================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
------------------------
COMMISSION FILE NUMBER: 000-22007
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SOUTHWEST BANCORPORATION OF TEXAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0519693
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 235-8800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes U No ____
------------------------
There were 9,390,933 shares of the Registrant's Common Stock outstanding as
of the close of business on March 31, 1997.
================================================================================
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent
Accountants.................... 2
Consolidated Balance Sheet as of
March 31, 1997 and December 31,
1996........................... 3
Consolidated Statement of Income
for the Quarters Ended March
31,
1997 and 1996................. 4
Consolidated Statement of
Changes in Shareholders' Equity
for the
Year Ended December 31, 1996,
and the quarter ended March 31,
1997........................... 5
Consolidated Statement of Cash
Flows for the Quarters Ended
March 31,
1997 and 1996................. 6
Notes to Consolidated Financial
Statements..................... 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations...... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........... N/A
Item 2. Changes in Securities....... N/A
Item 3. Default upon Senior
Securities........................... N/A
Item 4. Submission of Matters to a
Vote of Security Holders............. N/A
Item 5. Other Information........... N/A
Item 6. Exhibits and Reports on Form
8-K.................................. N/A
Signatures........................... 16
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Southwest
Bancorporation of Texas, Inc. and Subsidiaries (the "Company") as of March 31,
1997 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the three-month period then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the year then ended (the consolidated statements of income and
cash flows are not presented herein); and in our report dated January 31, 1997,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1996, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 8, 1997
2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Cash and due from banks.............. $ 72,550 $ 79,734
Federal funds sold................... 22,600 62,954
------------ ------------
Total cash and cash
equivalents............ 95,150 142,688
Securities -- available for sale..... 311,820 289,217
Loans receivable, net................ 643,032 595,451
Premises and equipment, net.......... 9,548 7,959
Accrued interest receivable.......... 7,264 6,803
Prepaid expenses and other assets.... 6,684 2,381
------------ ------------
Total assets............... $ 1,073,498 $1,044,499
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing... $ 287,183 $ 308,438
Demand -- interest-bearing...... 8,523 53,819
Money market accounts........... 416,069 311,499
Savings......................... 3,194 3,168
Time, $100 and over............. 98,071 104,007
Other time...................... 55,538 52,638
------------ ------------
Total deposits............. 868,578 833,569
Securities sold under repurchase
agreements......................... 116,989 136,119
Other short-term borrowings.......... 5,044 10,027
Accrued interest payable............. 622 608
Other liabilities.................... 3,118 2,184
------------ ------------
Total liabilities.......... 994,351 982,507
------------ ------------
Commitments and contingencies
Bank preferred stock................. -- 7,323
------------ ------------
Shareholders' equity:
Common stock -- $1 par value,
50,000,000 shares authorized;
9,390,933 and 7,734,961 shares
issued and outstanding at March
31, 1997 and December 31, 1996,
respectively................... 9,391 7,734
Additional paid-in capital...... 38,135 18,030
Retained earnings............... 31,813 28,730
Net unrealized appreciation
(depreciation) on securities
available for sale, net of
deferred taxes of $103 and
$(94) at March 31, 1997 and
December 31, 1996,
respectively................... (192) 175
------------ ------------
Total shareholders'
equity................. 79,147 54,669
------------ ------------
Total liabilities and
shareholders' equity... $ 1,073,498 $1,044,499
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
QUARTER ENDED MARCH
31,
--------------------
1997 1996
--------- ---------
Interest income:
Loans........................... $ 13,590 $ 10,185
Securities...................... 4,418 4,629
Federal funds sold and other.... 352 175
--------- ---------
Total interest income...... 18,360 14,989
Interest expense on deposits and
other borrowings................... 7,860 6,438
--------- ---------
Net interest income........ 10,500 8,551
Provision for loan losses............ 438 280
--------- ---------
Net interest income after
provision for loan
losses.................. 10,062 8,271
--------- ---------
Other income:
Service charges................. 927 661
Other operating income.......... 764 404
Gain on sale of securities,
net............................ 137 --
--------- ---------
Total other income......... 1,828 1,065
--------- ---------
Other expenses:
Salaries and employee
benefits....................... 4,204 3,201
Occupancy expense............... 1,219 804
Other operating expenses........ 1,667 1,390
--------- ---------
Total other expenses....... 7,090 5,395
--------- ---------
Income before income
taxes................... 4,800 3,941
Provision for income taxes........... (1,681) (1,379)
--------- ---------
Net income before bank
preferred stock
dividend................ 3,119 2,562
--------- ---------
Bank preferred stock dividend........ 36 115
--------- ---------
Net income available for
common shareholders..... $ 3,083 $ 2,447
========= =========
Earnings per common
share................... $ 0.32 $ 0.29
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
(DEPRECIATION)
COMMON STOCK ADDITIONAL ON SECURITIES TOTAL
------------------ PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS FOR SALE EQUITY
-------- ------- ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995........... 7,717,580 $ 7,717 $ 17,745 $ 19,142 $ 222 $44,826
Issuance of common stock to
benefit plan.................. 17,435 17 151 168
Liquidation of partial shares... (54) (1) (1)
Deferred compensation
amortization.................. 135 135
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $25......... (47) (47)
Cash dividends on preferred
stock ($.61 per share)........ (457) (457)
Net income...................... 10,045 10,045
-------- ------- ---------- -------- -------------- -------------
BALANCE DECEMBER 31, 1996............ 7,734,961 7,734 18,030 28,730 175 54,669
Issuance of common stock to
benefit plan.................. 2,520 3 33 36
Exercise of stock options....... 330,952 331 1,648 1,979
Proceeds of public offering..... 1,322,500 1,323 18,578 19,901
Redemption of Bank preferred
stock......................... (177) (177)
Deferred compensation
amortization.................. 23 23
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $197........ (367) (367)
Cash dividends on preferred
stock ($.05 per share)........ (36) (36)
Net income...................... 3,119 3,119
-------- ------- ---------- -------- -------------- -------------
BALANCE, MARCH 31, 1997.............. 9,390,933 $ 9,391 $ 38,135 $ 31,813 $ (192) $79,147
======== ======= ========== ======== ============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
QUARTER ENDED MARCH
31,
----------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net income...................... $ 3,119 $ 2,562
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan
losses.................. 438 280
Depreciation............... 702 477
Compensation expense....... 36 33
Deferred compensation
amortization............ 23 33
Realized gains on
securities available for
sale.................... (137) --
Net amortization of
premiums and
discounts............... 351 96
Dividends on Federal Home
Loan Bank stock......... (581) (560)
Increase in accrued
interest receivable,
prepaid expenses and
other assets............ (4,595) (857)
Increase in accrued
interest payable and
other liabilities....... 2,747 1,123
---------- ----------
Net cash provided by
operating
activities......... 2,103 3,187
Cash flows from investing activities:
Proceeds from maturity of
securities available for
sale........................... 4,000 17,000
Principal paydowns of
mortgage-backed securities
available for sale............. 10,285 12,700
Proceeds from sale of securities
available for sale............. 24,608 567
Purchase of securities available
for sale....................... (61,693) (54,816)
Proceeds from sale of other real
estate and other loan related
assets......................... 18 --
Net increase in loans
receivable..................... (48,020) (13,917)
Purchase of premises and
equipment...................... (2,291) (496)
---------- ----------
Net cash used in
investing
activities......... (73,093) (38,962)
Cash flows from financing activities:
Net decrease in
noninterest-bearing demand
deposits....................... (21,255) (8,108)
Net (decrease) increase in time
deposits....................... (3,036) 20,467
Net increase (decrease) in other
interest-bearing deposits...... 59,300 (14,887)
Net (decrease) increase in
securities sold under
repurchase agreements.......... (19,130) 1,959
Net (decrease) increase in other
short-term borrowings.......... (4,983) 5,823
Net proceeds from initial public
offering of common stock....... 19,901 --
Net proceeds from exercise of
stock options.................. 307 --
Retirement of Bank preferred
stock.......................... (7,500) --
Payment of dividends on Bank
preferred stock................ (152) --
---------- ----------
Net cash provided by
financing
activities......... 23,452 5,254
---------- ----------
Net decrease in cash and cash
equivalents........................ (47,538) (30,521)
Cash and cash equivalents at
beginning of period................ 142,688 81,195
---------- ----------
Cash and cash equivalents at end of
period............................. $ 95,150 $ 50,674
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Southwest
Bankcorporation of Texas, Inc. (the "Company") and its wholly-owned
subsidiaries Southwest Bank of Texas National Association (the "Bank") and
Southwest Bancorporation of Delaware Inc. All material intercompany accounts and
transactions have been eliminated. In the opinion of management, the unaudited
consolidated financial statements reflect all adjustments, consisting only of
normal and recurring adjustments, necessary to present fairly the Company's
financial position at March 31, 1997 and the Company's results of operations and
cash flows for the three-month periods ended March 31, 1997 and 1996. Interim
period results are not necessarily indicative of results of operations or cash
flows for a full-year period.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1996.
2. SHAREHOLDERS' EQUITY
In January 1997, the Company completed an initial public offering ("IPO")
of its common stock. A total of 1,322,500 shares of common stock were sold by
the Company at $16.50 per share yielding net proceeds of $19.9 million, after
deducting underwriting discount and other expenses. Substantially all of the net
proceeds from the IPO were contributed to the Bank. Approximately $7.5 million
was used to redeem the 750,000 outstanding shares of the Bank's preferred stock,
and the balance was used for general corporate purposes.
3. EARNINGS PER COMMON SHARE:
Earnings per common share is computed as follows:
QUARTER ENDED MARCH 31,
------------------------------
1997 1996
-------------- --------------
Net income available for common
shareholders....................... $ 3,083 $ 2,447
Divided by average common shares and
common share equivalents:
Average common shares........... 8,821,037 7,718,410
Average common share
equivalents................... 718,274 769,338
-------------- --------------
Total average common shares and
common share equivalents........... 9,539,311 8,487,748
Earnings per common share............ $ 0.32 $ 0.29
============== ==============
4. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
During the quarter ended March 31, 1997, the Company reduced its federal
income tax liability by approximately $1.9 million and recorded a corresponding
increase to additional paid-in capital representing the tax benefit related to
the exercise of certain stock options.
5. SUBSEQUENT EVENT:
On April 28, 1997, the Company and the Bank entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Pinemont Bank, whereby Pinemont
Bank will merge into the Bank. The Merger Agreement, which is subject to
approval of the shareholders of the Company and Pinemont Bank and various
regulatory authorities, provides for the exchange of 0.625 of a share of the
Company's common shares for each share of Pinemont Bank stock, resulting in the
issuance of approximately 1,775,000 shares of the Company's common shares. At
March 31, 1997, Pinemont Bank had total assets of approximately
7
<PAGE>
$235 million and total deposits of $215 million. The transaction is expected to
be accounted for as a pooling of interests.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Total assets at March 31, 1997, and December 31, 1996 were $1.07 billion,
and $1.04 billion, respectively. Loans were $649.3 million at March 31, 1997, an
increase of $47.8 million or 7.9% from $601.5 million at December 31, 1996. This
growth was a result of a strong local economy, and the Company's style of
relationship banking. Deposits experienced similar growth, increasing to $868.6
million at March 31, 1997 from $833.6 million at December 31, 1996.
Shareholders' equity was $79.1 million and $54.7 million at March 31, 1997 and
December 31, 1996, respectively. This increase was primarily due to the
Company's recently completed initial public offering ("IPO") of its common
stock. A total of 1,322,500 shares of common stock were sold by the company at
$16.50 per share, yielding net proceeds of $19.9 million after deducting
underwriting discount and other expenses. Substantially all of the net proceeds
from the IPO were contributed to the Bank. Approximately $7.5 million was used
to redeem the 750,000 outstanding shares of the Bank's preferred stock and the
balance was used for general corporate purposes.
Net income available for common shareholders was $3.1 million and $2.4
million and earnings per common share was $0.32 and $0.29 for the quarters ended
March 31, 1997 and 1996, respectively. This increase in net income was primarily
the result of strong loan growth, maintaining strong asset quality and expense
control and resulted in returns on average assets of 1.23% and 1.27% and returns
on average common equity of 17.74% and 21.47% for the quarters ended March 31,
1997 and 1996, respectively.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income for the quarter ended March 31, 1997 was $18.4 million, an
increase of $3.4 million or 22.5% from the quarter ended March 31, 1996. The
increase was primarily due to an increase of $3.4 million in interest earned on
loans over the prior comparable period. The increase in interest income on loans
was due primarily to a $174.5 million increase in average loans outstanding.
Interest income from securities was $4.4 million for the quarter ended March 31,
1997, a decrease of $211,000 from the prior comparable period. The decrease was
primarily due to a $17.6 million decrease in average securities outstanding.
Total interest-earning assets for the quarter ended March 31, 1997 averaged
$930.4 million compared to $759.2 million for the quarter ended March 31, 1996.
INTEREST EXPENSE.
Interest expense on deposits and other borrowings was $7.9 million for the
quarter ended March 31, 1997, as compared to $6.4 million for the same period in
1996. The increase in interest expense was due to a $122.4 million increase in
average interest-bearing liabilities during such period and an increase in the
average rate paid on interest-bearing liabilities to 4.60% for the quarter ended
March 31, 1997 from 4.54% for the quarter ended March 31, 1996. The average
balance of interest-bearing liabilities was $692.9 million for the quarter ended
March 31, 1997 as compared to $570.5 million for the quarter ended March 31,
1996.
NET INTEREST INCOME
Net interest income was $10.5 million for the quarter ended March 31, 1997
as compared to $8.6 million for the same period in 1996. The increase in net
interest income was primarily due to an increase of $171.2 million or 22.6% in
average interest-earning assets from the quarter ended March 31, 1996. Net
interest income was also positively affected by an improved net interest margin.
The net interest margin is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities. The increase in the
net interest margin was primarily due to the increase in the yield on average
earning assets which improved six basis points to 8.00% for the quarter ended
March 31, 1997. The net interest margin for the quarter ended March 31, 1997 was
4.58% compared with 4.53% for the comparable period in 1996.
8
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are daily average balances. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1997 MARCH 31, 1996
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ------- ------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans.............................. $ 614,021 $13,590 8.98% $ 439,489 $10,185 9.32%
Securities......................... 290,533 4,418 6.17 307,212 4,629 6.06
Federal funds sold and other....... 25,865 352 5.52 12,504 175 5.63
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets..................... 930,419 18,360 8.00% 759,205 14,989 7.94%
------- ------- ------- -------
Less allowance for loan losses.......... 6,244 5,065
----------- -----------
Total earning assets, net of
allowance............................. 936,663 764,270
Nonearning assets....................... 80,008 49,285
----------- -----------
Total assets.................. $ 1,016,671 $ 813,555
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits... $ 42,797 145 1.37% $ 31,910 120 1.51%
Money market and savings
deposits......................... 352,417 3,947 4.54 303,749 3,285 4.35
Certificates of deposits........... 154,354 2,056 5.40 132,823 1,770 5.36
Repurchase agreements and borrowed
funds............................ 143,211 1,712 4.85 101,979 1,263 4.98
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities................ 692,779 7,860 4.60% 570,461 6,438 4.54%
------- ------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 247,404 184,861
Other liabilities.................. 3,524 4,631
----------- -----------
Total liabilities............. 943,707 759,953
Bank preferred stock.................... 2,441 7,323
Shareholders' equity.................... 70,523 46,279
----------- -----------
Total liabilities and
shareholders' equity....... $ 1,016,671 $ 813,555
=========== ===========
Net interest income..................... $10,500 $ 8,551
======= =======
Net interest spread..................... 3.40% 3.40%
======= =======
Net interest margin..................... 4.58% 4.53%
======= =======
</TABLE>
9
<PAGE>
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates.
For purposes of this table, changes attributable to both rate and volume which
can be segregated have been allocated.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
------------------------------------------
1997 VS. 1996
------------------------------------------
INCREASE (DECREASE)
DUE TO
------------------------------------------
VOLUME RATE DAYS TOTAL
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................................... $ 4,044 $ (527) $ (112) $ 3,405
Securities.............................. (239) 79 (51) (211)
Federal funds sold and other............ 186 (7) (2) 177
--------- --------- --------- ---------
Total increase (decrease) in
interest income.................. 3,991 (455) (165) 3,371
--------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits........ 41 (15) (1) 25
Money market and savings deposits....... 531 167 (36) 662
Certificates of deposits................ 288 17 (19) 286
Repurchase agreements and borrowed
funds................................. 511 (48) (14) 449
--------- --------- --------- ---------
Total increase (decrease) in
interest expense................. 1,371 121 (70) 1,422
--------- --------- --------- ---------
Increase (decrease) in net interest
income................................ $ 2,620 $ (576) $ (95) 1,949
========= ========= ========= =========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $438,000 for the quarter ended March 31,
1997 as compared to $280,000 for the quarter ended March 31, 1996. The increase
in the provision for loan losses was due to the increased loan balances which
averaged $614.0 million for the quarter ended March 31, 1997 compared to $439.5
million for the comparable period in 1996. Although no assurance can be given,
management believes that the present allowance for loan losses is adequate
considering loss experience, delinquency trends and current economic conditions.
Management will continue to review its loan loss allowance policy as the
Company's loan portfolio grows and diversifies to determine if changes to the
policy are necessary.
NONINTEREST INCOME
Noninterest income for the quarter ended March 31, 1997 was $1.8 million,
an increase of $763,000 or 71.6% over the same period in 1996. The following
table presents for the periods indicated the major changes in noninterest
income.
QUARTER ENDED MARCH
31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Service charges on deposit
accounts........................... $ 927 $ 662
Retail services income............... 22 22
Corporate services income............ 11 4
Loan operations...................... 155 96
Investment services.................. 508 268
Gain on sale of securities, net...... 137 --
Other noninterest income............. 68 13
--------- ---------
Total noninterest income........ $ 1,828 $ 1,065
========= =========
10
<PAGE>
Service charges were $927,000 for the quarter ended March 31, 1997,
compared to $662,000 for the quarter ended March 31, 1996, an increase of
$265,000 or 40.0%. During this period the Company introduced several new
products which contributed to the increase in service charge income.
Additionally, the number of accounts serviced increased to 19,166 at March 31,
1997 from 15,409 at March 31, 1996.
Other significant increases in noninterest income were recognized in the
categories of loan operations and investment services. Fee income from
investment services has increased significantly in the past year. For the
quarter ended March 31, 1997, investment services income grew to $508,000, an
increase of $240,000 or 89.6% over the 1996 level. This increase is the result
of a strategic focus by the Company to increase its competitive position in
providing investment services.
NONINTEREST EXPENSES
For the quarter ended March 31, 1997, noninterest expenses totaled $7.1
million, an increase of $1.7 million, or 31.4%, from $5.4 million during 1996.
The increase in noninterest expenses during these periods was due primarily to
salaries and employee benefits. For the same time periods the efficiency ratio
increased slightly to 58.14% for the quarter ended March 31, 1997, from 56.12%
for the comparable period in 1996. This slight deterioration resulted from an
increase in salaries and benefits which as a percent of average earning assets
increased to 1.84% for the quarter ended March 31, 1997 from 1.69% for the
comparable 1996 period.
Salary and benefit expense for the quarter ended March 31, 1997 was $4.2
million, an increase of $1.0 million or 31.2% from $3.2 million for the quarter
ended March 31, 1996. This increase was due primarily to hiring of additional
personnel required to accommodate the Company's growth, including staffing for
two new branches, a second downtown branch at 909 Fannin, and a branch west of
downtown in the Memorial area. Total full-time equivalent employees for the
quarters ended March 31, 1997 and March 31, 1996 were 332 and 275, respectively.
Occupancy expense increased $415,000 or 51.6% to $1.2 million for the
period ended March 31, 1997. Major categories included within occupancy expense
are building lease expense, depreciation expense, and maintenance contract
expense. Building lease expense increased to $414,000 for the quarter ended
March 31, 1997 from $235,000 for the same period in 1996. This increase was the
result of opening two new branches during the past year and additionally, by
increasing the rentable square feet of the Galleria location by moving to a
larger facility. Depreciation expense increased $187,000 or 54.0% in 1997 from
the comparable period in 1996. This increase was due primarily to depreciation
on equipment provided to new employees and expense related to technology
upgrades throughout the Company. Maintenance contract expense for the quarter
ended March 31, 1997 was $114,000, an increase of $29,000 or 34.1% compared to
$85,000 in 1996. The Company has purchased maintenance contracts for major
operating systems throughout the organization.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory
rate, plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of nondeductible interest expense, and
the amount of other nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officers salaries, less interest income from federal securities. For the quarter
ended March 31, 1997, income tax expense was $1.7 million, an increase of
$300,000 or 21.4% from the $1.4 million of income tax expense for the same
period in 1996.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans were $649.3 million at March 31, 1997, an increase of $47.9
million or 8.0% from $601.4 million at December 31, 1996. Consistent with the
Company's historically high rate of growth, this increase is believed to be the
result of the Company's style of relationship banking featuring professional,
11
<PAGE>
attentive and responsive service to customers' needs, and focusing on commercial
lending to middle market companies and private banking for individuals.
The following table summarizes the loan portfolio of the Company by type of
loans as of March 31, 1997 and December 31, 1996:
MARCH 31, 1997 DECEMBER 31, 1996
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Commercial and Industrial...... $ 329,568 50.8% $ 295,003 49.0%
Real estate....................
Construction and Land
Development............... 71,193 11.0 71,808 12.0
1-4 Family................ 123,369 19.0 113,801 18.9
Commercial Owner Occupied. 61,109 9.4 52,138 8.7
Ranchland................. 8,519 1.3 8,845 1.5
Other.......................... 3,435 0.5 3,159 0.5
Consumer....................... 52,142 8.0 56,721 9.4
---------- ------- ---------- -------
Total Loans.................... $ 649,335 100.00% $ 601,475 100.00%
========== ======= ========== =======
NONPERFORMING ASSETS
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets were $1.6 million at March 31, 1997 compared with
$1.3 million at December 31, 1996. This resulted in a ratio of nonperforming
assets to loans plus other real estate of 0.24% and 0.21% at March 31, 1997 and
December 31, 1996, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $ 1,230 $ 955
Accruing loans 90 or more days past
due.................................. 57 22
Restructured loans................... -- --
ORE and OLRA......................... 263 281
--------- ------------
Total non-performing assets..... $ 1,550 $1,258
========= ============
Nonperforming assets to total loans
and other real estate.............. 0.24% 0.21%
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Based on an evaluation of
the loan portfolio, management presents a quarterly review of the allowance for
loan losses to the Board of Directors, indicating any changes in the allowance
since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers the diversification by
industry of the Company's commercial loan portfolio, the effect of changes in
the local real estate market on collateral values, the results of recent
regulatory examinations, the effects on the loan portfolio of current economic
indicators and their probable impact on borrowers, the amount of charge-offs for
the period, the amount of nonperforming loans and related collateral security,
the evaluation of its loan portfolio by the loan review function and the annual
examination of the Company's financial statements by its independent auditors.
Charge-offs occur when loans are deemed to be uncollectible.
In order to determine the adequacy of the allowance for loan 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
12
<PAGE>
specific allowances for loans which management believes require reserves greater
than those allocated according to their classification or delinquent status. An
unallocated allowance is also established based on the Company's historical
charge-off experience. The Company then charges to operations a provision for
loan losses determined on an annualized basis to maintain the allowance for loan
losses at an adequate level determined according to the foregoing methodology.
Management believes that the allowance for loan losses at March 31, 1997 is
adequate to cover losses inherent in the portfolio as of such date. There can be
no assurance, however, that the Company will not sustain losses in future
periods, which could be greater than the size of the allowance at March 31,
1997.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
QUARTER ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
-------------- -------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses beginning
of period............................ $6,024 $ 4,921
Provision for loan losses............ 438 1,670
Charge-offs.......................... (175) (595)
Recoveries........................... 15 28
-------------- -------------
Allowance for loan losses end of
period............................... $6,302 $ 6,024
============== =============
SECURITIES
The amortized cost and approximate fair value of securities classified as
available for sale is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------- FAIR
COST GAIN LOSS VALUE
--------- ----- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U. S. Government securities.......... $ 88,461 $ 101 $ (206) $ 88,356
Mortgage-backed securities........... 177,841 478 (671) 177,648
Federal Reserve Bank stock........... 950 -- -- 950
Federal Home Loan Bank stock, at
cost................................. 39,966 -- -- 39,966
Other securities..................... 4,898 2 -- 4,900
--------- ----- ------ ----------
Total securities available for
sale.......................... $ 312,116 $ 581 $ (877) $ 311,820
========= ===== ====== ==========
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------- FAIR
COST GAIN LOSS VALUE
--------- ----- ------ ----------
(DOLLARS IN THOUSANDS)
U. S. Government securities.......... $ 83,345 $ 315 $ (68) $ 83,592
Mortgage-backed securities........... 159,106 524 (507) 159,123
Federal Reserve Bank stock........... 950 -- -- 950
Federal Home Loan Bank stock, at
cost................................. 39,386 -- -- 39,386
Other securities..................... 6,161 5 -- 6,166
--------- ----- ------ ----------
Total securities available for
sale.......................... $ 288,948 $ 844 $ (575) $ 289,217
========= ===== ====== ==========
</TABLE>
13
<PAGE>
DEPOSITS
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings, NOW
accounts, money market and time accounts. The Company relies primarily on
advertising, competitive pricing policies and customer service to attract and
retain these deposits. As of March 31, 1997, the Company had less than five
percent of its deposits classified as brokered funds and does not anticipate any
significant increase. Deposits provide the primary source of funding for the
Company's lending and investment activities, and the interest paid for deposits
must be managed carefully to control the level of interest expense.
The Company's ratio of average demand deposits to average total deposits
for the periods ended March 31, 1997 and December 31, 1996, were 31.0% and
30.0%, respectively.
The average daily balances and weighted average rates paid on deposits for
the three months ended March 31, 1997 and the year ended December 31, 1996, are
presented below:
MARCH 31, 1997 DECEMBER 31, 1996
-------------------- --------------------
AVG. AVG. AVG.
BALANCE AVG. RATE BALANCE RATE
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
NOW accounts................... $ 42,797 1.37% $ 37,325 1.40%
Regular savings................ 3,218 2.21 2,739 2.30
Treasury Plus.................. 217,751 4.89 172,597 4.84
Money market................... 131,448 4.03 127,073 3.98
CD's less than $100,000........ 45,540 5.28 43,182 5.23
CD's $100,000 and over......... 99,998 5.46 88,390 5.42
IRA's & QRP's.................. 8,816 5.38 8,421 5.36
-------- --------- -------- ---------
Total interest-bearing
deposits................ 549,568 4.54% 479,727 4.48%
========= =========
Noninterest-bearing deposits... 247,404 -- 205,720 --
-------- --------- -------- ---------
Total deposits............ $796,972 3.13% $685,447 3.14%
======== ========= ======== =========
The following table sets forth the maturity of the Company's certificates
of deposit that are $100,000 or greater as of the dates indicated:
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
3 months or less..................... $ 50,719 $ 58,700
Between 3 months and 6 months........ 21,376 20,608
Between 6 months and 1 year.......... 19,919 14,559
Over 1 year.......................... 6,057 10,140
-------------- -----------------
Total CD's $100,000 and over.... $ 98,071 $ 104,007
============== =================
On March 10, 1997, the Bank restructured its personal checking accounts
into master accounts containing a checking subaccount and a savings subaccount.
The allocation of funds between such subaccounts has resulted in a decrease in
the amount of NOW accounts and a corresponding increase in money market accounts
at March 31, 1997. Funds in the checking subaccount are swept into the savings
subaccount on a periodic basis, and then swept back into the checking subaccount
as needed to cover checks or other withdrawals. In order to avoid having the
savings subaccount reclassified as a "transaction account" for purposes of
Regulation D, the number of transfers from the savings account to the checking
subaccount is limited to six per month, with the sixth such transfer sweeping
all funds from the savings subaccount to the checking subaccount. The purpose of
this restructuring is to reduce the required non-interest bearing balances held
at the Federal Reserve. On April 1, 1997, the Bank restructured its non-interest
bearing demand accounts in the same manner described above thus causing a
decrease in the amount of non-interest bearing demand accounts and a
corresponding increase in money market accounts.
14
<PAGE>
BORROWINGS
Securities sold under repurchase agreements and other short-term
borrowings, consisting of federal funds purchased and treasury, tax, and loan
deposits, generally represent borrowings with maturities ranging from one to
thirty days. Information relating to these borrowings is summarized as follows:
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $ 126,090 $103,927
Period-end...................... 116,989 136,119
Maximum month-end balance during
period........................ 123,884 136,119
Interest rate:
Average......................... 4.78% 4.88%
Period-end...................... 4.84% 4.93%
Other short-term borrowings:
Average......................... $ 17,298 $ 13,137
Period-end...................... 5,044 10,027
Maximum month-end balance during
period........................ 32,143 60,044
Interest rate:
Average......................... 5.32% 5.30%
Period-end...................... 5.68% 5.16%
Securities sold under repurchase agreements are maintained in safekeeping
by correspondent banks.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. For the quarter ended March 31, 1997, the Company's
liquidity needs have primarily been met by growth in core deposits and proceeds
from the Company's IPO. Although access to purchased funds from correspondent
banks is available and has been utilized on occasion to take advantage of
investment opportunities, the Company does not generally rely on these external
funding sources. The cash and federal funds sold position, supplemented by
amortizing securities and loan portfolios, have generally created an adequate
liquidity position.
The Company's risk-based capital ratios remain above the levels designated
as "well capitalized" on March 31, 1997 with Leverage Capital, Tier 1
Risk-Based Capital and Risk-Based Capital Ratios of 7.77%, 10.83% and 11.70%,
respectively.
OTHER MATTERS
On April 28, 1997, the Company and the Bank entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Pinemont Bank, whereby Pinemont
Bank will merge into the Bank. The Merger Agreement which is subject to approval
of the shareholders of the Company and Pinement Bank and various regulatory
authorities, provides for the exchange of 0.625 of a share of the Company's
common shares for each share of Pinemont Bank stock, resulting in the issuance
of approximately 1,775,000 shares of the Company's common shares. At March 31,
1997, Pinemont Bank had total assets of approximately $235 million and total
deposits of $215 million. The transaction is expected to be accounted for as a
pooling of interests.
In the first quarter of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
("SFAS 128") and Statement of Financial Accounting Standards No. 129
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE ("SFAS 129"). These
statements will be adopted by the Company effective December 31, 1997. SFAS 128
simplifies the computation of earnings per common share by replacing primary and
fully diluted presentations with the new basic and diluted disclosures. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. Under the provisions of SFAS 128, basic and diluted earnings per
share would be $0.35 and $0.32, respectively, for the quarter ended March 31,
1997 and $0.32 and $0.29, respectively, for the quarter ended March 31, 1996.
15
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - --------------------------------------------------- ------------------------------------------ -------------
<C> <S> <C>
WALTER E. JOHNSON Chairman of the Board and Chief Executive May , 1997
WALTER E. JOHNSON Officer (Principal Executive Officer)
DAVID C. FARRIES Executive Vice President, May , 1997
DAVID C. FARRIES Treasurer and Secretary (Principal
Financial Officer)
R. JOHN McWHORTER Vice President and Controller (Principal May , 1997
R. JOHN MCWHORTER Accounting Officer)
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 72,550
<INT-BEARING-DEPOSITS> 1,091
<FED-FUNDS-SOLD> 21,509
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 311,820
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 649,334
<ALLOWANCE> 6,302
<TOTAL-ASSETS> 1,073,498
<DEPOSITS> 888,578
<SHORT-TERM> 122,033
<LIABILITIES-OTHER> 3,740
<LONG-TERM> 0
0
0
<COMMON> 9,391
<OTHER-SE> 69,756
<TOTAL-LIABILITIES-AND-EQUITY> 1,073,498
<INTEREST-LOAN> 13,590
<INTEREST-INVEST> 4,418
<INTEREST-OTHER> 352
<INTEREST-TOTAL> 18,360
<INTEREST-DEPOSIT> 6,148
<INTEREST-EXPENSE> 7,860
<INTEREST-INCOME-NET> 10,500
<LOAN-LOSSES> 438
<SECURITIES-GAINS> 137
<EXPENSE-OTHER> 5,399
<INCOME-PRETAX> 4,800
<INCOME-PRE-EXTRAORDINARY> 3,083
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,083
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 4.58
<LOANS-NON> 1,230
<LOANS-PAST> 57
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,024
<CHARGE-OFFS> 175
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 6,302
<ALLOWANCE-DOMESTIC> 6,302
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
