ITEM 1. BUSINESS - ------- --------
Gulf Southwest Bancorp, Inc. ("Gulf Southwest" or "Company") is a Texas bank holding company organized in 1982 under the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). Gulf Southwest maintains its principal offices at 4200 Westheimer, Suite 210, Houston, Texas 77027 (telephone: (713) 622-0042).
As of December 31, 1995, Gulf Southwest owned all of the outstanding capital stock of Gulf Southwest Nevada Bancorp, Inc. ("Nevada Bancorp"), a Nevada corporation and intermediate bank holding company (unless otherwise indicated, all references herein to Gulf Southwest include Nevada Bancorp). Nevada Bancorp owns 100.0% of the outstanding capital stock of Merchants Bank and First Bank Mainland, 99.47% of the outstanding capital stock of First Bank Pearland and 97.13% of Texas City Bank (hereinafter such banks may be referred to collectively as the "Subsidiary Banks" and individually as a "Subsidiary Bank"). Effective January 1, 1996, First Bank Mainland, First Bank Pearland and Texas City Bank were merged with and into Merchants Bank, which was the surviving bank. Gulf Southwest continued to own 100% of the outstanding capital stock of Merchants Bank. The banking facilities of the three merged banks will operate as branch facilities of Merchants Bank.
Gulf Southwest's principal activity is the ownership and management of the Subsidiary Banks. All Subsidiary Banks are state banks organized in the State of Texas. Each of the Subsidiary Banks offers a full range of banking services to its customers, including demand and time deposits and various types of commercial and consumer loans. The Subsidiary Banks draw substantially all of their deposits and a majority of their loans from the Galveston County/Harris County area. In addition, Gulf Southwest has two wholly owned non-banking subsidiaries which conduct various aspects of its non-banking operations.
As a bank holding company, Gulf Southwest may own or control, directly or indirectly, one or more banks and furnish services to such banks. The banking activities of Gulf Southwest are conducted by the Subsidiary Banks. The officers and directors of the Subsidiary Banks direct its operations. The principal role of Gulf Southwest is to provide management assistance with respect to various aspects of the Subsidiary Banks' operations, including the areas of asset and liability management, business development, loan policies and procedures, capital planning, advertising, data processing, credit and loan administration, accounting, auditing, financial reporting and compliance with legal and governmental regulations.
BANKING SERVICES - ----------------
The Subsidiary Banks offers a wide range of financial services to commercial, industrial, financial and individual customers, including short-term and medium-term loans, revolving credit arrangements, inventory and accounts receivable financing, equipment financing, real estate lending, Small Business Administration lending, letters of credit, installment and other consumer loans, savings accounts and various savings programs, including individual retirement accounts, and interest and non-interest-bearing checking accounts. Other services include federal tax depository, safe deposit and night depository services.
Other than the Subsidiary Banks' charters to operate as a bank, the business of Gulf Southwest is not materially dependent upon any patent, trademark, license, franchise or concession. The business of Gulf Southwest is not seasonal.
SUBSIDIARY BANKS - ----------------
The following table sets forth certain balance sheet and operating information at December 31, 1995, with respect to the Subsidiary Banks:
SUBSIDIARY BANKS ----------------
(IN THOUSANDS)
First Bank Mainland, First Bank Pearland, Merchants Bank and Texas City Bank are state-chartered banking associations organized in 1947, 1976, 1970 and 1907, respectively. The services offered by the Subsidiary Banks are generally those offered by commercial banks of comparable size in their trade areas. The Subsidiary Banks do not engage in international operations or trust activities.
Effective January 1, 1996, the Subsidiary Banks were merged with and into Merchants Bank. Currently, Merchants Bank's main office is at 999 North Shepherd, Houston, Texas with eleven branches located in Houston, and the surrounding communities.
NON-BANKING ACTIVITIES - ----------------------
G.S.W. Data Processing, Inc. ("GSWDP"), a Texas corporation, and Central Data Processing, Inc. ("CDP"), a Texas corporation, perform certain data processing services for the Subsidiary Banks. In addition, the Board of Governors of the Federal Reserve System (the "Board") has authorized GSWDP to furnish data processing services to banks in Texas which are not affiliated with Gulf Southwest. As of December 31, 1995, GSWDP was furnishing these services for one non-affiliated bank. As of December 31, 1995, Nevada Bancorp owned 100.0% of the outstanding capital stock of each of GSWDP and CDP.
Effective January 31, 1996, the operations of GSWDP and CDP were acquired by Merchants Bank and the two subsidiaries were liquidated into Nevada Bancorp.
SUBSIDIARY BANK HOLDING COMPANY - -------------------------------
Nevada Bancorp is a Nevada corporation organized in 1994, and is wholly owned by Gulf Southwest. The only activities of Nevada Bancorp relate to holding the stock of the Subsidiary Banks, CDP and GSWDP. Nevada Bancorp currently has no employees.
EXPANSION - ---------
ACQUISITION OF TEXAS GULF COAST BANCORP, INC. On May 1,1995, Nevada Bancorp consummated its acquisition of Texas Gulf Coast Bancorp, Inc. ("Texas Gulf"). Texas Gulf was a holding company which owned 100% of the stock of First Bank Mainland in Lamarque, Texas and over 95% of the stock of each of Texas City Bank in Texas City, Texas and First Bank Pearland, Pearland, Texas. As of May 1, 1995, Texas Gulf had consolidated assets of approximately $203 million.
BRANCH EXPANSION. On October 10,1995, an application to establish a branch facility at the corner of West Rittenhouse and Interstate 45 North in Houston, Texas was approved by the Texas Department of Banking and the Federal Deposit Insurance Corporation ("FDIC"). It is anticipated that the branch facility will commence operations in April, 1996.
An application to establish a branch facility at 5005 Woodway, Houston, Texas has been filed with the Texas Department of Banking and the FDIC. Approval was received in March, 1996, and operations at this branch facility are expected to commence in June, 1996.
SUPERVISION AND REGULATION - --------------------------
GULF SOUTHWEST. As a bank holding company, Gulf Southwest is subject to regulation by the Board and is required to file with the Board an annual report and to furnish such additional information as the Board may require pursuant to the Holding Company Act. The Board may conduct examinations of Gulf Southwest and each of its subsidiaries.
Gulf Southwest is required to obtain the prior approval of the Board for the acquisition of five percent or more of the voting shares or substantially all the assets of any bank or bank holding company. In considering proposed acquisitions, the Board considers the expected benefits to the public, including greater convenience, identifying and meeting the credit needs of the applicant's entire community, increased competition or gains in efficiency, weighed against the risks of possible adverse effects, such as undue concentration of resources, lessening or elimination of competition, conflicts of interest or unsound banking practices. After an application to acquire the voting shares of a state or national bank in Texas has been accepted for filing by the Board, a copy of such application must be submitted to the Texas Banking Commissioner ("Commissioner") pursuant to the Texas Banking Act of 1995, as amended ("Act"). Prior to September 29, 1995, no application to acquire shares of a bank located outside Texas could be approved by the Board unless such acquisition was expressly authorized by the statutes of the state where the bank whose shares or assets are to be acquired was located.
Bank holding companies are prohibited by law, except in certain instances prescribed by statute, from acquiring a direct or indirect interest in or control of more than five percent of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or providing service to its subsidiaries. Bank holding companies, however, may engage in, and may own shares of companies engaged in certain activities found by the Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. When an application concerning these activities is filed with the Board, a copy of such application also must be submitted to the Commissioner pursuant to the Act for a determination as to whether the application should be approved. The Commissioner is required to oppose the application if the proposed activities would be detrimental to the public's interest as the result of probable effects, such as undue concentration of resources, competition, conflicts of interest or unsound banking practices.
Under the Holding Company Act and the Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of property or furnishing of services. The Board possesses enforcement powers intended to prevent or eliminate practices of bank holding companies and their non-bank subsidiaries deemed to be unsafe and unsound or in violation of applicable laws.
THE INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994. On September 29, 1994, the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") was enacted into law. The IBBEA authorizes adequately capitalized and adequately managed bank holding companies to acquire banks in any state beginning September 29, 1995 subject to certain restrictions. In addition, IBBEA authorizes interstate branching. Beginning June 1, 1997, a bank may merge with a bank located in another state so long as one or both of the states have not opted out of interstate branching. States may enact laws opting out of interstate branching anytime before June 1, 1997. States also may enact laws permitting (a) interstate branching before June 1, 1997, or (b) de novo branching. If a state opts out, no bank in any other state may establish a branch in that state, either through an acquisition or de novo. A bank whose home state opts out of interstate branching may not participate in any interstate branching. The State of Texas has elected to opt out of interstate branching.
SUBSIDIARY BANKS. As Texas State Chartered Banks, the Subsidiary Banks are subject to regulation, supervision and periodic examination by the Texas Department of Banking. Effective January 1, 1996, First Bank Mainland, First Bank Pearland and Texas City Bank were merged with and into Merchants Bank. Because the resultant bank is not a member of the Federal Reserve System (i.e., a "non-member bank") and its' deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent authorized by law, it is also subject to supervision and regulation, as well as examination by the FDIC. Various requirements of Federal and Texas law affect the operation of the Subsidiary Banks, including requirements relating to maintenance of reserves against deposits, restrictions on the nature and the amount of loans which may be made and the interest that may be charged thereon and restrictions relating to investments and other activities.
Cash revenues derived from dividends paid by the Subsidiary Banks represent the primary source of revenues for Gulf Southwest. Under the Act, a state bank may not reduce its capital and surplus through dividends without the prior written approval of the Commissioner. Dividends may be paid out of the undivided profits. At December 31, 1995, there was an aggregate amount of $25,424,000 available for the payment of dividends by the Subsidiary Banks under these restrictions. The payment of dividends is further subject to the authority of regulatory authorities to prohibit payment of dividends if such payment is determined to be an unsafe or unsound banking practice or if after making such distribution, the subsidiary bank would be considered "undercapitalized".
For further discussion of certain additional regulations affecting Gulf Southwest and the Subsidiary Banks, reference should be made to the "Government Fiscal and Monetary Policies" discussion below.
ENVIRONMENTAL ISSUES. Under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), an owner or operator of a property where hazardous substances are located is potentially liable for hazardous waste cleanup costs. CERCLA specifically excludes from the definition of owner or operator "a person, who without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility." However, courts have reached differing conclusions as to what actions can be taken by a secured lender without such lender being deemed to be "participating in the management" of a property. Merchants Bank is not aware of any material liability to which it may be subject for hazardous waste clean-up costs. If a property is deemed to have a potential environmental problem, Merchants Bank will not foreclosure on the property until an environmental study has been performed.
COMPETITION - -----------
The activities in which the Subsidiary Banks engage are highly competitive. Each activity engaged in and geographic market served involves competition with other banks, as well as with non-banking financial institutions and non- financial enterprises. The Subsidiary Banks actively compete with other banks in their efforts to obtain deposits and make loans, in the scope of types of services offered, in interest rates paid on time deposits and charged on loans and in other aspects of banking. At December 31, 1995, the Subsidiary Banks had deposits of $434,073,000.
In addition to competing with other commercial banks within and outside their primary service area, the Subsidiary Banks compete with other financial institutions engaged in the business of making loans or accepting deposits, such as savings and loan associations, credit unions, industrial loan associations, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit card organizations and other enterprises. In recent years, competition for funds from securities brokers for money market accounts has intensified. Additional competition for deposits comes from government and private issues of debt obligations and other investment alternatives for depositors such as money market funds and mutual funds.
CUSTOMERS. The Subsidiary Banks are not dependent upon any single customer or few customers; the loss of any one or more of which would have a materially adverse effect upon their business.
GOVERNMENT FISCAL AND MONETARY POLICIES - ---------------------------------------
The commercial banking business is affected not only by general economic conditions but also by the fiscal and monetary policies of the Board. Changes in the discount rate on Federal Reserve borrowings, availability of borrowings at the Federal Reserve "discount window", open market operations, the imposition of any changes in reserve requirements against member banks' deposits and assets of foreign branches, the imposition of any changes in reserve requirements against certain borrowings by member banks and their affiliates, and the placing of limits on interest rates which member banks may pay on time and savings deposits are some of the instruments of fiscal and monetary policy available to the Board. Fiscal and monetary policies influence to a significant extent the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings deposits. The nature of future monetary policies and the effect of such policies on the future business and earnings of Gulf Southwest and the Subsidiary Banks cannot be predicted.
The Board has cease and desist powers over bank holding companies, non- banking subsidiaries or any institution-affiliated party thereof to forestall activities which represent unsafe and unsound practices or constitute violations of law or regulations. The Board can also require affirmative actions to correct a violation or practice through the issuance of a cease and desist order. In certain instances, the Board is empowered to assess civil penalties against companies or individuals who violate the Holding Company Act or regulations or orders issued pursuant thereto in amounts up to $1,000,000 for each day's violation, to order termination of non-banking activities of non- banking subsidiaries and to order termination of ownership and control of a non- subsidiary bank by a bank holding company.
Section 18(j) of the Federal Deposit Insurance Act makes applicable to state nonmember insured banks the provisions of Section 23A of the Federal Reserve Act among other statutes. Section 23A of the Federal Reserve Act and related statutes impose limits and collateralization requirements with respect to the amount of loans, extensions of credit, or investments or certain other transactions by member banks with their "affiliates", as well as limits on the amount of advances to third parties which are collateralized by the securities or obligations. Gulf Southwest is an "affiliate" of the Subsidiary Bank and, therefore, these restrictions are applicable to transactions by the Subsidiary Bank with Gulf Southwest. In addition, Section 23B of the Federal Reserve Act prohibits a bank that is an insured depository institution from engaging in certain transactions (including, for example, loans) with certain affiliates unless the transactions are substantially the same or at least as favorable to such bank or its subsidiaries, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. In the absence of such comparable transactions, any transaction between a member bank and its affiliates must be on terms and under circumstances, including credit standards, that, in good faith, would be offered to or would apply to nonaffiliated companies. The Subsidiary Bank is also subject to certain prohibitions against tie-in arrangements in connection with extensions of credit and certain other transactions.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") contains important provisions affecting all federally insured financial institutions ("banking organizations") in such areas as anti-fraud and anti-abuse enforcement powers, each banking organization's performance and record in meeting community credit needs, and acquisitions of savings and loans institutions. For further discussion of these capital requirements, reference should be made to the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Management" presentation beginning on page 23 of this report.
In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. The provisions of FDICIA include a plan to recapitalize the Bank Insurance Fund ("BIF") that is the source of deposit insurance coverage to FDIC-insured institutions, authority to ultimately fund such recapitalization plan through increased deposit insurance premiums, various supervisory reforms which will increase the frequency of on-site examinations by federal banking regulators, changes in the deposit insurance system, an array of new consumer lending requirements, and the adoption of the Truth in Savings Act. FDICIA also authorizes federal banking regulators to take prompt, corrective action against institutions which are under-capitalized, institute a risk-based assessment system for deposit insurance, and implement a series of operational and management-based standards and potential sanctions for violations of such standards. Under FDICIA, the FDIC is authorized to assess insurance premiums on a bank's deposits at a variable rate depending on the probability that the deposit insurance fund will incur a loss with respect to the bank. During 1995, the FDIC determined that the BIF was adequately funded and that banks which are adequately or well capitalized would not be assessed premiums for deposit insurance. Currently, Gulf Southwest and its Subsidiary Bank are deemed to be well capitalized.
EFFECTS OF INTEREST RATES AND USURY LAWS. Texas usury laws limit the rate of interest that may be charged by the Subsidiary Bank. Certain federal laws provide a limited preemption of texas usury laws. The maximum rate of interest that the Subsidiary Bank may charge on business loans under Texas law varies between 18% per annum and (i) 28% per annum for business loans above $250,000 or (ii) 24% per annum for other loans. Texas' floating usury ceilings are tied to the 26-week united states treasury bill auction rate. A 1980 federal statute removed the interest ceiling under usury laws for loans by the Subsidiary Bank which are secured by first liens on residential real property.
EMPLOYEES. Gulf Southwest and its subsidiaries had approximately 305 employees as of December 31, 1995. None of the employees are represented by any collective bargaining unit, and management believes it has excellent relations with its employees.
ITEM 2.

ITEM 2. PROPERTIES - ------- ----------
The executive offices of Gulf Southwest are located at 4200 Westheimer, Suite 210, Houston, Texas 77027. Merchants Bank owns the 27,000 square foot branch facility located at 1111 Spencer Highway, South Houston, Texas, which consists of a two-story building and adjacent fourteen-window drive-in facility. The branch facilities located at 2051 West Main in League City, Texas and 3409 Spencer Highway, Pasadena, Texas are owned by Merchants Bank and consist of 13,000 and 4,400 square feet, respectively, of office and lobby space. The other banking quarters and drive-in facilities of Merchants Bank are leased.
The banking facilities of First Bank Mainland and First Bank Pearland are owned by the respective banks. First Bank Mainland has two bank lobbies and drive-in facilities located at 920 First Street, LaMarque, Texas and 2801 Main, Dickinson, Texas. First Bank Pearland's bank facilities are located at 3102 East Broadway and 2624 McHard in Pearland, Texas.
Texas City Bank owns the banking and drive-in facilities located at 701 Sixth Street, North and 1110 25th Street, North in Texas City, Texas. The banking lobby located at 9300 Emmet Lowry Expressway in Texas City is a leased facility.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS - ------- -----------------
Neither Gulf Southwest nor any of its subsidiaries is a party to any legal proceedings, which, in management's judgment, based upon opinions of legal counsel, would have a material adverse effect on the consolidated financial position of Gulf Southwest and its subsidiaries.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- ---------------------------------------------------
Since the annual shareholders' meeting held on May 16, 1995, no matters have been submitted to a vote of the shareholders of Gulf Southwest.
PART II.
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND - ------- --------------------------------------------- RELATED SHAREHOLDER MATTERS ---------------------------
There is no established public trading market for shares of the Company's common stock, par value $1.00 per share (the "Common Stock"). The Board of Directors of Gulf Southwest has no present intention to arrange for the listing of the Common Stock on any stock exchange. Notwithstanding the foregoing, a limited market for the shares of the Common Stock exists, and such shares are traded on a sporadic basis. During 1995, 46,703 shares of the Common Stock were presented for transfer on the books of Gulf Southwest.
The following table sets forth the number of shares of the Common Stock presented for transfer on the books of Gulf Southwest for each quarterly period within the last two calendar years.
Because there is no public trading market for the Common Stock, the trading price is determined by private negotiations between the buyer and the seller.
HOLDERS - -------
At March 1, 1996, the Common Stock was owned of record by approximately 960 shareholders. On such date, no shares of Gulf Southwest's preferred stock were issued and outstanding. The officers and directors of Gulf Southwest collectively owned 21.0% of the Common Stock as of such date.
DIVIDENDS AND DIVIDEND POLICY - -----------------------------
DIVIDEND POLICY. Holders of Common Stock are entitled to receive such dividends as are declared by gulf southwest's board of directors in accordance with Gulf Southwest's Dividend Policy. Factors which Gulf Southwest's Board of Directors consider prior to declaring a dividend include earnings, regulatory capital requirements, general business conditions and the capital needs of its subsidiaries, as well as other factors which the Board of Directors may deem relevant.
DIVIDENDS FOR SUBSIDIARY BANKS. Since Gulf Southwest is a bank holding company, it is dependent upon receipt of dividends from its subsidiaries (primarily the Subsidiary Banks) for payment of dividends to shareholders. The payment of dividends by the Subsidiary Banks is limited by applicable banking laws.
DIVIDEND HISTORY. Gulf Southwest paid quarterly cash dividends on the Common Stock from 1983 through December 31, 1986. Effective March 31, 1987, Gulf Southwest suspended the payment of dividends to holders of the Common Stock as a consequence of losses sustained from operations and a resulting desire to conserve capital. On December 14, 1993, Gulf Southwest's Board of Directors resumed the payment of cash dividends on the Common Stock by declaring a quarterly cash dividend of $.05 per share and a special cash dividend of $.05 per share. During 1994, regular quarterly dividends of $.05 per share of Common Stock were paid. On March 14, 1995, the Board of Directors declared a cash dividend of $.08 per share of Common Stock to shareholders of record on March 14, 1995, payable on March 28, 1995 and on June 15, 1995, payable on June 30, 1995. On September 26, 1995, the Board of Directors increased the quarterly cash dividend to $.10 per share of Common Stock, payable October 4, 1995 to shareholders of record on September 26, 1995. Concurrent with increased earnings, the Board of Directors increased the fourth quarter cash dividend to $.15 per share, payable on December 21, 1995 to shareholders of record on December 12, 1995.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
Selected financial data presented below for the fiscal years ended December 31, 1995, 1995, 1993, 1992 and 1991 have been derived from the consolidated financial statements of the Company. The audited historical financial data for the fiscal years ended December 31, 1995, 1994 and 1993 are qualified in their entirety by, and should be read in conjunction with, the financial statements and the notes thereto included elsewhere herein.
CONDENSED STATEMENTS OF EARNINGS - --------------------------------
The following is a comparison of Gulf Southwest's condensed statements of earnings for the most recent five-year period.
CONDENSED AVERAGE BALANCE SHEETS - --------------------------------
Although year-end statistics present general trends, the daily average balance sheets are more indicative of Gulf Southwest's levels of activity throughout the years indicated and less subject to day-to-day business activity fluctuations. The following schedule sets forth a comparison of the most recent five years' consolidated daily average balance sheets for Gulf Southwest.
(1) The Company's financial statements for the fiscal year ended December 31,1995 reflect the acquisition of Texas Gulf, which occurred May 1, 1995. See note 2 to the Company's Consolidated financial statements.
(2) For the years ended December 31, 1995, 1994, 1993, 1992 and 1991, interest income would have been $29,565,000, $17,156,000, $16,071,000, 16,688,000, and $18,960,000, respectively, and net interest income would have been $19,988,000, $12,360,000, $11,128,000, $10,790,000 and $9,912,000, respectively, if all such amounts were shown using a comparable fully taxable equivalent basis (using a tax rate of 34%).
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS -------------------------
Net earnings increased 49.0% in 1995 to $5,907,000,as compared to $3,965,000 in 1994. The acquisition/merger of Texas Gulf Coast Bancorp, Inc. represented $1,304,000 of the increase of $1,942,000. In 1995, earnings per common share were $3.44, as compared to $3.15 in 1994. Highlights of the major components that affected Gulf Southwest's net earnings are as follows:
Average assets grew $156.6 million, or 63.7% to $402.6 million, with average deposits totaling, $356.7 million, representing an increase of 61.5%.
Non-performing assets - loans past due 90 days or more, non-accrual loans plus other real estate acquired - totaled $5.7 million, or 1.2% of total assets at December 31, 1995, as compared to 1.1% at December 31, 1994.
Net interest income - the difference between total interest income on earning assets and total interest expense on deposits and borrowings - totaled $19.6 million for 1995, as compared to $12.2 million for 1994.
Non-interest income - the fees charged for banking services - totaled $4.7 million for 1995, as compared to $3.2 million during 1994.
Non-interest expense - carrying costs and losses incurred with the acquisition and sale of other real estate, employee compensation and other expenses, such as for occupancy, furniture and equipment, advertising, professional fees, deposit insurance premiums and supplies - totaled $15.9 million as compared to $10.4 million in 1994.
Income tax expense - the income tax provision on current year earnings - totaled $2.3 million in 1995, versus $1.0 million in 1994.
In the following sections, these and other major factors and trends affecting the components of income and expense are examined in depth. Information concerning assets and liabilities is subsequently provided so that an evaluation can be made of capitalization and liquidity as they may affect Gulf Southwest's future outlook. Balances of the banks acquired in 1995 are only included in the totals reported for 1995.
NET INTEREST INCOME - -------------------
Net interest income on a taxable equivalent basis for 1995 was $20.0 million, an increase of $7.6 million, or 61.3%, from $12.4 million in 1994. Net interest income for 1994 was $12.4 million, up $1.3 million, or 11.7%, from $11.1 million in 1993.
Disregarding the acquisition of Texas Gulf Coast, net interest income increased $1.7 million, or 14.0%, for 1995 as compared to 1994. The improvement in net interest income for 1995 was primarily due to increases in average earning assets with higher average yields. The increase in average earning assets was the result of an increase of 3.8% in average deposits. The increase in 1994 was mainly due to the same factors, as well as the shift of non-earning assets to earning assets. Total interest expense increased $1.2 million in 1995 as compared to the 1994 decrease of $147 thousand. The 1995 increase was primarily due to an increase in interest bearing deposits with higher interest rates. The data used in the analysis of net interest income changes is derived from the daily average levels of interest-bearing assets and liabilities as well as from the rates earned and paid on these amounts. The following schedule gives a three-year history of Gulf Southwest's daily average interest-earning assets and interest-bearing liabilities. Net interest income is developed on a taxable equivalent basis because management of Gulf Southwest is of the opinion that such a presentation facilitates the analytical discussion of changes in the components of earnings. A history of the net interest margin on a taxable equivalent basis (using a federal income tax rate of 34%) is set forth below (in thousands), followed by detailed schedules of its components.
SUMMARY OF EARNING ASSETS AND INTEREST-BEARING LIABILITIES (IN THOUSANDS)
Note: Average balances are based upon daily balances. The interest on non- taxable securities has been calculated on a fully taxable equivalent basis- 34% tax basis. Non-accruing loans have been included in assets for these computations, thereby reducing yields on these investments.
The following rate/volume variance has been allocated to the changes in rates. Non-accrual loans are included in the calculations made below. The interest on non-taxable investment income has been calculated on a fully taxable equivalent basis incorporating an effective tax rate of 34%.
RATE/VOLUME ANALYSIS CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(IN THOUSANDS)
LOAN PORTFOLIO - --------------
The following tables show the composition of the loan portfolio at the end of the last five years and the loan maturity distribution as of December 31, 1995 (dollars in thousands):
LOAN PORTFOLIO COMPOSITION - --------------------------
Total loans increased 64.5% from December 31, 1994 to December 31, 1995. Commercial and industrial loans increased $16,058,000, or 56.2%, real estate related loans increased $44,079,000, or 50.3%, and installment loans increased $31,979,000, or 115.1%. Eliminating the loans acquired through the acquisition of Texas Gulf Coast, total loans increased $16,231,000, or 11.2%.
The composition of the loan portfolio at the end of the last three years is displayed in the following table:
Non-accrual loans and past due loans (90 days or more) totaled $3,125,000 and $850,000, respectively at December 31, 1995, as compared to $1,215,000 and $128,000, respectively at December 31, 1994.
PROVISION FOR CREDIT LOSSES - ---------------------------
The allowance for credit losses at December 31, 1995 was $2,411,000, representing 1.01% of outstanding loans. A year earlier, this ratio was 1.43%. The provision for credit losses charged against earnings was $135,000 in 1995, $50,000 in 1994, and $410,000 in 1993. For the year 1995, the Company had net losses totaling $525,000 as compared to net recoveries of $27,000 in 1994 and net losses of $149,000 in 1993. Included in the net losses of $525,000, loans totaling approximately $300,000 are expected to be recovered through litigation. During 1995, the net charge-off ratio to average loans was .26% as compared to a net recovery ratio to average loans of .02% in 1994 and a net charge-off of .12% in 1993.
To a very large extent, the Subsidiary Banks' loan portfolio remains secured and current re-appraisals of collateral value have been received and undertaken in an effort to further assess loss potential. Management has closely scrutinized its loss potential on its non-performing assets, as well as on the entire loan portfolio, and has, to the best of its knowledge and belief, reserved for losses accordingly.
The transactions occurring in the allowance for credit losses for the five years ended December 31, 1995, including a breakdown of net charge-offs by type of loan, are as follows:
SUMMARY OF LOAN LOSS EXPERIENCE
(IN THOUSANDS)
Management of the Subsidiary Banks continues to concentrate on identifying and addressing credit problems. Efforts have been undertaken and are ongoing to strengthen credit review policies and procedures. Intensive efforts are ongoing to ensure that any existing or identifiable developing problem loans receive the necessary effective attention. The Subsidiary Banks' procedures for reviewing the adequacy of their allowance for credit losses involve a review of lending policies and practices, the lending history of personnel involved in the lending process and the compliance by those personnel with the policies. Consideration also is given to (i) management's review of individual outstanding and proposed credits, (ii) the current size and composition of the loan portfolio, (iii) expectations of future economic conditions and their impact on particular industries and specific borrowers, (iv) the level and composition of non- performing loans, (v) evaluation of the underlying collateral for secured loans, (vi) historical loan loss and recovery experience and (vii) comments made during regular examinations or audits by banking regulators, the Subsidiary Banks' internal loan review staff and independent auditors.
The allocation of the Subsidiary Banks' allowance for credit losses by loan category for the five years ended December 31, 1995 is presented in the following table (dollars in thousands).
* Less than $1,000
NON-PERFORMING ASSETS - ---------------------
All loans which cause management to have doubt as to the borrower's ability to substantially comply with present loan repayment terms are included in the schedule of non-performing loans.
Non-performing loans consist of loans on which interest is not being accrued; loans which are 90 days or more past due as to principal and/or interest payment and not yet in a non-accruing status. The policy of the Subsidiary Banks is to continue to accrue interest on loans which are 90 days or more past due if periodic payments are being made on the loans. If a loan is classified as past due and payments then resume on the loan, it continues to be classified as past due until all past due amounts are paid. The Company had no material renegotiated or troubled debt restructuring loans during the years 1991 through 1995.
The following table discloses information regarding non-performing assets for each of the last five years (in thousands):
The Subsidiary Banks included in reported income for 1995, $61,858 of interest received on non-accrual loans. Had these loans paid interest at their original rates, the Subsidiary Banks would have reported $262,583 of interest on these non-accrual loans.
NON-INTEREST INCOME - -------------------
Non-interest income increased 43.8% in 1995 compared to an increase of 8.7% in 1994. Service charges on deposits, the largest component of non-interest income, increased by 47.6% in 1995 as compared to a decrease of 1.40% in 1994. Disregarding the acquisition of Texas Gulf Coast, non-interest income decreased by 10.3%
The components of other charges and fees consist of miscellaneous fees such as collection fees, credit card fees, safe deposit rentals, research fees, check printing income and wire transfer fees. These fees correlate to the level of transactions in each of the referenced categories. Other operating income increased $264,000, or 39.8%, from 1994 to 1995. The majority of the increase is attributable to the acquisition of the mortgage operation of Texas Gulf Coast. Income from the mortgage operation includes origination fees, as well as fees charged for servicing the underlying mortgages.
The following table sets forth by category the non-interest income and the percentage from the prior year for the most recent three years:
NON-INTEREST EXPENSE - --------------------
Total non-interest expense increased by 52.8% for 1995 as compared to a decrease of 1.0% in 1994. All categories had significant increases due to the Texas Gulf Coast acquisition. Disregarding the acquisition, total non-interest expenses decreased $340,000, or 3.1%. Decreases in occupancy and furniture and equipment expenses ($139,000, or 8.3%), other real estate ($196,000, or 43.2%) and other operating expenses ($494,000, or 14.4%) were partially offset by an increase of $489,000 (10.1%) in salaries and benefits.
The following table sets forth by category the operating expenses and the percentage change from the prior year for the most recent three years:
INCOME TAXES - ------------
At December 31,1995, the Company has for tax reporting purposes, $302,000 of alternative minimum tax credit carryforward. Footnote 10 to the financial statements on page 47 sets forth the components of the income tax provision and the amounts of deferred tax assets and liabilities of the Company.
BALANCE SHEET MANAGEMENT - ------------------------
During 1995, total average earning assets increased $139.9 million or 62.2%. Average loans increased $66.2 million, average investment securities increased $60.0 million and average short-term money market instruments increased $13.8 million (these investments include federal funds sold and interest bearing deposits in financial institutions and the Federal Home Loan Bank). The acquisition of Texas Gulf Coast accounts for approximately 75.2% of the increase in average earning assets.
During 1994, total average earning assets increased $13.0 million or 6.1% from 1993. Average loans increased $11.5 million or 9.3% and average investment securities increased $7.8 million or 15.5%. These increases were partially funded by a decrease of $6.3 million or 19.9% in average short-term money market investments, which include federal funds sold and interest-bearing deposits in financial institutions. The remaining growth in average assets was funded by deposits and shareholders' equity, which expanded by an average balance of $7.9 million and $2.5 million, respectively.
The following table presents the Company's average balance sheet composition on a percentage basis:
BALANCE SHEET COMPOSITION - PERCENTAGE OF TOTAL ASSETS - ------------------------------------------------------
PERCENTAGE OF TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY - --------------------------------------------------------
INVESTMENT SECURITIES - ---------------------
The book and market values of investment securities held by the Company as of dates indicated are summarized as follows (in thousands):
On January 1, 1994, all bank holding companies were required to adopt the Financial Accounting Standard Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." FASB No. 115 requires institutions to divide their securities holdings among three categories: held- to-maturity, available-for-sale and trading securities. The accounting standard provides a different accounting treatment for each category.
Held-to-maturity securities are those debt securities which an institution has the positive intent and ability to hold to maturity. These debt securities are reported at amortized cost.
Trading securities are those debt and equity securities that an institution buys and holds principally for the purpose of selling in the near term. Trading securities are reported at fair value, with unrealized changes in value reported directly in the income statement as a part of the institution's earnings.
Available-for-sale securities are those debt securities which the institution does not have the positive intent and ability to hold to maturity, yet does not intend to trade actively as part of its trading account. Available-for-sale securities must be reported at fair value with any unrealized appreciation or depreciation in the value of these securities, net of tax effects, reported directly as a separate component of equity capital. Thus, unrealized changes in the value of these securities will have no effect on the reported earnings of the bank holding company.
The following table shows as of December 31, 1995, the distribution of maturities and the weighted average interest yields to maturity of the Company's investment securities (dollars in thousands).
The interest on non-taxable investment securities has been calculated on a fully taxable equivalent basis incorporating an effective tax rate of 34%.
LIQUIDITY MANAGEMENT - --------------------
Like any commercial bank, the liability structure of the Subsidiary Banks requires that they maintain an appropriate level of liquid resources to meet normal day-to-day fluctuations in deposit volume and to make new loans and investments as opportunities arise. Liquidity can be provided by either assets or liabilities. The liquidity of Gulf Southwest is provided primarily by dividends from the Subsidiary Banks and GSWDP, income tax benefits and interest on time deposits in financial institutions. Sources of liquidity for the Subsidiary Banks are principally provided by maturing loans, deposits, cash, short-term investments, time deposits in other financial institutions, federal funds sold and profits. At December 31, 1995, the Subsidiary Banks had $29,486,000 in cash, $51,704,000 in federal funds sold and interest bearing deposits with the Federal Home Loan Bank, $898,000 in time deposits with other financial institutions and a $150,719,000 investment securities portfolio in which the market value was $1,728,000 more than the carrying value. The loan- to-deposit ratio was 55.1% at December 31, 1995 compared to 63.9% at December 31, 1994.
A financial service company's activities consist primarily of financing and investing activities. These activities result in large cash flows. Gulf Southwest's Consolidated Statement of Cash Flows on page 32 indicates the sources of these cash flows.
CAPITAL COMMITMENTS - -------------------
Gulf Southwest believes that it has sufficient capital and financial resources to meet its current and anticipated capital commitments.
DEPOSITS - --------
The most important source of the Subsidiary Bank's funds is deposits. The type of deposits that were in the Subsidiary Bank on a daily average basis and the related average rate paid during each of the last three years are broken down as follows (dollars in thousands):
The following table provides certain information regarding certificates of deposit issued by the Subsidiary Bank in amounts equal to or exceeding $100,000 at December 31, 1995 (dollars in thousands):
INTEREST RATE SENSITIVITY - -------------------------
The objectives of monitoring and managing the interest rate risk position of the balance sheet are to contribute to earnings and to minimize the adverse changes in net interest income. The potential for earnings to be affected by changes in interest rates is inherent in a financial institution.
Interest rate sensitivity is the relationship between changes in market interest rates and changes in net interest income due to the repricing characteristics of assets and liabilities. An asset sensitive position in a given period will result in more assets being subject to repricing; therefore, market interest rate changes will be reflected more quickly in asset rates. If interest rates decline, such a position will normally have an adverse effect on net interest income. Conversely, in a liability sensitive position, where liabilities reprice more quickly than assets in a given period, a decline in rates will benefit net interest income.
One way to analyze interest rate risk is to evaluate the balance of the interest sensitivity position. A mix of assets and liabilities that are roughly equal in volume and repricing represents a matched interest sensitivity position. Any excess of assets or liabilities results in an interest sensitivity gap. The purpose of this analysis is to be aware of the potential risk on future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions. However, this type of analysis is as of a point-in-time; when in fact that position can quickly change as market conditions, customer needs, and management strategies change. Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same time.
The following table presents the interest sensitivity position of the Company at December 31, 1995 (dollars in thousands):
The Company had a negative interest rate sensitive gap position in the 30-day period of $91.4 million. The cumulative rate sensitive gap position was a positive $19.3 million, which indicates that the Company may benefit from rising interest rates; conversely falling interest rates may have a negative impact upon the Company.
CAPITAL MANAGEMENT - ------------------
The Board has adopted a system using the risk-based capital adequacy guidelines to evaluate the capital adequacy of bank holding companies. Under the risk- based capital guidelines, different categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. Certain off-balance sheet items, which previously were not expressly considered in capital adequacy computations, are added to the risk-weighted asset base by converting them to a balance sheet equivalent and assigning them to the appropriate risk weight.
The guidelines require that banking organizations achieve minimum ratios of total capital-to-risk-weighted assets of 8.0% (of which at least 4.0% should be in the form of certain "Tier 1" elements). Total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited to 100 percent of "Tier 1." For bank holding companies, "Tier 1" capital includes, with certain restrictions, common Shareholders' equity, perpetual preferred stock, and minority interests in consolidated subsidiaries. "Tier 2" capital includes, with certain limitations, certain forms of perpetual preferred stock, as well as maturing capital instruments and the reserve for possible credit losses.
At December 31, 1995, the Company's ratio of "Tier 1" and total capital to risk- weighted assets were approximately 18.85% and 19.79%, respectively. Both ratios significantly exceed regulatory minimums.
The following table summarizes the Company's Tier 1 and Total Capital (dollars in thousands):
In addition to the risk-based capital guidelines, the Board and the FDIC have adopted the use of a leverage ratio as an additional tool to evaluate the capital adequacy of banks and bank holding companies. The leverage ratio is defined to be a company's "Tier 1" capital divided by its adjusted total assets. The leverage ratio adopted by the federal banking agencies requires a ratio of 3.0% "Tier 1" capital to adjusted total assets for banks with a CAMEL rating of 1 or for bank holding companies with a BOPEC rating of 1. All other institutions will be expected to maintain at least a 100 to 200 basis point cushion, i.e., these institutions will be expected to maintain a leverage ratio of 4.0% to 5.0%. The Company's leverage ratio at December 31, 1995 was 9.92%, which also exceeds the regulatory minimum.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
-----------------------------
All other schedules or supplementary data are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
HIDALGO, BANFILL, ZLOTNIK & KERMALI, P.C. C E R T I F I E D P U B L I C A C C O U N T A N T S (Originally Founded in 1949)
Board of Directors and Shareholders Gulf Southwest Bancorp, Inc. Houston, Texas
INDEPENDENT AUDITORS' REPORT ----------------------------
We have audited the accompanying consolidated balance sheet of Gulf Southwest Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995, and the balance sheet of Gulf Southwest Bancorp, Inc. (parent company only) as of December 31, 1995 and 1994, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gulf Southwest Bancorp, Inc. and subsidiaries and the financial position of Gulf Southwest Bancorp, Inc. (parent company only) as of December 31, 1995 and 1994, and the respective results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
Houston, Texas February 21, 1996
3555 TIMMONS LANE, SUITE 460 - HOUSTON, TEXAS 77027 - (713) 963-8008
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------
CONSOLIDATED BALANCE SHEET --------------------------
ASSETS ------
See notes to financial statements
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------
CONSOLIDATED BALANCE SHEET --------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------
CONSOLIDATED STATEMENT OF INCOME --------------------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES ----------------------------------------------
CONSOLIDATED STATEMENT OF INCOME (CONTINUED) --------------------------------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES (CONSOLIDATED) ------------------------------------------------------------ AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY ---------------------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES ----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) ------------------------------------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES ----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) ------------------------------------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. ---------------------------- (PARENT COMPANY ONLY) ----------------------
BALANCE SHEET -------------
ASSETS ------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. ---------------------------- (PARENT COMPANY ONLY) ----------------------
STATEMENT OF INCOME -------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. ---------------------------- (PARENT COMPANY ONLY) ----------------------
STATEMENT OF CASH FLOWS -----------------------
See notes to financial statements.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------
The accounting and reporting policies of Gulf Southwest Bancorp, Inc. (Company) and its subsidiaries conform to generally accepted accounting principles and practices within the banking industry which require the use of estimates by management in the preparation of financial statements.
The Company and its subsidiaries offer a full range of financial services to commercial, industrial, financial and individual customers in the greater Houston, Texas and surrounding area, including short-term and medium-term loans, revolving credit arrangements, inventory and accounts receivable financing, equipment financing, real estate lending, Small Business Administration lending, letters of credit, installment and other consumer loans, savings accounts and various savings programs, including individual retirement accounts, and interest and non-interest-bearing checking accounts. Other services include federal tax depository, safe deposit and night depository services. A summary of the more significant accounting policies follows:
FINANCIAL STATEMENT PRESENTATION - --------------------------------
The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary, Gulf Southwest Nevada Bancorp, Inc. and its wholly-owned subsidiaries Merchants Bank, First Bank Mainland, Central Data Processing, Inc. and G.S.W. Data Processing, Inc. and its majority owned subsidiaries Texas City Bank and First Bank Pearland. All significant intercompany accounts and transactions have been eliminated in consolidation. Investment in subsidiary is accounted for on the equity method of accounting in the Parent Company Only financial statements.
INVESTMENT SECURITIES - ---------------------
On January 1, 1994, the Company adopted SFAS 115, which addresses the accounting for investments in debt and equity securities. Such securities are classified in three categories and accounted for as follows: debt securities that the Company has the intent and ability to hold to maturity are classified as held- to-maturity and are carried at amortized cost; debt and equity securities bought and held principally for the purpose of reselling, of which the Company has none, are classified as trading securities and are carried at fair value, with unrealized gains and losses included in income; debt or equity securities not classified as either held-to-maturity or trading securities are deemed available-for-sale and are carried at fair value, with unrealized gains and losses, net of applicable income taxes, reported as a separate component of stockholders' equity.
Interest income on investment securities, including amortization of premiums and accretion of discounts, is recognized using the interest method. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported in securities transactions.
LOANS - -----
Loans are stated at the principal amount outstanding, net of unearned income and the allowance for possible loan losses. Interest on commercial, real estate and other loans is accrued over the term of the loan based on the amount of principal outstanding except where serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. Interest income on installment loans is computed primarily on sum-of-the-months-digit method which, in the aggregate, does not differ materially from the interest method. Net loan origination and commitment fees are being deferred and amortized into income over the term of the loan as an adjustment of the yield.
Nonaccrual loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status if in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the loan or when principal or interest is past due 90 days or more and collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. All cash receipts, whether
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - ---------------------------------------------------------------
LOANS (CONTINUED) - -----------------
designated as principal or interest are used to reduce the carrying value of the loan when it is in the nonaccrual status. Loans are restored to accrual status when principal and interest payments are brought current and future payments in accordance with loan terms are reasonably assured.
Impaired loans are carried at the fair value of the loan's collateral. Changes in these values are reflected as adjustments to the allowance for loan losses.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - ----------------------------------
The allowance for possible loan losses is established by a charge to income as a provision for loan losses. Actual loan losses or recoveries are charged or credited directly to this allowance. The amount of the allowance is determined based upon evaluation of the loan portfolio, a review of past loan loss experience and management's judgment with respect to current and expected economic conditions and their potential impact on the loan portfolio.
BANK PREMISES AND EQUIPMENT - ---------------------------
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line method based upon the estimated useful lives of the assets. Amortization of leasehold improvements is based on the estimated useful lives of the improvements or the term of the respective lease, whichever is shorter. At the time of a retirement or sale, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is recorded in income. Maintenance and repairs are charged to expense as incurred. Renewals and betterments, expenditures which generally increase the value of the property or extend its useful life, are capitalized.
REAL ESTATE AND OTHER LOAN-RELATED ASSETS - -----------------------------------------
Real estate and other loan-related assets are stated at the lower of cost or estimated fair value, less the estimated costs to sell. Any reduction from cost (loan value) to estimated fair value at the time of foreclosure is charged to the allowance for possible loan losses. Subsequent valuation adjustments are charged to current earnings through the provision for revaluation of real estate and other loan-related assets. Losses on dispositions are recognized in the period of occurrence while gains are not recognized until all criteria for income recognition have been met. Also, any income received or expense incurred during the period the assets are owned is recognized as income or expense during the period in which it is received or incurred and is included in other real estate expense.
EXCESS OF COST OVER EQUITY IN NET ASSETS ACQUIRED - -------------------------------------------------
The fair value of the net assets acquired in transactions accounted for as purchases is recorded as an investment by the parent company. The excess of the cash or market value of the consideration given in the transaction over the fair value of the net assets acquired is recorded as the excess of cost over fair value of assets acquired, which is amortized into other operating expenses on a straight-line basis over a period of 15 to 40 years.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - ---------------------------------------------------------------
INCOME TAXES - ------------
The Company and its subsidiaries file a consolidated Federal income tax return. The subsidiaries record income tax expense by applying the statutory tax rate to their income as adjusted for tax exempt interest and other temporary differences and remit the portion of Federal income taxes currently due to the parent company. The parent company records, as a tax benefit, the difference between total taxes reflected by the subsidiaries and the consolidated provision for income taxes. Deferred tax assets and liabilities are recognized for balance sheet basis differences for tax and financial reporting purposes. The deferred taxes represent future tax return consequences of those differences. Investment tax credits and alternative minimum tax credits are recognized as a reduction of Federal income taxes when such credits are utilized.
EARNINGS PER SHARE - ------------------
Earnings per share of common stock are computed by dividing earnings by the weighted average number of shares outstanding during the year.
CASH AND CASH EQUIVALENTS - -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest bearing deposits with bank and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
RECLASSIFICATIONS - -----------------
Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform with the 1995 presentation.
NOTE 2 - ACQUISITION AND MERGERS - --------------------------------
On May 1, 1995, the Company through its wholly owned subsidiary Gulf Southwest Nevada Bancorp, Inc. acquired all of the outstanding common stock of Texas Gulf Coast Bancorp, Inc. by issuing 696,205 (with a fair value of $25.50 per share) shares of Gulf Southwest Bancorp, Inc. common stock plus cash of $52,231 for fractional and dissenter shares to effect the merger. The acquisition and merger was accounted for as a purchase transaction. The excess of cost of the acquired Company over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed of $194,650 was recorded as excess of cost over the net equity in net assets acquired and is being amortized over 15 years.
The operations of Texas Gulf Coast Bancorp, Inc. since May 1, 1995 are included in the accompanying financial statements. If the Companies had been combined for all of 1995 and 1994 the results of operations would have been as follows:
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 2 - ACQUISITION AND MERGERS (CONTINUED) - --------------------------------------------
On January 1, 1996, Gulf Southwest Nevada Bancorp, Inc. a wholly owned subsidiary of the Company merged all of its subsidiary Banks into its Merchants Bank subsidiary and the former subsidiary Banks became branches of Merchants Bank.
Effective November 30, 1994, the Company contributed its investment in Merchants Bank and G.S.W. Data Processing, Inc., wholly owned subsidiaries to Gulf Southwest Nevada Bancorp, Inc., a newly formed, wholly owned, multi bank holding company subsidiary.
NOTE 3 - RESERVE REQUIREMENTS - -----------------------------
Cash and due from banks of approximately $8,344,000 and $5,245,000 at December 31, 1995 and 1994, respectively, were maintained to satisfy regulatory reserve and other requirements.
NOTE 4 - INVESTMENT SECURITIES - ------------------------------
On January 1, 1994, the Company adopted SFAS 115, which addresses the accounting for investments in debt and equity securities. See Note One for a further discussion with respect to SFAS 115.
In December of 1995 the Company reassessed the appropriateness of the classifications of investment securities in accordance with the Special Report on A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities. The Company transferred all U.S. Treasury and U.S. Government Agencies investment securities in the held-to- maturity classification to the available-for-sale classification. This transfer will enable the Company to more easily control their interest rate risks and liquidity as part of its overall asset/liability management.
U. S. Treasury securities at their amortized cost of $45,194,977 and U.S. Government Agencies securities at their amortized cost of $55,250,854 were transferred to the available-for-sale classification at their fair value of $45,129,601 and $56,058,300, respectively.
HELD-TO-MATURITY INVESTMENT SECURITIES: - ---------------------------------------
The amortized cost and estimated fair value of held-to-maturity investment securities were as follows:
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 4 - INVESTMENT SECURITIES (CONTINUED) - ------------------------------------------
HELD-TO-MATURITY INVESTMENT SECURITIES (CONTINUED): - ---------------------------------------------------
AVAILABLE-FOR-SALE INVESTMENT SECURITIES: - -----------------------------------------
The amortized cost and estimated fair value of available-for-sale investment securities were as follows:
Cash proceeds from the maturity of held-to-maturity investment securities during 1995, 1994 and 1993 were $19,036,859, $6,830,000 and $14,293,450, respectively. Cash proceeds from the maturity and sales of available-for-sale investment securities during 1995 and 1994 was $19,311,807 and $7,500,000, respectively. During 1995 the Company had a net loss of $40 on the call of held-to-maturity investment securities (gross gains of $53 and gross losses of $93.) The Company had no gross gains or losses from matured or sold held-to- maturity or available-for-sale securities during 1994. Net gains from investment securities matured or sold in 1993 amounted to $28,793 (gross gains of $61,419 and gross losses of $32,626).
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 4 - INVESTMENT SECURITIES (CONTINUED) - ------------------------------------------
AVAILABLE-FOR-SALE INVESTMENT SECURITIES: - -----------------------------------------
The amortized cost and estimated fair value of investment securities at December 31, 1995 by contractual maturity were as follows:
Investment securities with amortized costs of $74,309,085 and $6,220,306 at December 31, 1995 and 1994, were pledged to secure public deposits and for other purposes as required by law.
NOTE 5 - LOANS - --------------
The loan portfolio was comprised of the following categories at December 31:
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 5 - LOANS (CONTINUED) - --------------------------
Loans on which interest was not being accrued and past due loans (90 days or more) amounted to $3,125,506 and $849,588, respectively at December 31, 1995, compared to $1,215,347 and $127,984, respectively at December 31, 1994.
The allowance for loan losses related to these loans was $226,208 and $111,938 in 1995 and 1994, respectively.
Interest income lost on impaired loans and the average balance of impaired loans was as follows for the year ended December 31:
Some of the directors and executive officers of the Company and its subsidiaries and their related parties are loan customers at the Company's subsidiary banks. In management's judgment, such borrowings were on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and do not involve other than normal risk of collectibility.
An analysis of loans to these parties, exclusive of loans to such persons that in the aggregate do not exceed $60,000, is as follows:
Transactions in the allowance for possible loan losses were as follows:
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 5 - LOANS (CONTINUED) - --------------------------
The Company adopted the Financial Accounting Standards Boards Financial Accounting Standard No. 114, Accounting by Creditors for Impairment of a Loan and No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures on January 1, 1995. The adoption of these standards had no material effect on the Company's financial position or results of operations.
NOTE 6 - BANK PREMISES AND EQUIPMENT - ------------------------------------
Bank premises and equipment were comprised of the following at December 31:
Depreciation and amortization charged to operating expense was $814,045 in 1995, $506,385 in 1994, and $414,175 in 1993.
NOTE 7 - INTEREST BEARING DEPOSITS - ----------------------------------
Interest bearing deposits were comprised of the following categories at December 31:
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 8 - BORROWINGS - -------------------
The Company had the following indebtedness at December 31, 1995:
Subsidiaries - ------------
In January of 1996 the above borrowings were repaid.
NOTE 9 - DIVIDENDS FROM SUBSIDIARIES - ------------------------------------
Substantially all of the retained earnings of the Company represent undistributed net income of subsidiaries. Dividends paid by the Company's subsidiary banks are subject to restrictions by certain regulatory agencies.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 10 - FEDERAL INCOME TAXES - ------------------------------
The Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, effective January 1, 1992. The cumulative adjustment resulted in a tax benefit of $2,469,500.
Deferred income taxes result from differences between amounts of assets and liabilities as measured for income tax and financial reporting purposes. The significant components of Federal deferred tax assets and liabilities as of December 31, are as follows:
The consolidated provision for income taxes for the years ended December 31, consists of the following:
The income tax expense applicable to securities gains and losses for the years 1995, 1994 and 1993 was $(12), $(-0-) and $5,760, respectively.
The difference between the effective tax rate on consolidated income before income taxes and the statutory rate is attributed to the following:
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED) - ------------------------------------------
Deferred income taxes result from temporary differences between the carrying value of assets and liabilities for financial reporting and tax reporting purposes. The sources and related tax effects of these differences are as follows:
At December 31, 1995, the Company has, for tax reporting purposes, alternative minimum tax credits of approximately $301,700.
NOTE 11 - COMMITMENTS AND CONTINGENCIES - ---------------------------------------
In the normal course of business, the Company's subsidiary banks are a party to financial instruments with off balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheet.
The Company's subsidiary banks use the same credit policies in making commitments as it does for on-balance sheet instruments. Collateral is required to support the off-balance sheet instruments when it is deemed necessary. Collateral held varies, but may include: deposits held in financial institutions, accounts receivable, inventory and property, plant and equipment.
Financial instruments whose contract amounts represent potential credit risk are as follows at December 31:
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED) - ---------------------------------------------------
The Company and subsidiaries have non-cancelable operating leases covering certain equipment and buildings. The following is a schedule of future minimum lease payments as of December 31, 1995:
Rent expense incurred under operating leases amounted to $519,882, $402,859 and $305,460 for the years ended December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, the Company's subsidiary banks had contracts for construction of new branch facilities and purchase of land and equipment of $1,400,150.
Various lawsuits are pending against the Company's subsidiary banks. Management, after reviewing these suits with legal counsel, considers that the aggregate liability, if any, would not have a material adverse effect on the Company's financial position.
NOTE 12 - FLEXIBLE STOCK OPTION PLAN - ------------------------------------
In 1986, the Company adopted a Flexible Stock Option Plan, pursuant to which two hundred thousand (200,000) shares of the authorized, but unissued, or reacquired common stock were reserved for issuance. The plan provides for both incentive and nonstatutory stock options.
Options may be granted to any key employee, including officers and directors who are also employees, of the Company or of subsidiary corporations of the Company. Options granted under the plan generally become exercisable in installments of 25 percent per year beginning one year after the date of grant.
The exercise price of the stock options granted under the plan will be determined by the Board of Directors at the time of grant, and said exercise price must be at least equal to the fair market value of the common stock on the date of grant. The exercise price to any participant who owns stock possessing more than 10 percent of the total combined voting power of all classes of the stock of the Company, must be at least 110 percent of the fair market value of the common stock on the date of grant.
The maximum number of shares of common stock for which options may be granted to members of the Board of Directors under the plan is one hundred thousand (100,000) shares. No individual member of the Board of Directors may be granted options to purchase more than an aggregate of ten thousand (10,000) shares of common stock.
As of December 31, 1995 no options have been granted under the plan.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS - --------------------------------
The Company has a noncontributory defined benefit pension plan covering substantially all full time employees. Benefits are based on an employee's years of service and compensation. The Company makes contributions to the plan annually based upon actuarial valuations. The plan assets are managed and invested by the trust division of a commercial bank. The plan assets are invested in several equity, bond and common trust investment funds managed by the trustee bank.
The Company's pension plan was adopted on September 1, 1994. The Texas Gulf Coast Bancorp, Inc. noncontributory defined benefit pension plan was merged with the Company's pension plan on December 31, 1995.
Unrecognized prior service cost of the Company's pension plan is being amortized on a straight line basis over fifteen years.
Net periodic pension cost for the pension plan was as follows for 1995:
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED) - --------------------------------------------
The Company has a qualified employee benefit plan under section 401(k) of the Internal Revenue Code. Employees can contribute up to 15% of their compensation to the plan on a pretax basis subject to regulatory limits and the Company at its discretion can match up to 100 percent of 6 percent of the participant's compensation. The administrative cost of the plan is paid by the Company at no cost to the participants.
NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosure about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required 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.
Cash and cash equivalents - - For cash and due from banks, interest bearing deposits with bank, time deposits in financial institutions and federal funds sold, the carrying amount is a reasonable estimate of fair value.
Investment securities - - Investment 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. See Note One for valuation methodologies used for investment 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 value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Borrowings -- The fair value of borrowings is estimated based upon current market interest rates for Companies with like credit ratings and similar maturities.
Commitments to extend credit and standby letters of credit - - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties. For fixed-rate commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of letters of credit is based on fees currently charged for similar letters of credit.
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES --------------------------------------------- AND --- GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY) --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) - -------------------------------------------------------------------
The estimated fair values of the Company's financial instruments are as follows:
NOTE 15 - OTHER OPERATING EXPENSE - ---------------------------------
Other operating expense for the years ended December 31, are as follows:
ITEM 9.

ITEM 9. ACCOUNTING AND FINANCIAL DISCLOSURE - ------- -----------------------------------
None
PART III.
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- --------------------------------------------------
(Incorporated by reference to the section entitled "Nominees for Election as Directors" of Gulf Southwest's Proxy Statement for its 1996 annual meeting of shareholders.)
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION - -------- ----------------------
(Incorporated by reference to the section entitled "Executive Compensation" of Gulf Southwest's Proxy Statement for its 1996 annual meeting of shareholders.)
ITEM 12.

ITEM 12. SECURITY OWENRSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- --------------------------------------------------------------
(Incorporated by reference to the section entitled "Ownership of Common Stock" of Gulf Southwest's Proxy Statement for its 1996 annual meeting of shareholders.)
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ----------------------------------------------
(Incorporated by reference to the section entitled "Certain Relationships and Related Transactions" of Gulf Southwest's Proxy Statement for its 1996 annual meeting of shareholders.)
PART IV.
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON - -------- ------------------------------------------------------ FORM 8-K --------
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements See index to financial statements at Item 8 of this report. (2) Exhibits
(B) REPORTS ON FORM 8-K.
No reports were filed.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GULF SOUTHWEST BANCORP, INC.
BY: /s/ J. W. Lander, Jr. -------------------- J. W. Lander, Jr. Chief Executive Officer
Date: March 21, 1996
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 0-11033
GULF SOUTHWEST BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDEX TO EXHIBITS