The Securities and Exchange Commission charged yesterday that three top officers of the old Southwest Bancshares Inc. of Houston, which had assets of $7.6 billion and owned all of the common stock of 38 Texas banks, violated federal securities laws in 1982 and 1983 by failing to assign enough reserves to loan portfolios to cover possible losses.
The case is the latest of a half-dozen in which the SEC accused banks of improperly boosting earnings levels at the expense of loan reserves after many loans soured in the recession during those years.
Simultaneously with the filing of an SEC complaint in federal court here, the three officers consented to the entry of final orders restraining them from aiding and abetting violations of the periodic reporting provisions of the Securities Exchange Act of 1934. The officers consented to the settlement without either admitting or denying the violations.
The three officers were: Charles E. McMahen, president, chief operating officer and a director; John T. Cater, board chairman and chief executive officer, and Joseph J. Whiteside, an executive vice president and chief financial officer who left Southwest two years ago.
McMahen also consented to a final order enjoining him from violations of antifraud provisions of the exchange act and of the Securities Act of 1933. In addition, McMahen and Cater agreed to an order barring them from aiding and abetting violations of certain proxy provisions of the 1934 law. Finally, McMahen and Whiteside consented to be enjoined from aiding and abetting violations of certain internal accounting provisions of the 1934 law.
Last October, Southwest merged with Mercantile Texas Corp., a Dallas-based bank holding venture that became MCorp and that brought McMahen and Cater aboard as executives and directors. MCorp said that it was not a party to the SEC enforcement action and that the action will not affect its financial statements.
The SEC's complaint alleged that Southwest's annual reports to the SEC for 1982 and 1983, together with its quarterly reports for the third quarter of 1982 and for the first three quarters of 1983, were false and misleading in failing to show that Southwest:
*Failed to maintain an adequate loan-loss reserve for the two final quarters of 1982 and the second and third quarters of 1983, thus causing quarterly income to be inflated in reports to the commission.
*Recorded a $75 million addition to its loan-loss reserve in the fourth quarter of 1983 without disclosure that a portion of the money should have been added in preceding quarters.
*Deferred recognition of certain identified loan losses in the four quarters ended Sept. 30, 1983, resulting in material understatements of net charge-offs for those same quarters.
The SEC complaint also alleged that over the 15 months ended Sept. 30, 1983, Southwest failed to conduct adequate evaluations of its loan-loss reserve and charge-off needs as required by generally accepted accounting principles (GAAP). McMahen is a certified public accountant.
In another charge, the complaint said that Southwest based some decisions about its loan-loss reserve and charge-offs partially on factors unrelated to the quality of the loan portfolio, including a desire to maintain earnings at certain levels in the second and third quarters of 1983.
Before the final quarter of that year, the SEC also alleged, Southwest operated on the basis that consolidated loan-loss reserves had to approximate only 1 percent of outstanding loans, although that proportion was insufficient for compliance with GAAP.
Meanwhile, the complaint said, Southwest gave inadequate consideration to certain internal estimates of loan-loss reserves and charge-off needs and to negative information about its loan portfolio.