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, 1998
[ ] 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 (I.R.S. EMPLOYER
OF 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 11,572,687 shares of the Registrant's Common Stock outstanding
as of the close of business on March 31, 1998.
================================================================================
<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
Consolidated Balance Sheet as of
March 31, 1998 and December 31,
1997........................... 3
Consolidated Statement of Income
for the Three Months Ended
March 31,
1998 and 1997................. 4
Consolidated Statement of
Changes in Shareholders' Equity
for the
Year Ended December 31, 1997,
and the Three Months Ended
March 31, 1998................. 5
Consolidated Statement of Cash
Flows for the Three Months
Ended March 31,
1998 and 1997................. 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........... 15
Item 2. Changes in Securities....... 15
Item 3. Default upon Senior
Securities........................... 16
Item 4. Submission of Matters to a
Vote of Security Holders............. 16
Item 5. Other Information........... 16
Item 6. Exhibits and Reports on Form
8-K.................................. 16
Signatures........................... 17
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Southwest Bancorporation of Texas, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Southwest Bancorporation of Texas, Inc. and Subsidiary (the "Company") as of
March 31, 1998, the related condensed consolidated statements of income and cash
flows for the three-month periods ended March 31, 1998 and 1997 and the
condensed consolidated statement of changes in shareholders' equity for the
three-month period ended March 31, 1998. 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, 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated February 10, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1997
and the accompanying condensed consolidated statement of changes in
shareholders' equity for the year ended December 31, 1997, is fairly stated, in
all material respects, in relation to the consolidated financial statements from
which it has been derived.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 30, 1998
2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
ASSETS
Cash and due from banks.............. $ 111,001 $ 104,363
Federal funds sold and other interest
earning assets....................... 72,045 132,616
------------ -------------
Total cash and cash
equivalents............ 183,046 236,979
Securities -- available for sale..... 579,351 555,398
Loans receivable, net................ 1,044,587 975,815
Premises and equipment, net.......... 22,680 21,348
Accrued interest receivable.......... 10,730 11,159
Prepaid expenses and other assets.... 10,426 6,905
------------ -------------
Total assets............... $ 1,850,820 $ 1,807,604
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing... $ 441,686 $ 492,843
Demand -- interest-bearing...... 64,399 58,915
Money market accounts........... 664,800 580,605
Savings......................... 11,669 14,850
Time, $100 and over............. 251,441 267,533
Other time...................... 94,565 97,595
------------ -------------
Total deposits............. 1,528,560 1,512,341
Securities sold under repurchase
agreements......................... 172,916 155,832
Other short-term borrowings.......... 20,654 17,243
Accrued interest payable............. 1,160 1,259
Other liabilities.................... 3,337 6,094
------------ -------------
Total liabilities.......... 1,726,627 1,692,769
------------ -------------
Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value,
50,000,000 shares authorized;
11,572,687 and 11,185,263
shares issued and outstanding
at March 31, 1998 and December
31, 1997, respectively......... 11,573 11,185
Additional paid-in capital...... 52,790 49,549
Retained earnings............... 57,472 52,333
Accumulated other comprehensive
income......................... 2,358 1,768
------------ -------------
Total shareholders'
equity................. 124,193 114,835
------------ -------------
Total liabilities and
shareholders' equity... $ 1,850,820 $ 1,807,604
============ =============
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 MARCH 31,
--------------------
1998 1997
--------- ---------
Interest income:
Loans........................... $ 22,433 $ 16,780
Securities...................... 7,566 5,277
Federal funds sold and other.... 1,948 530
--------- ---------
Total interest income...... 31,947 22,587
Interest expense on deposits and
other borrowings................... 14,157 9,331
--------- ---------
Net interest income........ 17,790 13,256
Provision for loan losses............ 600 542
--------- ---------
Net interest income after
provision for loan
losses.................. 17,190 12,714
--------- ---------
Other income:
Service charges................. 1,994 1,347
Other operating income.......... 1,596 851
Gain on sale of securities,
net............................ 8 129
--------- ---------
Total other income......... 3,598 2,327
--------- ---------
Other expenses:
Salaries and employee
benefits....................... 7,940 5,529
Occupancy expense............... 2,137 1,621
Merger-related expenses......... 19 --
Other operating expenses........ 2,727 2,178
--------- ---------
Total other expenses....... 12,823 9,328
--------- ---------
Income before income
taxes................... 7,965 5,713
Provision for income taxes........... 2,826 2,006
--------- ---------
Net income before bank
preferred stock
dividend................ 5,139 3,707
--------- ---------
Bank preferred stock dividend........ -- 36
--------- ---------
Net income available for
common shareholders..... $ 5,139 $ 3,671
========= =========
Earnings per common share:
Basic...................... $ 0.45 $ 0.35
========= =========
Diluted.................... $ 0.43 $ 0.32
========= =========
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>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS INCOME EQUITY
--------- ------- ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........... 9,403,582 $ 9,403 $ 28,536 $ 35,564 $ (88) $ 73,415
Issuance of common stock to
benefit plan.................. 2,520 3 33 36
Exercise of stock options....... 456,661 456 2,514 2,970
Proceeds of public offering..... 1,322,500 1,323 18,487 19,810
Redemption of Bank preferred
stock......................... (177) (177)
Deferred compensation
amortization.................. 156 156
Cash dividends on preferred
stock ($.05 per share)........ (36) (36)
Comprehensive income:
Net income for the year ended
December 31, 1997.......... 16,805 16,805
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of ($999)... 1,856 1,856
-------------
Total comprehensive income.... 18,661
--------- ------- ---------- -------- -------------- -------------
BALANCE DECEMBER 31, 1997............ 11,185,263 11,185 49,549 52,333 1,768 114,835
Common stock issued in
acquisition................... 140,000 140 444 584
Exercise of stock options....... 247,424 248 2,764 3,012
Deferred compensation
amortization.................. 33 33
Comprehensive income:
Net income for the three
months ended March 31,
1998....................... 5,139 5,139
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of ($318)... 590 590
-------------
Total comprehensive income.... 5,729
--------- ------- ---------- -------- -------------- -------------
BALANCE, MARCH 31, 1998.............. 11,572,687 $11,573 $ 52,790 $ 57,472 $ 2,358 $ 124,193
========= ======= ========== ======== ============== =============
</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)
THREE MONTHS
ENDED MARCH 31,
----------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income...................... $ 5,139 $ 3,707
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan
losses.................. 600 542
Depreciation............... 1,081 901
Compensation expense....... -- 36
Deferred compensation
amortization............ 33 23
Realized gains on
securities available for
sale, net............... (8) (129)
Net amortization of
premiums and
discounts............... 458 415
Dividends on Federal Home
Loan Bank stock......... (566) (591)
Increase in accrued
interest receivable,
prepaid expenses and
other assets............ (3,639) (4,645)
Increase (decrease) in
accrued interest payable
and other liabilities... (729) 2,678
---------- ----------
Net cash provided by
operating
activities......... 2,369 2,937
---------- ----------
Cash flows from investing activities:
Proceeds from maturity of
securities available for
sale........................... 95,808 8,235
Principal paydowns of
mortgage-backed securities
available for sale............. 30,661 10,735
Proceeds from sale of securities
available for sale............. 4,186 27,746
Purchase of securities available
for sale....................... (153,584) (72,024)
Proceeds from sale of other real
estate and other loan related
assets......................... 14 34
Net increase in loans
receivable..................... (69,372) (54,655)
Purchase of premises and
equipment...................... (2,413) (2,472)
---------- ----------
Net cash used in
investing
activities......... (94,700) (82,401)
---------- ----------
Cash flows from financing activities:
Net decrease in
noninterest-bearing demand
deposits....................... (51,157) (21,634)
Net (decrease) increase in time
deposits....................... (19,122) 3,966
Net increase in other
interest-bearing deposits...... 86,498 59,613
Net increase (decrease) in
securities sold under
repurchase agreements.......... 17,084 (19,130)
Net increase (decrease) in other
short-term borrowings.......... 3,411 (4,983)
Net proceeds from initial public
offering of common stock....... -- 19,901
Net proceeds from exercise of
stock options.................. 1,684 307
Retirement of Bank preferred
stock.......................... -- (7,500)
Payment of dividends on Bank
preferred stock................ -- (152)
---------- ----------
Net cash provided by
financing
activities......... 38,398 30,388
---------- ----------
Net decrease in cash and cash
equivalents........................ (53,933) (49,076)
Cash and cash equivalents at
beginning of period................ 236,979 172,863
---------- ----------
Cash and cash equivalents at end of
period............................. $ 183,046 $ 123,787
========== ==========
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
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 financial statements
reflect all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the Company's financial position at March 31, 1998
and the Company's results of operations and cash flows for the three-month
periods ended March 31, 1998 and 1997. Interim period results are not
necessarily indicative of results of operations or cash flows for a full-year
period. The 1997 year-end condensed 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.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME, in the first quarter of 1998.
Accordingly, the components of comprehensive income have been reported in the
accompanying condensed consolidated statement of changes in shareholders' equity
for all periods presented.
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, 1997.
2. EARNINGS PER COMMON SHARE:
Earnings per common share is computed as follows:
THREE MONTHS
ENDED MARCH 31,
----------------------
1998 1997
---------- ----------
Net income available for common
shareholders....................... $ 5,139 $ 3,671
Divided by average common shares and
common share equivalents:
Average common shares........... 11,391 10,489
Average common share
equivalents................... 610 839
---------- ----------
Total average common shares and
common share equivalents........... 12,001 11,328
Earnings per common share:
Basic........................... $ 0.45 $ 0.35
========== ==========
Diluted......................... $ 0.43 $ 0.32
========== ==========
3. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
During the quarter ended March 31, 1998, 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.
4. ACQUISITION ACTIVITY:
On February 5, 1998, the Bank acquired First Republic Capital Corp. and
City Financial Services, Inc., two related commercial finance companies. These
companies specialize in providing operating funds to businesses by converting
their accounts receivable to cash. The transaction, which resulted in the
exchange of 140,000 shares of the Company's common shares for all of the
outstanding stock of First Republic Capital Corp. and City Financial Services,
Inc., has been accounted for as a pooling of interests, although historical
financial statements have not been restated due to immateriality.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Total assets at March 31, 1998, and December 31, 1997 were $1.85 billion,
and $1.81 billion, respectively. Loans were $1.06 billion at March 31, 1998, an
increase of $69.3 million or 7.0% from $986.2 million at December 31, 1997. This
growth was a result of a strong local economy, and the Company's style of
relationship banking. Deposits experienced similar growth, increasing to $1.53
billion at March 31, 1998 from $1.51 billion at December 31, 1997. Shareholders'
equity was $124.2 million and $114.8 million at March 31, 1998 and December 31,
1997, respectively.
Net income available for common shareholders was $5.1 million and $3.7
million and earnings per diluted common share was $0.43 and $0.32 for the
quarters ended March 31, 1998 and 1997, 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 1.18%
and 1.20% and returns on average common equity of 17.51% and 16.64% for the
quarters ended March 31, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income for the quarter ended March 31, 1998 was $31.9 million, an
increase of $9.4 million or 41.4% from the quarter ended March 31, 1997. The
increase was primarily due to an increase of $5.7 million in interest earned on
loans over the prior comparable period. The increase in interest income on loans
was due primarily to a $254.3 million increase in average loans outstanding.
Interest income from securities was $7.6 million for the quarter ended March 31,
1998, an increase of $2.3 million from the prior comparable period. The increase
was primarily due to a $141.8 million increase in average securities
outstanding. Total interest-earning assets for the quarter ended March 31, 1998
averaged $1.64 billion compared to $1.14 billion for the quarter ended March 31,
1997.
INTEREST EXPENSE.
Interest expense on deposits and other borrowings was $14.2 million for the
quarter ended March 31, 1998, as compared to $9.3 million for the same period in
1997. The increase in interest expense was due to a $381.2 million increase in
average interest-bearing liabilities and an increase in the average rate paid on
interest-bearing liabilities to 4.70% from 4.50% for the quarter ended March 31,
1998 compared to the quarter ended March 31, 1997. The average balance of
interest-bearing liabilities was $1.22 billion for the quarter ended March 31,
1998 as compared to $840.3 million for the quarter ended March 31, 1997.
NET INTEREST INCOME
Net interest income was $17.8 million for the quarter ended March 31, 1998
as compared to $13.3 million for the same period in 1997. The increase in net
interest income was primarily due to an increase of $499.2 million or 43.9% in
average interest-earning assets from the quarter ended March 31, 1997. Net
interest income was negatively impacted by a lower 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 decrease in the net interest margin
was primarily due to the decrease in the yield on average earning assets which
decreased fourteen basis points to 7.91% for the quarter ended March 31, 1998.
The net interest margin for the quarter ended March 31, 1998 was 4.41% compared
with 4.73% for the comparable period in 1997.
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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
--------------------------------- ---------------------------------
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.............................. $ 1,002,199 $22,433 9.08% $ 747,880 $16,780 9.10%
Securities......................... 492,562 7,566 6.23 350,733 5,277 6.10
Federal funds sold and other....... 142,186 1,948 5.56 39,085 531 5.51
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets..................... 1,636,947 31,947 7.91% 1,137,698 22,588 8.05%
------- ------- ------- -------
Less allowance for loan losses.......... (10,764) (7,644)
----------- -----------
Total earning assets, net of allowance.. 1,626,183 1,130,054
Nonearning assets....................... 136,811 115,429
----------- -----------
Total assets.................. $ 1,762,994 $ 1,245,483
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits......................... $ 677,630 7,134 4.27% $ 468,906 4,650 4.02%
Certificates of deposits........... 348,779 4,550 5.29 228,229 2,970 5.28
Repurchase agreements and borrowed
funds............................ 195,091 2,473 5.14 143,211 1,712 4.85
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities................ 1,221,500 14,157 4.70% 840,346 9,332 4.50%
------- ------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 418,039 308,168
Other liabilities.................. 4,422 5,050
----------- -----------
Total liabilities............. 1,643,961 1,153,564
Bank preferred stock.................... -- 2,441
Shareholders' equity.................... 119,033 89,478
----------- -----------
Total liabilities and
shareholders' equity....... $ 1,762,994 $ 1,245,483
=========== ===========
Net interest income..................... $17,790 $13,256
======= =======
Net interest spread..................... 3.21% 3.55%
======= =======
Net interest margin..................... 4.41% 4.73%
======= =======
</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
cannot be segregated have been allocated.
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 VS. 1997
-------------------------------
INCREASE (DECREASE)
DUE TO
-------------------------------
VOLUME RATE TOTAL
--------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $ 5,706 $ (53) $ 5,653
Securities.............................. 2,134 155 2,289
Federal funds sold and other............ 1,401 16 1,417
--------- --------- ---------
Total increase in interest
income........................... 9,241 118 9,359
--------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits....... 2,070 414 2,484
Certificates of deposits................ 1,569 11 1,580
Repurchase agreements and borrowed
funds................................. 620 141 761
--------- --------- ---------
Total increase in interest
expense.......................... 4,259 566 4,825
--------- --------- ---------
Increase (decrease) in net interest
income................................ $ 4,982 $ (448) $ 4,534
========= ========= =========
PROVISION FOR LOAN LOSSES
The provision for loan losses was $600,000 for the quarter ended March 31,
1998 as compared to $542,000 for the quarter ended March 31, 1997. The increase
in the provision for loan losses was due to the increased loan balances which
averaged $1.0 billion for the quarter ended March 31, 1998 compared to $747.9
million for the comparable period in 1997. 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.
NONINTEREST INCOME
Noninterest income for the quarter ended March 31, 1998 was $3.6 million,
an increase of $1.3 million or 56.2% over the same period in 1997. The following
table presents for the periods indicated the major changes in noninterest
income.
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Service charges on deposit
accounts........................... $ 1,994 $ 1,347
Loan operations...................... 267 182
Investment services.................. 772 508
Gain on sale of securities, net...... 8 129
Factoring fee income................. 320 --
Other noninterest income............. 237 161
--------- ---------
Total noninterest income........ $ 3,598 $ 2,327
========= =========
Service charges were $2.0 million for the quarter ended March 31, 1998,
compared to $1.3 million for the quarter ended March 31, 1997, an increase of
$647,000 or 48.0%. This increase resulted from a substantial increase in the
accounts serviced during the past twelve months.
10
<PAGE>
Other changes in noninterest income were recognized in the categories of
investment services and factoring fee income. For the quarter ended March 31,
1998, investment services income grew to $772,000, an increase of $264,000 or
52.0% over the 1997 level. This increase is the result of a strategic focus by
the Company to increase its competitive position in providing investment
services. Factoring fee income results from the recent pooling of First Republic
Capital Corp. and City Financial Services, Inc. Due to immateriality, prior
periods were not restated.
NONINTEREST EXPENSES
For the quarter ended March 31, 1998, noninterest expenses totaled $12.8
million, an increase of $3.5 million, or 37.8%, from $9.3 million during 1997.
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 59.95% for the quarter ended March 31, 1998, from 59.86%
for the comparable period in 1997. Although the ratio remained basically the
same as last year, improvement was in several areas including an increase in
noninterest income as a percent of earning assets, and a decrease in noninterest
expense as a percent of earning assets.
Salary and benefit expense for the quarter ended March 31, 1998 was $7.9
million, an increase of $2.4 million or 43.8% from $5.5 million for the quarter
ended March 31, 1997. This increase was due primarily to hiring of additional
personnel required to accommodate the Company's growth. Total full-time
equivalent employees for the quarters ended March 31, 1998 and 1997 were 606 and
458, respectively.
Occupancy expense increased $520,000 or 32.2% to $2.1 million for the
period ended March 31, 1998. Major categories included within occupancy expense
are building lease expense, depreciation expense, and maintenance contract
expense. Building lease expense increased to $598,000 for the quarter ended
March 31, 1998 from $440,000 for the same period in 1997. This increase was
primarily the result of increasing the rentable square feet of the Galleria
location and the opening of one new branch during the past year. Depreciation
expense increased $179,000 or 20.0% in 1998 from the comparable period in 1997.
This increase was due 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, 1998 was $246,000, an increase
of $112,000 or 83.6% compared to $134,000 for the same period in 1997. 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, 1998, the provision for income taxes was $2.8 million, an
increase of $820,000 or 40.9% from the $2.0 million provided for the same period
in 1997.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans were $1.06 billion at March 31, 1998, an increase of $69.3
million or 7.0% from $986.2 million at December 31, 1997. 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,
attentive and responsive service to customers' needs, and focusing on commercial
lending to middle market companies and private banking for individuals.
11
<PAGE>
The following table summarizes the loan portfolio of the Company by type of
loan as of March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
---------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial............... $ 482,897 45.8% $ 448,348 45.5%
Real estate.............................
Construction and land
development........................ 150,207 14.2 128,985 13.1
1-4 Family......................... 170,296 16.1 171,551 17.3
Commercial owner occupied.......... 152,086 14.4 132,052 13.4
Ranchland.......................... 7,950 0.8 8,384 0.9
Other................................... 12,060 1.1 8,199 0.8
Consumer................................ 79,967 7.6 88,631 9.0
------------ ------- ---------- -------
Total Loans............................. $ 1,055,463 100.0% $ 986,150 100.0%
============ ======= ========== =======
</TABLE>
NONPERFORMING ASSETS
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets were $2.1 million at March 31, 1998 compared with
$3.7 million at December 31, 1997. This resulted in a ratio of nonperforming
assets to loans plus other real estate of 0.20% and 0.37% at March 31, 1998 and
December 31, 1997, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $ 1,475 $2,724
Accruing loans 90 or more days past
due.................................. 32 383
Restructured loans................... -- --
ORE and OLRA......................... 571 546
--------- ------------
Total non-performing assets..... $ 2,078 $3,653
========= ============
Nonperforming assets to total loans
and other real estate.............. 0.20% 0.37%
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
and the evaluation of its loan portfolio by the loan review function.
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 the
Company's historical charge-off experience. The Company then charges to
operations a provision for
12
<PAGE>
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, 1998 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,
1998.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1998 1997
------------------- -------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses beginning
of period............................ $10,335 $ 7,400
Provision for loan losses............ 600 3,886
Charge-offs.......................... (108) (1,078)
Recoveries........................... 49 127
------------------- -------------
Allowance for loan losses end of
period............................... $10,876 $10,335
=================== =============
Allowance to period-end loans........ 1.03% 1.05%
Net charge-offs to average loans..... 0.02% 0.11%
Allowance to period-end nonperforming
loans.............................. 721.70% 332.64%
SECURITIES
The amortized cost and approximate fair value of securities classified as
available for sale is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAIN LOSS VALUE
--------- ------ ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U. S. Government securities.......... $ 166,449 $ 573 $ (90) $ 166,932
Mortgage-backed securities........... 361,792 3,148 (65) 364,875
Federal Reserve Bank stock........... 1,800 -- -- 1,800
Federal Home Loan Bank stock......... 38,508 -- -- 38,508
Other securities..................... 7,174 62 -- 7,236
--------- ------ ------ ----------
Total securities available for
sale.......................... $ 575,723 $3,783 $ (155) $ 579,351
========= ====== ====== ==========
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAIN LOSS VALUE
--------- ------ ------ ----------
(DOLLARS IN THOUSANDS)
U. S. Government securities.......... $ 163,230 $ 536 $ (4) $ 163,762
Mortgage-backed securities........... 323,434 2,275 (151) 325,558
Federal Reserve Bank stock........... 1,791 -- -- 1,791
Federal Home Loan Bank stock......... 37,942 -- -- 37,942
Other securities..................... 26,281 64 -- 26,345
--------- ------ ------ ----------
Total securities available for
sale.......................... $ 552,678 $2,875 $ (155) $ 555,398
========= ====== ====== ==========
</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, 1998, 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, 1998 and December 31, 1997, was 29.1% and 29.7%,
respectively.
The average daily balances and weighted average rates paid on deposits for
the three months ended March 31, 1998 and the year ended December 31, 1997, are
presented below:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
---------------------- ----------------------
AMOUNT RATE AMOUNT RATE
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NOW accounts......................... $ 29,480 0.70% $ 36,944 1.73%
Regular savings...................... 11,679 2.22 11,373 2.29
Treasury Plus........................ 366,302 4.97 278,448 4.91
Money market......................... 270,169 3.79 221,901 3.66
CD's less than $100,000.............. 78,342 5.17 80,835 5.14
CD's $100,000 and over............... 252,517 5.30 198,202 5.38
IRA's & QRP's........................ 17,920 5.64 17,379 5.26
---------- --------- ---------- ---------
Total interest-bearing
deposits...................... 1,026,409 4.62% 845,082 4.55%
========= =========
Noninterest-bearing deposits......... 418,039 357,697
---------- ----------
Total deposits.................. $1,444,448 $1,202,779
========== ==========
</TABLE>
The following table sets forth the maturity of the Company's time deposits
that are $100,000 or greater as of the dates indicated:
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(DOLLARS IN THOUSANDS)
3 months or less..................... $170,603 $ 179,422
Between 3 months and 12 months....... 65,391 79,624
Over 1 year.......................... 15,447 12,684
-------------- -----------------
Total time deposits $100,000 and
over.......................... $251,441 $ 271,730
============== =================
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,
1998 1997
---------- ------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $ 175,769 $129,460
Period-end...................... 172,916 155,832
Maximum month-end balance during
period........................ 240,670 155,832
Interest rate:
Average......................... 5.03% 4.97%
Period-end...................... 5.11% 5.02%
Other short-term borrowings:
Average......................... $ 19,322 $ 14,843
Period-end...................... 20,654 17,243
Maximum month-end balance during
period........................ 55,043 50,645
Interest rate:
Average......................... 6.19% 5.60%
Period-end...................... 5.74% 6.54%
Securities sold under repurchase agreements are maintained in safekeeping
by correspondent banks.
14
<PAGE>
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, 1998, 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 March 31, 1998 with Leverage Capital, Tier 1
Risk-Based Capital and Risk-Based Capital Ratios of 6.58%, 9.37% and 10.20%,
respectively.
OTHER MATTERS
On February 5, 1998, the Bank acquired all the common stock of First
Republic Capital Corp. and City Financial Services, Inc., two related commercial
finance companies. These companies specialize in providing operating funds to
businesses by converting their accounts receivable to cash. The transaction
which resulted in the exchange of 140,000 shares of the Company's common shares
for all of the outstanding stock of First Republic Capital Corp. and City
Financial Services, Inc., has been accounted for as a pooling of interests,
although historical financial statements have not been restated due to
immateriality.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME, in the first quarter of 1998.
Accordingly, the components of comprehensive income have been reported in the
accompanying condensed consolidated statement of changes in shareholders' equity
for all periods presented.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On February 5, 1998, the Company issued 140,000 shares of its Common Stock,
$1.00 par value (the "Shares"), to First Republic Capital Corp., a Texas
corporation ("FRC"), and City Financial Services, Inc., a Texas corporation
("CFC"), in exchange for all of the common stock of FRC and CFC in a
transaction accounted for as a pooling of interests. The transaction was exempt
from registration under the Securities Act of 1933 (the "Act") as a private
offering under Section 4(2) of the Act. Each of FRC and CFC and all shareholders
of FRC and CFC (a total of five individuals) is an "accredited investor"
within the meaning of Rule 501(a) under the Act, and no advertising and general
solicitation was involved in connection with the issuance of the Shares.
No brokers or underwriters were involved in connection with the
transaction. Immediately following the closing of the transaction, CFC and FRC
were dissolved and distributed in Shares in a liquidating distribution to the
following shareholders:
NAME OF SHAREHOLDER NO. OF SHARES
- ---------------------------------------- -------------
Joel Rosenthal 43,750
Gregory L. Brown 43,750
Allan D. Rosenthal 17,500
Norman Rosenthal 17,500
Larry Sondock 17,500
15
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 15.1 Awareness Letter of Coopers & Lybrand L.L.P.
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
None
16
<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
- --------------------------------------------------- ------------------------------------------ -------------
<S> <C> <C>
WALTER E. JOHNSON Chairman of the Board and Chief Executive May 12, 1998
WALTER E. JOHNSON Officer (Principal Executive Officer)
DAVID C. FARRIES Executive Vice President, May 12, 1998
DAVID C. FARRIES Treasurer and Secretary (Principal
Financial Officer)
R. JOHN McWHORTER Vice President and Controller (Principal May 12, 1998
R. JOHN MCWHORTER Accounting Officer)
</TABLE>
17
EXHIBIT 15.1
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Southwest Bancorporation of Texas, Inc.
Registrations on Form S-8 and Form S-3
We are aware that our report dated April 30, 1998, on our review of interim
financial information of Southwest Bancorporation of Texas, Inc. and Subsidiary
as of and for the three months ended March 31, 1998 and 1997, and included in
the Company's quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference in the Company's registration statements on Form S-8
(File Nos. 333-21619, 333-27891 and 333-33533) and Form S-3 (File No.
333-47995). Pursuant to Rule 436(c) under the Securities Act of 1933, this
report should not be considered a part of the registration statement prepared or
certified by us within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 12, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 111,001
<INT-BEARING-DEPOSITS> 182
<FED-FUNDS-SOLD> 71,864
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 579,351
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,055,463
<ALLOWANCE> 10,876
<TOTAL-ASSETS> 1,850,820
<DEPOSITS> 1,528,560
<SHORT-TERM> 193,570
<LIABILITIES-OTHER> 4,497
<LONG-TERM> 0
0
0
<COMMON> 11,573
<OTHER-SE> 112,620
<TOTAL-LIABILITIES-AND-EQUITY> 1,850,820
<INTEREST-LOAN> 22,433
<INTEREST-INVEST> 7,566
<INTEREST-OTHER> 1,948
<INTEREST-TOTAL> 31,947
<INTEREST-DEPOSIT> 11,684
<INTEREST-EXPENSE> 14,157
<INTEREST-INCOME-NET> 17,790
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 9,233
<INCOME-PRETAX> 7,965
<INCOME-PRE-EXTRAORDINARY> 5,139
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,139
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 4.41
<LOANS-NON> 1,475
<LOANS-PAST> 32
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,335
<CHARGE-OFFS> 108
<RECOVERIES> 49
<ALLOWANCE-CLOSE> 10,876
<ALLOWANCE-DOMESTIC> 10,876
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
