm the absence of any
claims by the undersigned against CBI, CBI Delaware or Heritage;
NOW THEREFORE, in consideration of the premises contained herein and ten
dollars and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the undersigned hereby agrees as follows:
Section 1. Release. The undersigned hereby RELEASES and FOREVER
DISCHARGES CBI, CBI Delaware and Heritage and their successors, assigns,
representatives and attorneys from all manners of action, causes of action,
suits, debts, sums of money, accounts, reckonings, bonds, bills, specialties,
covenants, contracts, controversies, agreements, premises, variances,
trespasses, damages, judgments, executions, claims and demands whatsoever in law
or in equity which the undersigned ever had, now has, or hereafter can, shall or
may have against CBI, CBI Delaware or Heritage, in respect of any and all
agreements and obligations incurred on or prior to the date hereof, or in
respect of any event occurring or circumstances existing on or prior to the date
hereof; provided, however, that CBI, CBI Delaware and Heritage shall not be
released from any of its obligations or liabilities to the undersigned (i)
pursuant to the provisions of the certificate or articles of incorporation or
association or bylaws of CBI, CBI Delaware and Heritage regarding the
indemnification of directors and officers; and (ii) in connection with any
indebtedness or contractual obligation or liability to the undersigned existing
on the date hereof.
Section 2. Successors. This Release shall be binding upon the
undersigned and his or her heirs, devisees, administrators, executors, personal
representatives, successors and assigns and shall inure to the benefit of CBI,
CBI Delaware and Heritage and its successors and assigns.
Section 3. Governing Law. This Release shall be governed by and
construed in accordance with the laws of the State of Texas, without giving
effect to Texas principles of conflicts of law.
F-1
Section 4. Modification. This Release may be modified only by a
written instrument executed by the undersigned, CBI, CBI Delaware and Heritage.
IN WITNESS WHEREOF, the undersigned has executed this Release effective as
of the date first above written.
-----------------------------
Signature
-----------------------------
Printed Name
F-2
EXHIBIT G
RELEASE OF CLAIMS
THIS RELEASE OF CLAIMS ("Release") dated the ____ day of ___________,
_____, is executed and delivered by Commercial Bancshares, Inc., a Texas
corporation ("CBI"), Heritage Bancshares, Inc., a Delaware corporation ("CBI
Delaware") and Heritage Bank, a Texas banking association ("Heritage").
WHEREAS, the persons listed on Schedule A attached hereto and made a part
hereof constitute the duly elected or appointed executive officers and directors
("Executive Officers and Directors") of CBI, CBI Delaware and Heritage as of the
date hereof; and
WHEREAS, Prosperity Bancshares, Inc. ("Prosperity") will acquire CBI, CBI
Delaware and Heritage pursuant to that certain Agreement and Plan of
Reorganization dated as of _____________, 2000 by and between Prosperity and CBI
(the "Agreement"); and
WHEREAS, CBI has required as a condition to such acquisition that the
Executive Officers and Directors be released of any claims by CBI, CBI Delaware
and Heritage against the Executive Officers and Directors;
NOW THEREFORE, in consideration of the premises contained herein and ten
dollars and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, CBI, CBI Delaware and Heritage hereby agrees
as follows:
Section 1. Release. CBI, CBI Delaware and Heritage hereby RELEASE and
FOREVER DISCHARGE each Executive Officer and Director from all manners of
action, causes of action, suits, debts, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, agreements,
premises, variances, trespasses, damages, judgments, executions, claims and
demands whatsoever in law or in equity which CBI, CBI Delaware and Heritage ever
had, now has, or hereafter can, shall or may have against such Executive Officer
or Director in respect of any and all agreements and obligations incurred on or
prior to the date hereof, or in respect of any event occurring or circumstances
existing on or prior to the date hereof; provided, however, that no Executive
Officer or Director shall be released from (i) any action arising from
intentional fraud, deceit or wilful misconduct, (ii) any of such Executive
Officer's or Director's obligations or liabilities to CBI or Heritage in
connection with any indebtedness or contractual obligation or liability related
to deposits, accounts and loans of such Executive Officer or Director to CBI or
Heritage existing on the date hereof and (iii) any action arising in connection
with the transactions contemplated by the Agreement.
Section 2. Successors. This Release shall be binding upon CBI, CBI
Delaware and Heritage and their respective successors and assigns and shall
inure to the benefit of the Executive
G-1
Officers and Directors and their respective heirs, devisees, administrators,
executors, personal representatives, successors and assigns.
Section 3. Governing Law. This Release shall be governed by and
construed in accordance with the laws of the State of Texas, without giving
effect to Texas principles of conflicts of law.
Section 4. Counterparts. This Release may be executed in several
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument.
Section 5. Modification. This Release may be modified as to any
Executive Officer or Director only by a written instrument executed by CBI, CBI
Delaware and Heritage such Executive Officer or Director.
[SIGNATURE PAGE FOLLOWS]
G-2
IN WITNESS WHEREOF, CBI, CBI Delaware and Heritage have executed this
Release effective as of the date first above written.
COMMERCIAL BANCSHARES, INC.
By:
----------------------------
Name:
--------------------------
Title:
--------------------------
HERITAGE BANCSHARES, INC.
By:
----------------------------
Name:
--------------------------
Title:
--------------------------
HERITAGE BANK
By:
----------------------------
Name:
--------------------------
Title:
--------------------------
G-3
SCHEDULE A
EXECUTIVE OFFICERS AND DIRECTORS OF
CBI, CBI DELAWARE AND HERITAGE
G-4
EXHIBIT H
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is by and between First
Prosperity Bank, a Texas banking association (the "Bank"), and H. E. Timanus,
Jr., an individual residing in Houston, Harris County, Texas (the "Employee"),
effective as of ____________, 2001 (the "Effective Date").
W I T N E S S E T H:
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 and Chief Operating Officer 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 main
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 and chief operating officer 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; provided however,
that the Agreement shall not extend beyond the year in which Employee turns
sixty-five (65) years of age.
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 of the Term of this
Agreement, the Bank shall pay Employee a base salary ("Base Salary") of $235,000
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.
1
4.2 Annual Review. The Employee's Base Salary shall be reviewed
annually by the Executive Committee of the Board of Directors of the Bank and
may be increased from time to time at the discretion of the Board of Directors.
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
2
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.
3
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.
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. Anything in this Agreement
to the contrary notwithstanding, the Employee's legal representatives or
beneficiaries 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
4
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 and Chief Operating Officer at
the time of such assignment, or the removal by the Bank from Employee of
those duties usually appertaining to the position of President and Chief
Operating Officer 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 Control, 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 of the Bank under this Agreement;
or
5
(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 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, (b) the
acquisition of securities representing 25% or more of the issued and outstanding
voting securities of Bancshares or the Bank or (c) 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 of this 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.
6
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 Agreements. 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.
IN WITNESS WHEREOF, this Agreement is executed as of the ____ day of
_________, 2001.
"EMPLOYEE" "BANK"
First Prosperity Bank
_________________________________ By: ________________________________________
H. E. Timanus, Jr.
Name: ______________________________________
Title: _____________________________________
7
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
8
HOEFER & ARNETT
INCORPORATED
INVESTMENT BANKERS
101 W. SIXTH STREET, SUITE 416
AUSTIN, TEXAS 78701
December 8, 2000
Members of the Board of Directors
Commercial Bancshares, Inc.
4295 San Felipe
Houston, Texas 77027
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the shareholders of Commercial Bancshares, Inc.,
Houston, Texas ("Commercial") of the terms of the proposed merger of Commercial
with and into Prosperity Bancshares, Inc., Houston, Texas ("Prosperity") in
accordance with the terms and conditions of the Agreement and Plan of
Reorganization (the "Agreement"). Pursuant to the Agreement and subject to the
terms and conditions therein, each share of Commercial Common Stock issued and
outstanding immediately prior to the Effective Time (as defined in the
Agreement), other than Dissenting Shares (as defined in Section 1.6 of the
Agreement), shall, by virtue of the Merger and without any action on the part of
the holder thereof, be cancelled and converted into and represent the right to
receive, upon surrender of the certificate representing such share, the
consideration payable as set forth below (the "Merger Consideration"), without
interest thereon. Based on (i) 18,067 shares of Commercial Common Stock issued
and outstanding as of the Execution Date, each holder of Commercial Common Stock
shall receive Merger Consideration in the form of shares of common stock, $1.00
par value, of Prosperity ("Prosperity Common Stock") equal to 155 (the "Exchange
Ratio") shares of Prosperity Common Stock for each share of Commercial Common
Stock owned at the Effective Time.
As part of its investment banking business, Hoefer & Arnett, Incorporated is
regularly engaged in the valuation of bank, bank holding company and thrift
securities in connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Prior to being retained
for this assignment, we have provided investment banking and financial advisory
services to Commercial. The revenues derived from such services are
insignificant when compared to the firm's total gross revenues.
HOEFER & ARNETT
INCORPORATED
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) audited financial statements for
Commercial as of December 31, 1998 and December 31, 1999, Quarterly reports
filed with the Federal Reserve on Form FR Y-9C for September 30, 2000, June 30,
2000, March 31, 2000 and December 31, 1999, and internal financial statements
for the nine months ended September 30, 2000; (iii) financial statements for
Prosperity included in its Annual Reports on Form 10-K for the years ended
December 31, 1999 and December 31, 1998, Quarterly reports on Form 10-Q for
September 30, 2000, June 30, 2000, March 31, 2000 and December 31, 1999, and
internal financial statements for the nine months ended September 30, 2000; (iv)
financial analyses and forecasts for Commercial and Prosperity prepared by their
respective managements; (v) publicly available information concerning other
banks and holding companies whose securities are traded in public markets,
reviewed the historical stock prices and trading volumes of the common stock of
Prosperity; (vi) the nature and financial terms of certain other merger
transactions involving banks and bank holding companies. We have held
discussions with senior management of Commercial and Prosperity concerning their
past and current operations, financial condition and prospects, as well as the
results of regulatory examinations. We have conducted such other financial
studies, analyses and investigations, as we deemed appropriate for purposes of
this opinion.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the management of
Commercial and Prosperity as to the reasonableness of the financial and
operating forecasts and projections (and the assumptions and bases therefor)
provided to us, and we have assumed that such forecasts and projections reflect
the best currently available estimates and judgments of Commercial and
Prosperity management. We have also assumed, without assuming any
responsibility for the independent verification of the same, that the aggregate
allowances for loan losses for Prosperity and Commercial are adequate to cover
such losses. We have not made or obtained any evaluations or appraisals of the
property of Commercial or Prosperity, nor have we examined any individual loan
credit files. For purposes of this opinion, we have assumed that the merger
will have the tax, accounting and legal effects described in the Agreement and
assumed the accuracy of the disclosures set forth in the Agreement. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
to the holders of shares of Commercial Common Stock of the terms of the proposed
merger of Commercial with and into Prosperity and does not address Commercial's
underlying business decision to proceed with the merger.
HOEFER & ARNETT
INCORPORATED
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Commercial and Prosperity, including interest income, interest expense, net
interest income, net interest margin, provision for loan losses, non-interest
income, non-interest expense, earnings, dividends, internal capital generation,
book value, intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
Commercial and Prosperity; and (ii) the assets and liabilities of Commercial and
Prosperity, including the loan, investment and mortgage portfolios, deposits,
other liabilities, historical and current liability sources and costs and
liquidity. We have also taken into account our assessment of general economic,
market and financial conditions and our experience in other transactions, as
well as our experience in securities valuation and our knowledge of the banking
industry generally. Our opinion is necessarily based upon conditions as they
exist and can be evaluated on the date hereof and the information made available
to us through the date hereof.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the terms of the proposed merger of
Commercial with and into Prosperity are fair, from a financial point of view, to
the holders of shares of Commercial Common Stock.
Our opinion is directed to the Board of Directors of Commercial for its
information and assistance in connection with its consideration of the financial
terms of the transaction contemplated by the Merger and does not constitute a
recommendation to any shareholder of Commercial as to how such shareholder
should vote on the proposed transaction. We hereby consent to the reference to
our firm in the proxy statement or prospectus related to the merger transaction
and to the inclusion of our opinion as an exhibit to the proxy statement or
prospectus related to the merger transaction.
Very truly yours,
/s/ Hoefer & Arnett, Incorporated
Hoefer & Arnett, Incorporated
FIRST CAPITAL GROUP, L.L.C.
INVESTMENT BANKERS AND FINANCIAL ADVISORS
December 4, 2000
Board of Directors
Prosperity Bancshares, Inc.
3040 Post Oak Blvd.
Houston, Texas 77056
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to Prosperity Bancshares, Inc. ("Prosperity"), of the Exchange Ratio (as
defined below) set forth in the Agreement and Plan of Reorganization dated as of
November 8, 2000 (the "Reorganization Agreement") and the Agreement and Plan of
Merger dated as of November 8, 2000 (the "Plan of Merger"), incorporated by
reference therein, which provides for the merger (the "Merger") of Commercial
Bancshares, Inc., ("Commercial") with and into Prosperity. Pursuant to Section
1.5 of the Reorganization Agreement, subject to certain conditions, each
shareholder of the outstanding common stock, $1.00 par value, of Commercial (the
"Commercial Common Stock") has a right to receive 155 shares of the common
stock, $1.00 par value, of Prosperity (the "Prosperity Common Stock") for each
share of Commercial Common Stock tendered (the "Exchange Ratio"). The terms and
guidelines of the transaction are more fully set forth in the Reorganization
Agreement and the Plan of Merger.
In connection with our opinion, we have (i) analyzed certain internal financial
statements and other financial and operating data concerning Commercial prepared
by the management of Commercial and certain internal financial statements and
other financial and operating data concerning Prosperity prepared by the
management of Prosperity; (ii) analyzed certain publicly available financial
statements, both audited and unaudited, and other information of Commercial and
Prosperity, including Prosperity's Annual Reports for the three years ended
December 31, 1999, Prosperity's Quarterly Reports for the periods ended
September 30, 2000, June 30, 2000, and March 31, 2000, Commercials year-end
reports for the three years ended December 31, 1999, and Commercial's financial
statements for the quarters ended September 30, 2000, June 30, 2000, and March
31, 2000; (iii) analyzed certain pre-merger financial projections of Prosperity
prepared by the management of Prosperity and certain pre-merger financial
projections of Commercial prepared by the management of Commercial;
(iv) discussed the past and current operations and financial condition and
prospects of Prosperity with senior executives of Prosperity and the past and
current operations and financial condition and prospects of Commercial with
senior executives of Commercial; (v) examined financial forecasts and other
information and data for Prosperity and Commercial which were provided to, or
otherwise discussed with, us by Prosperity's management and Commercial's
management, including information relating to strategic implications and
operational benefits anticipated to result from the merger and an evaluation of
the pro forma financial impact of the Merger on Prosperity; (vi) evaluated the
pre-merger and post-merger market shares of Prosperity and Commercial within
their respective market areas; (vii) reviewed and compared the financial
performance of Commercial with that of certain other comparable banks and bank
holding companies; (viii) reviewed and compared the financial performance of
Prosperity and reported stock prices and trading activity of Prosperity Common
Stock with various stock market indices and that of certain other comparable
publicly-traded companies and their securities; (ix) reviewed and compared
certain security analysis reports of Prosperity Common Stock prepared by various
investment banking firms; (x) reviewed the financial terms, to the extent
publicly available, of certain comparable precedent transactions or other
similar transactions that we considered relevant in evaluating the Exchange
Ratio; (xi) reviewed the Reorganization Agreement; and (xii) performed such
other analyses and examinations and considered such other information and
financial, economic and market data as we deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information provided to or otherwise reviewed by us for
the purposes of this opinion. We have not made an independent evaluation of the
assets or liabilities (contingent or otherwise) or business prospects of
Prosperity or Commercial, nor have
128 Rose Road Memphis, Tennessee 38117 Telephone 901.766.8487
Facsimile 901.767.0765
Board of Directors
Prosperity Bancshares, Inc.
December 4, 2000
Page 2 of 2
we been furnished with any such appraisals or evaluations, nor have we made any
physical inspection of the properties or assets of Prosperity or Commercial. We
did not review any individual credit files of Prosperity or Commercial. We are
not experts in the evaluation of loan or lease portfolios for the purpose of
assessing the adequacy of the allowance for losses with respect thereto and have
assumed that such allowances for each of the companies are, in the aggregate,
adequate to cover such losses.
With respect to both Prosperity and Commercial, we relied upon publicly
available data, information provided to or reviewed with us by Prosperity and
Commercial, and discussions conducted with the respective managements of
Prosperity and Commercial regarding their respective financial condition,
performance and prospects and have further relied on the assurances of
managements of Prosperity and Commercial that they are not aware of any facts
that would make any of such information inaccurate or misleading. With respect
to financial forecasts (including forecasts of cost savings and operating
synergies forecasted by management of Prosperity to result from the Merger), we
have been advised by the managements of Prosperity and Commercial, and have
assumed, that they have been reasonably prepared and reflect the best currently
available estimates and judgments of management of Prosperity and Commercial,
respectively, as to the respective future financial performance of Prosperity
and Commercial and the strategic implications and operational benefits
anticipated to result from the Merger. We have assumed such forecasts and
projections will be realized in the amounts and at the times contemplated
thereby.
We have assumed, with your consent, that the Merger will be treated as a tax-
free reorganization for federal income tax purposes and that it qualifies, and
will be accounted for, as a "pooling of interests" in accordance with generally
accepted accounting principles. We have further assumed that the Merger will be
consummated in a timely fashion in accordance with the terms of the
Reorganization Agreement, without waiver of any of the conditions to the Merger
contained in the Reorganization Agreement. Our opinion is necessarily based on
economic, market and other conditions and circumstances as in effect and
existing on, and the information made available to us as of, the date hereof and
we assume no responsibility to update or revise our opinion based on
circumstances or events after the date hereof. Events occurring after the date
hereof could materially affect the assumptions used in preparing this opinion.
Our opinion, as set forth herein, relates to the relative values of Prosperity
and Commercial and is limited to the fairness, from a financial point of view,
to Prosperity of the Exchange Ratio as stated in the Reorganization Agreement
and Plan of Merger and does not address the value of the underlying securities
or underlying business decision to undertake the Merger. We are not expressing
any opinion as to what the value of Prosperity Common Stock actually will be
when issued pursuant to the Merger or the price at which Prosperity Common Stock
will trade subsequent to the announcement or consummation of the Merger. We were
not requested to consider, and our opinion does not address, the relative merits
of the Merger as compared to any alternative business strategies that might
exist for Prosperity or the effect of any other transaction in which Prosperity
might engage. Moreover, this letter, and the opinion expressed herein, does
not constitute a recommendation to any shareholder as to any approval of the
Merger or the Reorganization Agreement or the Plan of Merger. It is understood
that this letter is for the information of the Board of Directors of Prosperity
and may not be used for any other purpose without our prior written consent,
except that this opinion may be included in its entirety in any filing made by
Prosperity with the Securities and Exchange Commission with respect to the
Merger.
First Capital Group, L.L.C. is acting as financial advisor to Prosperity in
connection with the proposed Merger and will receive a fee for such services, a
significant portion of which is payable only upon the consummation of the
Merger. We also will receive a portion of the fee upon the issuance of this
opinion. In the ordinary course of our business we have previously provided
certain advisory services to Prosperity and Commercial and have received
customary compensation for such services.
Based on the foregoing and such other matters we have deemed relevant, we are of
the opinion, as of the date hereof, that the Exchange Ratio is fair, from a
financial point of view, to Prosperity.
Respectfully submitted,
FIRST CAPITAL GROUP, L.L.C.
128 Rose Road Memphis, Tennessee 38117 Telephone 901.766.8487
Facsimile 901.767.0765
APPENDIX D
PROVISIONS OF THE TEXAS BUSINESS CORPORATION ACT
RELATING TO RIGHTS OF
DISSENTING SHAREHOLDERS
(Articles 5.11 - 5.13)
Article 5.11. Rights of Dissenting Shareholders in the Event of Certain
Corporate Actions
A. Any shareholder of a domestic corporation shall have the right to dissent
from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and the
shareholder holds shares of a class or series that was entitled to vote thereon
as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without goodwill, of a corporation requiring the special
authorization of the shareholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the shareholder are
to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if (1) the shares held by the shareholder are part of a class
shares of which are listed on a national securities exchange, or are held of
record by not less than 2,000 holders, on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or the plan of exchange, and
(2) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his shares any consideration other than (a)
shares of a corporation that, immediately after the effective time of the merger
or exchange, will be part of a class or series of shares of which are (i)
listed, or authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
Article 5.12. Procedure for Dissent by Shareholders as to Said Corporate Actions
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(1)(a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a
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written objection to the action, setting out that the shareholder's right to
dissent will be exercised if the action is effective and giving the
shareholder's address, to which notice thereof shall be delivered or mailed in
that event. If the action is effected and the shareholder shall not have voted
in favor of the action, the corporation, in the case of action other than a
merger, or the surviving or new corporation (foreign or domestic) or other
entity that is liable to discharge the shareholder's right of dissent, in the
case of a merger, shall, within ten (10) days after the action is effected,
deliver or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery or
mailing of the notice, make written demand on the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, for
payment of the fair value of the shareholder's shares. The fair value of the
shares shall be the value thereof as of the day immediately preceding the
meeting, excluding any appreciation or depreciation in anticipation of the
proposed action. The demand shall state the number and class of the shares owned
by the shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the ten (10) day
period shall be bound by the action.
(b) With respect to proposed corporate action that is approved pursuant to
Section A of Article 9.10 of this Act, the corporation, in the case of action
other than a merger, and the surviving or new corporation (foreign or domestic)
or other entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten (10) days after the date the action
is effected, mail to each shareholder of record as of the effective date of the
action notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice shall
be accompanied by a copy of this Article and any articles or documents filed by
the corporation with the Secretary of State to effect the action. If the
shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand
shall state the number and class of shares owned by the dissenting shareholder
and the fair value of the shares as estimated by the shareholder. Any
shareholder failing to make demand within the twenty (20) day period shall be
bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
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(3) If, within sixty (60) days after the date on which the corporate action
was effected, the value of the shares is agreed upon between the shareholder and
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, payment for the shares shall be made within ninety
(90) days after the date on which the action was effected, and in the case of
shares represented by certificates, upon surrender of the certificates duly
endorsed. Upon payment of the agreed value, the shareholder shall cease to have
any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service or a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of their value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest
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thereon, beginning 91 days after the date on which the applicable corporate
action from which the shareholder elected to dissent was affected to the date of
such judgment, to the shareholders entitled to payment. The judgment shall be
payable to the holders of uncertificated shares immediately but to the holders
of shares represented by certificates only upon, and simultaneously with, the
surrender to the existing, surviving, or new corporation (foreign or domestic)
or other entity, as the case may be, of duly endorsed certificates for those
shares. Upon payment of the judgment, the dissenting shareholders shall cease to
have any interest in those shares or in the corporation. The court shall allow
the appraisers a reasonable fee as court costs, and all court costs shall be
allotted between the parties in the manner that the court determines to be fair
and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
Article 5.13. Provisions Affecting Remedies of Dissenting Shareholders
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights
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under Articles 5.12 and 5.16 of this Act unless a court of competent
jurisdiction for good and sufficient cause shown shall otherwise direct. If
uncertificated shares for which payment has been demanded or shares represented
by a certificate on which notation has been so made shall be transferred, any
new certificate issued therefor shall bear similar notation together with the
name of the original dissenting holder of such shares and a transferee of such
shares shall acquire by such transfer no rights in the corporation other than
those which the original dissenting shareholder had after making demand for
payment of the fair value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 of 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholders shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. 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 constitutes a
breach of duty of the director to the corporation or 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 or (iv) an act or
omission for which the liability of the director is expressly provided by
statute.
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.
Item 21. Exhibits and Financial Statements and Schedules
(a) Exhibits
The following documents are filed as exhibits to this Registration
Statement:
Exhibit
Number Description of Exhibit
- ------- ----------------------
2.1 Agreement and Plan of Reorganization by and between Prosperity Bancshares, Inc. and
Commercial Bancshares, Inc. dated November 8, 2000 (included in the joint proxy
statement-prospectus, which is a part of this Registration Statement on Form S-4, as
Appendix A)
2.2 Agreement and Plan of Reorganization by and between Prosperity Bancshares, Inc. and South
Texas Bancshares, Inc. dated June 17, 1999 (incorporated herein by reference to Exhibit 2.1
to Prosperity's Form 10-Q for the quarter ended June 30, 1999)
2.3 Agreement and Plan of Reorganization dated June 5, 1998 by and among Prosperity, First
Prosperity Bank and Union State Bank (incorporated herein by reference to Exhibit 10.4 to
Prosperity's Registration Statement on Form S-1 (Registration No. 333-63267)
3.1 Amended and Restated Articles of Incorporation of Prosperity (incorporated herein by
reference to Exhibit 3.1 to Prosperity's Registration Statement on Form S-1 (Registration No.
333-63267))
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Exhibit
Number Description of Exhibit
- ------- ----------------------
3.2 Amended and Restated Bylaws of Prosperity (incorporated herein by reference to Exhibit 3.2
to Prosperity's Registration Statement on Form S-1 (Registration No. 333-63267))
4.1 Form of certificate representing shares of Prosperity common stock (incorporated herein by
reference to Exhibit 4 to Prosperity's Registration Statement on Form S-1 (Registration No.
333-63267))
4.2 Form of Indenture by and between Prosperity Bancshares, Inc. and First Union Trust
Company, National Association with respect to the Junior Subordinated Debentures of
Prosperity Bancshares, Inc. (incorporated by reference from Exhibit 4.1 to Prosperity's
Registration Statement on Form S-1 (Registration No. 333-89481))
4.3 Form of Amended and Restated Trust Agreement of Prosperity Capital Trust I (incorporated
by reference from Exhibit 4.5 to Prosperity's Registration Statement on Form S-1
(Registration No. 333-89481))
4.4 Form of Trust Preferred Securities Guarantee Agreement by and between Prosperity
Bancshares, Inc. and First Union Trust Company, National Association (incorporated by
reference from Exhibit 4.7 to Prosperity's Registration Statement on Form S-1 (Registration
No. 333-89481))
5.1 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the securities being registered
8.1 Opinion of Bracewell & Patterson, L.L.P. as to certain tax matters
10.1 Prosperity Bancshares, Inc. 1995 Stock Option Plan (incorporated herein by reference to
Exhibit 10.1 to Prosperity's Registration Statement on Form S-1 (Registration No. 333-
63267))
10.2 Prosperity Bancshares, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to
Exhibit 10.2 to Prosperity's Registration Statement on Form S-1 (Registration No. 333-
63267))
10.3 Employment Agreements (incorporated herein by reference to Exhibit 10.3 to Prosperity's
Registration Statement on Form S-1 (Registration No. 333-63267))
10.4 Loan Agreement dated December 27, 1997 between Prosperity and Norwest Bank Minnesota,
National Association (incorporated herein by reference to Exhibit 10.5 to Prosperity's
Registration Statement on Form S-1 (Registration No. 333-63267))
10.5 Form of Employment Agreement by and between First Prosperity Bank and H. E. Timanus,
Jr. (included as Exhibit H to the merger agreement which is included in the joint proxy
statement-prospectus, which is a part of this Registration Statement on Form S-4, as Appendix A)
21.1 Subsidiaries of Prosperity (incorporated herein by reference to Exhibit 21 to Prosperity's
Annual Report on Form 10-K for the year ended December 31, 1999)
23.1 Consent of Deloitte & Touche LLP, independent auditors of Prosperity
23.2 Consent of Deloitte & Touche LLP, independent auditors of Commercial
23.3 Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit 5.1)
23.4 Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit 8.1)
24.1 Powers of Attorney (included as part of Signature Pages)
99.1 Form of Proxy to be used by Prosperity
99.2 Form of Proxy to be used by Commercial
99.3 Consent of First Capital Group, L.L.C.
99.4 Consent of Hoefer & Arnett, Incorporated
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(b) Financial Statements and Schedules
Either not applicable or shown in the financial statements or notes thereto.
(c) Opinion of Financial Advisor
Not applicable.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934, as amended (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(g)
(1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for
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by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(h) 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 Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
caused this Registration Statement or amendment thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, in Houston, Texas, on
December 20, 2000.
PROSPERITY BANCSHARES, INC.
(Registrant)
By: /s/ Tracy T. Rudolph
---------------------
Name: Tracy T. Rudolph
Title: Chairman of the Board
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Tracy T. Rudolph and David Zalman, with full power to each of them to act
without the other, the undersigned's true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for the undersigned and in
the undersigned's name, place and stead, in any and all capacities (until
revoked in writing), to sign this Registration Statement and any and all
amendments (including post-effective amendments) thereto, to file the same,
together with all exhibits thereto and documents in connection therewith, with
the Securities and Exchange Commission, to sign any and all applications,
registration statements, notices and other documents necessary or advisable to
comply with the applicable state securities authorities, granting unto said
attorney-in-fact and agent, or his or their substitute or substitutes, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, thereby ratifying and confirming all that said attorneys-in-
fact and agents, or his or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated and on the 20th day of December, 2000.
Signature Title
--------- -----
/s/ Tracy T. Rudolph Chairman of the Board
- -------------------- (Principal Executive Officer)
Tracy T. Rudolph
/s/ David Hollaway
- ------------------ Chief Financial Officer
David Hollaway (Principal Financial Officer/Principal Accounting Officer)
/s/ Harry Bayne Director
- ---------------
Harry Bayne
/s/ James A. Bouligny Director
- ---------------------
James A. Bouligny
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/s/ J. T. Herin Director
- ---------------
J. T. Herin
/s/ Charles M. Slavik Director
- ---------------------
Charles M. Slavik
/s/ Harrison Stafford II Director
- ------------------------
Harrison Stafford II
/s/ Robert Steelhammer Director
- ----------------------
Robert Steelhammer
/s/ David Zalman Director
- ----------------
David Zalman
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Exhibit
Number Description of Exhibit
- ------- ----------------------
2.1 Agreement and Plan of Reorganization by and between Prosperity Bancshares, Inc. and
Commercial Bancshares, Inc. dated November 8, 2000 (included in the joint proxy
statement-prospectus, which is a part of this Registration Statement on Form S-4, as Appendix
A)
2.2 Agreement and Plan of Reorganization by and between Prosperity Bancshares, Inc. and South
Texas Bancshares, Inc. dated June 17, 1999 (incorporated herein by reference to Exhibit 2.1 to
Prosperity's Form 10-Q for the quarter ended June 30, 1999)
2.3 Agreement and Plan of Reorganization dated June 5, 1998 by and among Prosperity, First
Prosperity Bank and Union State Bank (incorporated herein by reference to Exhibit 10.4 to
Prosperity's Registration Statement on Form S-1 (Registration No. 333-63267))
3.1 Amended and Restated Articles of Incorporation of Prosperity (incorporated herein by
reference to Exhibit 3.1 to Prosperity's Registration Statement on Form S-1 (Registration No.
333-63267))
3.2 Amended and Restated Bylaws of Prosperity (incorporated herein by reference to Exhibit 3.2
to Prosperity's Registration Statement on Form S-1 (Registration No. 333-63267))
4.1 Form of certificate representing shares of Prosperity common stock (incorporated herein by
reference to Exhibit 4 to Prosperity's Registration Statement on Form S-1 (Registration No.
333-63267))
4.2 Form of Indenture by and between Prosperity Bancshares, Inc. and First Union Trust
Company, National Association with respect to the Junior Subordinated Debentures of
Prosperity Bancshares, Inc. (incorporated by reference from Exhibit 4.1 to Prosperity's
Registration Statement on Form S-1 (Registration No. 333-89481))
4.3 Form of Amended and Restated Trust Agreement of Prosperity Capital Trust I (incorporated
by reference from Exhibit 4.5 to Prosperity's Registration Statement on Form S-1 (Registration
No. 333-89481)
4.4 Form of Trust Preferred Securities Guarantee Agreement by and between Prosperity
Bancshares, Inc. and First Union Trust Company, National Association (incorporated by
reference from Exhibit 4.7 to Prosperity's Registration Statement on Form S-1 Registration No.
333-89481))
5.1 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the securities being registered
8.1 Opinion of Bracewell & Patterson, L.L.P. as to certain tax matters
10.1 Prosperity Bancshares, Inc. 1995 Stock Option Plan (incorporated herein by reference to
Exhibit 10.1 to Prosperity's Registration Statement on Form S-1 (Registration No. 333-63267))
10.2 Prosperity Bancshares, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to
Exhibit 10.2 to Prosperity's Registration Statement on Form S-1 (Registration No. 333-63267))
10.3 Form of Employment Agreements (incorporated herein by reference to Exhibit 10.3 to
Prosperity's Registration Statement on Form S-1 (Registration No. 333-63267))
10.4 Loan Agreement dated December 27, 1997 between Prosperity and Norwest Bank Minnesota,
National Association (incorporated herein by reference to Exhibit 10.5 to Prosperity's
Registration Statement on Form S-1 (Registration No. 333-63267))
10.5 Form of Employment Agreement by and between First Prosperity Bank and H. E. Timanus, Jr.
(included as Exhibit H to the merger agreement which is included in the joint proxy statement-
prospectus, which is a part of this Registration Statement on Form S-4, as Appendix A)
21.1 Subsidiaries of Prosperity (incorporated herein by reference to Exhibit 21 to Prosperity's
Annual Report on Form 10-K for the year ended December 31, 1999)
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Exhibit
Number Description of Exhibit
- ------- ----------------------
23.1 Consent of Deloitte & Touche LLP, independent auditors of Prosperity
23.2 Consent of Deloitte & Touche LLP, independent auditors of Commercial
23.3 Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit 5.1)
23.4 Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit 8.1)
24.1 Powers of Attorney (included as part of Signature Pages)
99.1 Form of Proxy to be used by Prosperity
99.2 Form of Proxy to be used by Commercial
99.3 Consent of First Capital Group, L.L.C.
99.4 Consent of Hoefer & Arnett, Incorporated
II-8