================================================================================
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 SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
------------------------
COMMISSION FILE NUMBER: 000-22007
------------------------
SOUTHWEST BANCORPORATION OF TEXAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0519693
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION 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 [X] No [ ]
------------------------
There were 11,123,028 shares of the Registrant's Common Stock outstanding
as of the close of business on September 30, 1997.
================================================================================
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent
Accountants.................... 2
Condensed Consolidated Balance
Sheet as of September 30, 1997
and December 31, 1996.......... 3
Condensed Consolidated Statement
of Income for the three months
ended September 30, 1997 and
1996 and for the nine months
ended September 30, 1997
and 1996....................... 4
Condensed Consolidated Statement
of Changes in Shareholders'
Equity for the year ended
December 31, 1996, and for
the nine months ended
September 30, 1997............. 5
Condensed Consolidated Statement
of Cash Flows for the nine
months ended September 30,
1997 and 1996.................. 6
Notes to Condensed 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.................... 20
Signatures........................... 21
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Southwest Bancorporation of Texas, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Southwest Bancorporation of Texas, Inc. and Susidiary (the "Company") as of
September 30, 1997, the related condensed consolidated statements of income for
the three- and nine-month periods ended September 30, 1997, and the condensed
consolidated statements of changes in shareholders' equity and cash flows for
the nine-month period ended September 30, 1997. 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 aforementioned financial statements for them to be in
conformity with generally accepted accounting principles. We have not reviewed
the accompanying condensed consolidated statements of income for the three- and
nine-month periods ended September 30, 1996 and the condensed consolidated
statement of cash flows for the nine-month period ended September 30, 1996.
Accordingly, we do not express an opinion or any form of assurance on such
financial statements.
We have previously audited, prior to the restatement for the pooling of
interests described in Note 5, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Southwest Bancorporation of Texas,
Inc. and Subsidiary 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. The financial
statements of Pinemont Bank included in the December 31, 1996 restated condensed
consolidated balance sheet and the condensed consolidated statement of changes
in shareholders' equity for the year then ended were audited and reported on
separately by other auditors, and in their opinion dated February 7, 1997, they
expressed an unqualified option on those financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1996 and the condensed consolidated statement of
changes in shareholders' equity for the year then ended, are fairly stated, in
all material respects, in relation to the consolidated financial statements from
which they have been derived.
COOPERS & LYBRAND L.L.P.
Houston, Texas
November 7, 1997
2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
Cash and due from banks.............. $ 86,809 $ 91,384
Federal funds sold and other......... 162,320 81,479
------------- ------------
Total cash and cash
equivalents............ 249,129 172,863
Securities -- available for sale..... 434,945 345,398
Loans receivable, net................ 919,377 724,255
Premises and equipment, net.......... 18,893 16,468
Accrued interest receivable.......... 10,732 8,127
Prepaid expenses and other assets.... 5,155 5,030
------------- ------------
Total assets............... $ 1,638,231 $1,272,141
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing............. $ 407,348 $ 373,025
Money market and savings
accounts....................... 625,565 441,758
Time, $100 and over............. 259,709 137,357
Other time...................... 99,581 89,307
------------- ------------
Total deposits............. 1,392,203 1,041,447
Securities sold under repurchase
agreements......................... 124,774 136,119
Other short-term borrowings.......... 5,043 10,027
Accrued interest payable............. 1,451 1,123
Other liabilities.................... 5,261 2,687
------------- ------------
Total liabilities.......... 1,528,732 1,191,403
------------- ------------
Commitments and contingencies
Bank preferred stock................. -- 7,323
------------- ------------
Shareholders' equity:
Common stock -- $1 par value,
50,000,000 shares authorized;
11,123,028 and 9,403,582 shares
issued and outstanding at
September 30, 1997 and December
31, 1996, respectively......... 11,123 9,404
Additional paid-in capital...... 48,920 28,535
Retained earnings............... 47,279 35,564
Net unrealized appreciation
(depreciation) on securities
available for sale, net of
deferred taxes of $1,173 and
$(47) at September 30, 1997
and December 31, 1996,
respectively................... 2,177 (88)
------------- ------------
Total shareholders'
equity................. 109,499 73,415
------------- ------------
Total liabilities and
shareholders' equity... $ 1,638,231 $1,272,141
============= ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Interest income:
Loans.......................... $ 20,764 $ 14,380 $ 56,606 $ 40,172
Securities..................... 6,379 5,166 17,737 15,820
Federal funds sold and other... 2,142 328 3,399 955
--------- --------- --------- ---------
Total interest income..... 29,285 19,874 77,742 56,947
Interest expense on deposits and
other borrowings.................. 12,585 8,193 32,374 23,526
--------- --------- --------- ---------
Net interest income....... 16,700 11,681 45,368 33,421
Provision for loan losses........... 1,158 410 2,736 1,090
--------- --------- --------- ---------
Net interest income after
provision for loan
losses................. 15,542 11,271 42,632 32,331
--------- --------- --------- ---------
Other income:
Service charges................ 1,537 1,110 4,363 3,268
Other operating income......... 1,004 584 2,801 1,688
Gain on sale of securities..... 15 -- 569 35
--------- --------- --------- ---------
Total other income........ 2,556 1,694 7,733 4,991
--------- --------- --------- ---------
Other expenses:
Salaries and employee
benefits..................... 6,489 4,793 17,835 13,486
Occupancy expense.............. 1,651 1,306 4,957 3,611
Merger-related expenses and
other charges................ 2,011 -- 2,011 --
Other operating expenses....... 2,654 2,065 7,460 5,976
--------- --------- --------- ---------
Total other expenses...... 12,805 8,164 32,263 23,073
--------- --------- --------- ---------
Income before income
taxes.................. 5,293 4,801 18,102 14,249
Provision for income taxes.......... 1,855 1,682 6,351 4,991
--------- --------- --------- ---------
Net income before bank
preferred stock
dividend............... 3,438 3,119 11,751 9,258
Bank preferred stock dividend....... -- 115 36 341
--------- --------- --------- ---------
Net income available for
common shareholders.... $ 3,438 $ 3,004 $ 11,715 $ 8,917
========= ========= ========= =========
Earnings per common
share.................. $ 0.29 $ 0.29 $ 1.01 $ 0.86
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(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........... 9,042,451 $ 9,043 $ 25,319 $ 23,960 $ (18) $ 58,304
Issuance of common stock to
benefit plan.................. 17,435 17 151 -- -- 168
Net proceeds from sale of common
stock......................... 343,750 344 2,931 -- -- 3,275
Liquidation of partial shares... (54) -- (1) -- -- (1)
Deferred compensation
amortization.................. -- -- 135 -- -- 135
Net change in unrealized
depreciation on securities
available for sale, net of
deferred taxes of $37......... -- -- -- -- (70) (70)
Cash dividends on preferred
stock ($.61 per share)........ -- -- -- (457) -- (457)
Net income for the year ended
December 31, 1996............. -- -- -- 12,061 -- 12,061
--------- ------- ---------- -------- -------------- -------------
BALANCE, DECEMBER 31, 1996........... 9,403,582 9,404 28,535 35,564 (88) 73,415
Issuance of common stock to
benefit plan.................. 2,520 3 33 -- -- 36
Exercise of stock options....... 394,426 393 1,965 -- -- 2,358
Proceeds of public offering..... 1,322,500 1,323 18,487 -- -- 19,810
Redemption of Bank preferred
stock......................... -- -- (177) -- -- (177)
Deferred compensation
amortization.................. -- -- 77 -- -- 77
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $1,220...... -- -- -- -- 2,265 2,265
Cash dividends on preferred
stock ($.05 per share)........ -- -- -- (36) -- (36)
Net income for the nine months
ended September 30, 1997...... -- -- -- 11,751 -- 11,751
--------- ------- ---------- -------- -------------- -------------
BALANCE, SEPTEMBER 30, 1997.......... 11,123,028 $11,123 $ 48,920 $ 47,279 $2,177 $ 109,499
========= ======= ========== ======== ============== =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
------------ ----------
Cash flows from operating activities:
Net income...................... $ 11,751 $ 9,258
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan
losses.................. 2,736 1,090
Depreciation............... 2,732 1,926
Compensation expense....... 36 133
Deferred compensation
amortization............ 77 101
Realized (gains) losses on
securities available for
sale.................... (142) 71
Net amortization of
premiums and
discounts............... 986 1,225
Dividends on Federal Home
Loan Bank stock......... (1,752) (1,721)
Decrease (increase) in
accrued interest
receivable, prepaid
expenses and other
assets.................. (2,391) 991
Increase (decrease) in
accrued interest payable
and other liabilities... 3,793 (892)
------------ ----------
Net cash provided by
operating
activities......... 17,826 12,182
------------ ----------
Cash flows from investing activities:
Proceeds from maturity of
securities available for
sale........................... 30,080 33,725
Principal paydowns of
mortgage-backed securities
available for sale............. 29,820 41,611
Proceeds from sale of securities
available for sale............. 93,109 35,805
Purchase of securities available
for sale....................... (238,175) (116,484)
Proceeds from sale of other real
estate and other loan related
assets......................... 27 122
Net increase in loans
receivable..................... (198,239) (104,798)
Purchase of premises and
equipment...................... (5,157) (4,335)
------------ ----------
Net cash used in
investing
activities......... (288,535) (114,354)
------------ ----------
Cash flows from financing activities:
Net increase in
noninterest-bearing deposits... 34,323 35,456
Net increase in time deposits... 132,626 25,266
Net increase (decrease) in other
interest-bearing deposits...... 183,807 (8,029)
Net decrease in securities sold
under repurchase agreements.... (11,345) (9,462)
Net (decrease) increase in other
short-term borrowings.......... (4,984) 58,757
Net proceeds from sale of common
stock.......................... -- 3,275
Net proceeds from initial public
offering of common stock....... 19,810 --
Net proceeds from exercise of
stock options.................. 390 --
Retirement of Bank preferred
stock.......................... (7,500) --
Payment of dividends on Bank
preferred stock................ (152) (342)
------------ ----------
Net cash provided by
financing
activities......... 346,975 104,921
------------ ----------
Net increase in cash and cash
equivalents........................ 76,266 2,749
Cash and cash equivalents at
beginning of period................ 172,863 108,331
------------ ----------
Cash and cash equivalents at end of
period............................. $ 249,129 $ 111,080
============ ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Southwest Bancorporation of Texas, Inc. (the "Company") and its wholly-owned
subsidiary Southwest Bank of Texas National Association (the "Bank"). All
material intercompany accounts and transactions have been eliminated. In the
opinion of management, the unaudited condensed consolidated interim financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly the Company's consolidated financial
position at September 30, 1997, the consolidated results of operations for the
three-month and nine-month periods ended September 30, 1997 and 1996, and the
consolidated cash flows for the nine-month periods ended September 30, 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, Form S-4 dated May 28, 1997 and Form 8-K dated August 1,
1997. The 1996 year-end consolidated balance sheet and statement of changes in
shareholders' equity data were derived from audited financial statements, but do
not include all disclosures required by generally accepted accounting
principles.
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 $19.8 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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income available for common
shareholders...................... $ 3,438 $ 3,004 $ 11,715 $ 8,917
========= ========= ========= =========
Divided by average common shares and
common share equivalents:
Average common shares.......... 11,101 9,399 10,891 9,392
Average common share
equivalents.................. 748 928 760 909
--------- --------- --------- ---------
Total average common shares and
common share equivalents.......... 11,849 10,327 11,651 10,301
========= ========= ========= =========
Earnings per common share........... $ 0.29 $ 0.29 $ 1.01 $ 0.86
========= ========= ========= =========
4. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
During the nine months ended September 30, 1997, the Company reduced its
federal income tax liability by approximately $2.0 million and recorded a
corresponding increase to additional paid-in capital representing the tax
benefit related to the exercise of certain stock options.
7
<PAGE>
5. MERGER RELATED ACTIVITY:
Effective August 1, 1997, the Company and the Bank consummated their merger
with Pinemont Bank, whereby Pinemont Bank was merged into the Bank. In
accordance with the Agreement and Plan of Merger, the Company exchanged 0.625 of
a share of the Company's common shares for each share of Pinemont Bank stock,
resulting in the issuance of 1,668,621 shares of the Company's common shares.
The transaction was accounted for as a pooling of interests; therefore the
Company's condensed consolidated financial statements have been restated to
include the accounts and operations of Pinemont Bank for all periods presented.
Separate interest income and net income amounts of the merged entities are
presented in the following table:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
------------- -------------
Interest income:
Southwest Bancorporation........... $24,374 $63,989
Pinemont Bank...................... 4,911 13,753
------------- -------------
Total interest income......... $29,285 $77,742
============= =============
Net income available for common
shareholders:
Southwest Bancorporation........... $ 3,080 $10,018
Pinemont Bank...................... 358 1,697
------------- -------------
Total net income available for
common shareholders........ $ 3,438 $11,715
============= =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Total assets at September 30, 1997 and December 31, 1996 were $1.64
billion, and $1.27 billion, respectively. Loans were $928.8 million at September
30, 1997, an increase of $197.1 million or 26.9% from $731.7 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 $1.39 billion at September 30, 1997 from $1.04 billion at December 31, 1996.
Shareholders' equity was $109.5 million and $73.4 million at September 30, 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 $19.8 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.
The Company reported net income of $3.4 million for the three months ended
September 30, 1997, including merger-related expenses and other charges ("the
special charge") of approximately $2.0 million, pre-tax, related to its August
1, 1997, acquisition of Pinemont Bank, which was accounted for as a pooling of
interests. This amount of net income represents a 14.4% increase over the $3.0
million earned in the third quarter of 1996. For the nine months ended September
30, 1997, net income was $11.7 million, including the special charge, or $1.01
per fully diluted common share, an increase of 31.4% and 17.4%, respectively,
over the $8.9 million or $0.86 per fully diluted common share earned in the
first nine months of 1996. Return on average common equity was 15.88% and return
on average assets was 1.13% for the first nine months of 1997, compared with
16.68% and 1.15% for the same period a year ago.
For the nine months ended September 30, 1997, net income excluding
merger-related expenses and other charges would have been $13.0 million compared
to $8.9 million for the same period in 1996, an increase of 46.2 percent. For
the three months ended September 30, 1997, net income would have been
8
<PAGE>
$4.7 million or $0.40 per common share compared to $3.0 million or $0.29 per
common share for the same period in 1996, an increase of 58.0% and 37.9%
respectively. Return on average assets and return on common shareholders' equity
for the three months ended September 30, 1997 would have been 1.22%, and 17.72%,
respectively. The bank's efficiency ratio would have been 56.0% for the three
months ended September 30, 1997 compared with 60.8% for the same period last
year.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $16.7 million for the three months ended September
30, 1997, compared with $11.7 million for the three months ended September 30,
1996, an increase of 42.7%. For the nine months ended September 30, 1997, net
interest income increased 35.7% from the same period in 1996 to $45.4 million.
The increase in net interest income over the three- and nine-months ended
September 30, 1996 was primarily due to growth in average interest-earning
assets, principally loans.
The net interest margin was 4.58% for the three months ended September 30,
1997, compared with 4.68% in the third quarter of 1996. The net interest margin
was 4.71% for the nine months ended September 30, 1997, up from 4.67% for the
first nine months of 1996. During the third quarter of 1997 various public
entities had certificates of deposit and demand deposits which averaged
approximately $100 million. When the accounts were originally opened they were
expected to be temporary in nature. It is now anticipated that the funds will be
disbursed during the fourth quarter of 1997. Collateral supporting these
deposits will be reduced as these deposits are dispersed. The Bank has earned a
relatively narrow spread on this transaction resulting in a lower net interest
margin for the three- and nine-month periods ending September 30, 1997.
9
<PAGE>
The following tables present 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 tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ------- ------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans.............................. $ 891,750 $20,764 9.24% $ 620,450 $14,380 9.22%
Securities......................... 402,991 6,379 6.28 347,408 5,166 5.92
Federal funds sold and other....... 150,929 2,142 5.63 24,182 328 5.40
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets..................... 1,445,670 29,285 8.04% 992,040 19,874 7.97%
------- ------- ------- -------
Less allowance for loan losses.......... 8,841 6,740
----------- -----------
Total earning assets, net of allowance.. 1,436,829 985,300
Nonearning assets....................... 107,916 88,650
----------- -----------
Total assets.................. $ 1,544,745 $ 1,073,950
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits......................... $ 575,072 6,099 4.21% $ 407,345 4,077 3.98%
Certificates of deposits........... 348,770 4,702 5.35 199,254 2,611 5.21
Repurchase agreements and borrowed
funds............................ 138,772 1,784 5.10 121,814 1,505 4.92
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities................ 1,062,614 12,585 4.70% 728,413 8,193 4.47%
------- ------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing deposits....... 368,505 260,720
Other liabilities.................. 7,311 9,912
----------- -----------
Total liabilities............. 1,438,430 999,045
Bank preferred stock.................... -- 7,500
Shareholders' equity.................... 106,315 67,405
----------- -----------
Total liabilities and
shareholders' equity....... $ 1,544,745 $ 1,073,950
=========== ===========
Net interest income..................... $16,700 $11,681
======= =======
Net interest spread..................... 3.34% 3.50%
======= =======
Net interest margin..................... 4.58% 4.68%
======= =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ------- ------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans.............................. $ 823,923 $56,606 9.19% $ 577,118 $40,172 9.30%
Securities......................... 381,163 17,737 6.22 356,194 15,820 5.93
Federal funds sold and other....... 81,756 3,399 5.56 23,561 955 5.41
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets..................... 1,286,842 77,742 8.08% 956,873 56,947 7.95%
------- ------- ------- -------
Less allowance for loan losses.......... 8,213 6,494
----------- -----------
Total earning assets, net of allowance.. 1,278,629 950,379
Nonearning assets....................... 107,300 82,941
----------- -----------
Total assets.................. $ 1,385,929 $ 1,033,320
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits......................... $ 527,297 16,228 4.11% $ 400,991 11,769 3.92%
Certificates of deposits........... 272,706 10,834 5.31 195,971 7,684 5.24
Repurchase agreements and borrowed
funds............................ 141,416 5,312 5.02 110,306 4,073 4.93
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities................ 941,419 32,374 4.60% 707,268 23,526 4.44%
------- ------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing deposits....... 338,971 248,771
Other liabilities.................. 6,115 5,869
----------- -----------
Total liabilities............. 1,286,505 961,908
Bank preferred stock.................... 805 7,323
Shareholders' equity.................... 98,619 64,089
----------- -----------
Total liabilities and
shareholders' equity....... $ 1,385,929 $ 1,033,320
=========== ===========
Net interest income..................... $45,368 $33,421
======= =======
Net interest spread..................... 3.48% 3.51%
======= =======
Net interest margin..................... 4.71% 4.67%
======= =======
</TABLE>
11
<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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED
30, SEPTEMBER 30,
------------------------------- ------------------------------------------
1997 VS. 1996 1997 VS. 1996
------------------------------- ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------- ------------------------------------------
VOLUME RATE TOTAL VOLUME RATE DAYS TOTAL
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans................................... $ 6,344 $ 40 $ 6,384 $ 17,274 $ (693) $ (147) $ 16,434
Securities.............................. 843 370 1,213 1,151 824 (58) 1,917
Federal funds sold and other............ 1,725 89 1,814 2,359 88 (3) 2,444
--------- --------- --------- --------- --------- --------- ---------
Total increase (decrease) in
interest income.................. 8,912 499 9,411 20,784 219 (208) 20,795
--------- --------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits....... 1,695 327 2,022 3,736 766 (43) 4,459
Certificates of deposits................ 1,972 118 2,090 3,027 151 (28) 3,150
Repurchase agreements and borrowed
funds................................. 215 65 280 1,159 95 (15) 1,239
--------- --------- --------- --------- --------- --------- ---------
Total increase (decrease) in
interest expense................. 3,882 510 4,392 7,922 1,012 (86) 8,848
--------- --------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest
income................................ $ 5,030 $ (11) $ 5,019 $ 12,862 $ (793) $ (122) $ 11,947
========= ========= ========= ========= ========= ========= =========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1.2 million for the three months ended
September 30, 1997 as compared to $410,000 for the three months ended June 30,
1996. The provision for loan losses was $2.7 million for the nine months ended
September 30, 1997 as compared to $1.1 million for the nine months ended
September 30, 1996, an increase of 145.5%. This increase in the provision is
directly related to loan growth. The increase in the provision for loan losses
was due to the increased loan balances which averaged $891.8 million for the
three months ended September 30, 1997 compared to $620.5 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 provision as the Company's loan portfolio grows
and diversifies.
12
<PAGE>
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 1997 was $2.6
million, an increase of $900,000 or 52.9% over the same period in 1996.
Noninterest income for the nine months ended September 30, 1997 was $7.7
million, an increase of 54.0%, from $5.0 million during the comparable period in
1996. The following table presents for the periods indicated the major changes
in noninterest income.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit
accounts......................... $ 1,537 $ 1,110 $ 4,363 $ 3,268
Retail services income............. 92 70 247 206
Corporate services income.......... 7 7 30 17
Loan operations.................... 197 206 584 445
Investment services................ 631 244 1,663 860
Other noninterest income........... 77 57 277 160
Gain on sale of securities......... 15 -- 569 35
--------- --------- --------- ---------
Total noninterest income...... $ 2,556 $ 1,694 $ 7,733 $ 4,991
========= ========= ========= =========
All categories of noninterest income for the nine months ended September
30, 1997 reflect increased income compared to the nine months ended September
30, 1996. The increase in noninterest income for the three- and nine-months
ended September 30, 1997, compared to the three- and nine-months ended September
30, 1996, respectively, is primarily attributable to the increased number of
deposit accounts, the new business relationship acquired with Harris County and
the growth of the investment services department.
Service charges were $1.5 million for the three months ended September 30,
1997, compared to $1.1 million for the three months ended September 30, 1996, an
increase of $400,000 or 36.4%. Services charges were $4.4 million for the nine
months ended September 30, 1997, compared to $3.3 million for the same period in
1996. This was an increase of $1.1 million, or 33.3%. During this period the
number of accounts serviced increased to 38,651 at September 30, 1997 from
33,977 at September 30, 1996.
Fee income from investment services has increased significantly in the past
year. For the three months ended September 30, 1997, investment services income
grew to $631,000, an increase of $387,000 or 158.6% over the 1996 level. For the
nine month period ending September 30, 1997, investment services income grew to
$1.7 million or 97.7% from the $860,000 level during the same period in 1996.
This increase in the investment services income was attributable to a strategic
focus by the Company to increase its competitive position in providing
investment services.
NONINTEREST EXPENSES
For the three months ended September 30, 1997, noninterest expenses totaled
$12.8 million, including merger-related expenses and other charges of
approximately $2.0 million (the "special charge"), an increase of $4.6 million,
or 56.1%, from $8.2 million during 1996. For the nine months ended September 30,
1997, noninterest expenses totaled $32.3 million, including the special charge,
an increase of $9.2 million, or 39.8% from $23.1 million for the same period in
1996. The increase in noninterest expenses during these periods was due
primarily to salaries and employee benefits. The efficiency ratio, including the
special charge, increased to 66.46% for the three months ended September 30,
1997, from 60.76% for the comparable period in 1996. For the nine months ended
September 30, the efficiency ratio, including the special charge, increased to
60.70% for 1997 from 59.96% for 1996.
Salary and benefit expense for the three months ended September 30, 1997
was $6.5 million, an increase of $1.7 million or 35.4% from $4.8 million for the
three months ended September 30, 1996. Salary and benefit expense for the nine
months ended September 30, 1997 was $17.8 million, an increase of $4.3 million
or 31.9% from $13.5 million for the same period in 1996. This increase was due
primarily to hiring
13
<PAGE>
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 at September 30, 1997 and September 30, 1996 were 514 and 425,
respectively.
Occupancy expense increased $400,000 or 30.8% to $1.7 million for the three
months ended September 30, 1997. For the nine months ended September 30, 1997,
occupancy expense increased $1.4 million or 38.9% over the same period a year
ago to $5.0 million. Major categories included within occupancy expense are
building lease expense, depreciation expense, and maintenance contract expense.
Building lease expense increased to $465,000 for the three months ended
September 30, 1997 from $309,000 for the same period in 1996. For the nine
months ended September 30, 1997, building lease expense increased 58.7% to $1.3
million from $819,000 for the nine months ended September 30, 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 corporate offices by
moving to a larger facility. Depreciation expense for the third quarter
increased $202,000, to $726,000 or 38.6% in 1997 from the comparable period in
1996. For the nine months ended September 30, 1997, depreciation expense was
$2.2 million. This represents an increase of $653,000 or 42.8% over the same
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 three months ended September
30, 1997 was $224,000, an increase of $106,000 or 89.8% compared to $118,000 in
1996. For the nine months ended September 30, 1997, maintenance contract expense
was $502,000, an increase of 50.8% or $169,000 over the same period 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 three
months ended September 30, 1997, income tax expense was $1.9 million, an
increase of $200,000 or 11.8% from the $1.7 million of income tax expense for
the same period in 1996. For the nine month period ending September 30, 1997,
income tax expense was $6.4 million compared to $5.0 million during the same
period in 1996, an increase of 28.0%.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans were $928.8 million at September 30, 1997, an increase of
$197.1 million or 26.9% from $731.7 million at December 31, 1996. Consistent
with the Company's historically high rate of growth, this increase is believed
to be the result of a strong local economy and the Company's style of
relationship banking featuring professional, attentive and responsive service to
customers' needs, and focusing on commercial lending to middle market companies
and private banking for individuals.
14
<PAGE>
The following table summarizes the loan portfolio of the Company by type of
loan as of September 30, 1997 and December 31, 1996:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial......... $ 453,682 48.84% $ 348,218 47.59%
Real estate.......................
Construction and land
development................ 118,001 12.71 84,044 11.49
1-4 Family................... 173,564 18.69 146,271 19.99
Commercial owner occupied.... 113,046 12.17 86,087 11.77
Ranchland.................... 8,835 0.95 8,835 1.21
Other............................. 6,758 0.73 3,159 0.43
Consumer.......................... 54,879 5.91 55,042 7.52
---------- ------- ---------- -------
Total loans....................... $ 928,765 100.00% $ 731,656 100.00%
========== ======= ========== =======
NONPERFORMING ASSETS
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets were $1.7 million at September 30, 1997 compared
with $1.9 million at December 31, 1996. This resulted in a ratio of
nonperforming assets to loans plus other real estate of 0.18% and 0.26% at
September 30, 1997 and December 31, 1996, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $ 1,023 $1,615
Accruing loans 90 or more days past
due.................................. 23 22
Restructured loans................... -- --
Other real estate.................... 650 281
------------- ------------
Total nonperforming assets...... $ 1,696 $1,918
============= ============
Nonperforming assets to total loans
and other real estate.............. 0.18% 0.26%
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 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
15
<PAGE>
the Company's historical charge-off experience. The Company then charges to
operations a provision for loan losses determined on a quarterly 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 September 30,
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
September 30, 1997.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses beginning
of period.......................... $ 7,401 $ 6,024
Provision for loan losses............ 2,736 2,090
Charge-offs.......................... (853) (804)
Recoveries........................... 104 91
------------- -------------
Allowance for loan losses end of
period............................... $ 9,388 $ 7,401
============= =============
Allowance to period-end loans........ 1.01% 1.01%
Net charge-offs to average loans..... 0.12% 0.12%
Allowance to period-end nonperforming
loans.............................. 897.61% 452.11%
SECURITIES
The amortized cost and approximate fair value of securities classified as
available for sale is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- FAIR
COST GAIN LOSS VALUE
--------- ------ ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U. S. Government securities.......... $ 113,392 $ 607 $ (12) $ 113,987
Mortgage-backed securities........... 265,014 2,707 (8) 267,713
Federal Reserve Bank stock........... 1,393 -- -- 1,393
Federal Home Loan Bank stock, at
cost................................. 36,834 -- -- 36,834
Other securities..................... 14,969 50 (1) 15,018
--------- ------ ------- ----------
Total securities available for
sale.......................... $ 431,602 $3,364 $ (21) $ 434,945
========= ====== ======= ==========
DECEMBER 31, 1996
-----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- FAIR
COST GAIN LOSS VALUE
--------- ------ ------- ----------
(DOLLARS IN THOUSANDS)
U. S. Government securities.......... $ 126,966 $ 372 $ (484) $ 126,854
Mortgage-backed securities........... 169,399 571 (617) 169,353
Federal Reserve Bank stock........... 950 -- -- 950
Federal Home Loan Bank stock, at
cost................................. 40,082 -- -- 40,082
Other securities..................... 8,131 31 (3) 8,159
--------- ------ ------- ----------
Total securities available for
sale.......................... $ 345,528 $ 974 $(1,104) $ 345,398
========= ====== ======= ==========
</TABLE>
16
<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 September 30, 1997, the Company had less than three
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 three months ended September 30, 1997 and the year ended December 31,
1996, were 28.5% and 30.1%, respectively.
The average daily balances and weighted average rates paid on deposits for
the three months ended September 30, 1997 and the year ended December 31, 1996,
are presented below:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------- --------------------
AVG. AVG. AVG.
BALANCE AVG. RATE BALANCE RATE
---------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
NOW accounts................. $ 24,595 1.98% $ 51,906 1.51%
Regular savings.............. 11,629 2.29 9,924 2.35
Money market savings......... 538,848 4.35 343,879 4.34
CD's less than $100,000...... 82,579 5.18 72,585 5.09
CD's $100,000 and over....... 248,278 5.41 112,459 5.35
IRA's & QRP's................ 17,913 5.27 16,029 5.28
---------- --------- -------- ---------
Total interest-bearing
deposits.............. 923,842 4.64 606,782 4.37
Noninterest-bearing deposits. 368,505 -- 260,784 --
---------- --------- -------- ---------
Total deposits.......... $1,292,347 3.32% $867,566 3.06%
========== ========= ======== =========
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:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(DOLLARS IN THOUSANDS)
3 months or less..................... $169,058 $ 72,722
Between 3 months and 6 months........ 50,948 28,144
Between 6 months and 1 year.......... 28,887 24,226
Over 1 year.......................... 10,816 12,265
------------------ -----------------
Total CD's $100,000 and over.... $259,709 $ 137,357
================== =================
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 $61.2 million
decrease in the amount of NOW accounts and a corresponding increase in
noninterest-bearing money market accounts at September 30, 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.
17
<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:
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------- ------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase agreements:
Average......................... $ 124,718 $103,927
Period-end...................... 124,774 136,119
Maximum month-end balance during
period........................ 125,765 136,119
Interest rate:
Average......................... 4.93% 4.88%
Period-end...................... 4.92% 4.93%
Other short-term borrowings:
Average......................... $ 17,084 $ 13,137
Period-end...................... 5,043 10,027
Maximum month-end balance during
period........................ 50,645 60,044
Interest rate:
Average......................... 5.56% 5.57%
Period-end...................... 5.79% 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 three months ended September 30, 1997, the
Company's liquidity needs have primarily been met by growth in core deposits.
Although access to purchased funds from correspondent banks is available and has
been utilized on occasion to take advantage of investment opportunities, 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 September 30, 1997 with leverage capital, tier 1
risk-based capital and risk-based capital ratios of 6.68%, 9.89% and 10.79%,
respectively.
OTHER MATTERS
Effective August 1, 1997, the Company and the Bank consummated their merger
with Pinemont Bank, whereby Pinemont Bank was merged into the Bank. In
accordance with the Agreement and Plan of Merger, the Company exchanged 0.625 of
a share of the Company's common shares for each share of Pinemont Bank stock,
resulting in the issuance of 1,668,621 shares of the Company's common shares.
The transaction was accounted for as a pooling of interests; therefore the
Company's condensed consolidated financial statements have been restated to
include the accounts and operations of Pinemont Bank for all periods presented.
In the three months ended September 30, 1997, the Company expensed approximately
$2.0 million, pre-tax, of merger related expenses and other charges. Management
does not expect any material additional merger related expenses to be incurred.
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
18
<PAGE>
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 computed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income available for common
shareholders..................... $ 3,438 $ 3,004 $ 11,715 $ 8,917
========= ========= ========= =========
Divided by average common shares
and common share equivalents:
Average common shares......... 11,101 9,399 10,891 9,392
Average common share
equivalents................. 719 923 669 892
--------- --------- --------- ---------
Total average common shares and
common share equivalents......... 11,820 10,322 11,560 10,284
========= ========= ========= =========
Basic earnings per common share.... $ 0.31 $ 0.32 $ 1.08 $ 0.95
========= ========= ========= =========
Diluted earnings per common share.. $ 0.29 $ 0.29 $ 1.01 $ 0.86
========= ========= ========= =========
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for financial statements
issued for periods after December 31, 1997 and will have no impact on the
Company's financial position, results of operations or cash flows.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27. Financial Data Schedule
The required Financial Data Schedule has been included as Exhibit 27 of
the Form 10-Q filed electronically with the Securities and Exchange
Commission.
b) Reports on Form 8-K
The following report on Form 8-K was filed by the Company during the
three months ended September 30, 1997:
Current Report on Form 8-K dated August 1, 1997, and filed August 5,
1997, Items 2 and 7.
The following financial statements were included in Item 7 of such
report:
PINEMONT BANK
Report of Independent Certified Public Accountants
Balance Sheets as of March 31, 1997 (unaudited), and December 31,
1996 and 1995
Statements of Earnings for the Three Months Ended March 31, 1997
(unaudited) and 1996 (unaudited) and the Years Ended December 31,
1996, 1995 and 1994
Statements of Shareholders Equity for the Three Months Ended March 31,
1997 (unaudited) and the Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the Three Months Ended March 31, 1997
(unaudited) and 1996 (unaudited) and the Years Ended December 31,
1996, 1995 and 1994
Notes to Financial Statements
Pro Forma Financial Statements (Unaudited)
Pro Forma Combined Condensed Balance Sheet as of March 31, 1997
Pro Forma Combined Condensed Statements of Income for the Three Months
Ended March 31, 1997 and the Years Ended December 31, 1996 and 1995
Notes to Unaudited Pro Forma Financial Statements
20
<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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WALTER E. JOHNSON Chairman of the Board and November 12, 1997
WALTER E. JOHNSON Chief Executive Officer
(Principal Executive Officer)
/s/ DAVID C. FARRIES Executive Vice President, November 12, 1997
DAVID C. FARRIES Treasurer and Secretary
(Principal Financial Officer)
/s/ R. JOHN McWHORTER Vice President and Controller November 12, 1997
R. JOHN MCWHORTER (Principal Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 86,809
<INT-BEARING-DEPOSITS> 8,627
<FED-FUNDS-SOLD> 153,693
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 434,945
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 928,765
<ALLOWANCE> 9,388
<TOTAL-ASSETS> 1,638,231
<DEPOSITS> 1,392,203
<SHORT-TERM> 129,817
<LIABILITIES-OTHER> 6,712
<LONG-TERM> 0
0
0
<COMMON> 11,123
<OTHER-SE> 98,376
<TOTAL-LIABILITIES-AND-EQUITY> 1,638,231
<INTEREST-LOAN> 56,606
<INTEREST-INVEST> 17,737
<INTEREST-OTHER> 3,399
<INTEREST-TOTAL> 77,742
<INTEREST-DEPOSIT> 27,061
<INTEREST-EXPENSE> 32,374
<INTEREST-INCOME-NET> 45,368
<LOAN-LOSSES> 2,736
<SECURITIES-GAINS> 569
<EXPENSE-OTHER> 25,099
<INCOME-PRETAX> 18,102
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</TABLE>
