- --------------------------------------------------------------------------------
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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 JUNE 30, 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 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 [ ] No [ ]
------------------------
There were 23,188,748 shares of the Registrant's Common Stock outstanding
as of the close of business on June 30, 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
Condensed Consolidated Balance
Sheet as of June 30, 1998 and
December 31, 1997
(unaudited).................... 3
Condensed Consolidated Statement
of Income for the Three Months
Ended June 30,
1998 and 1997, and for the Six
Months Ended June 30, 1998 and
1997 (unaudited)............... 4
Condensed Consolidated Statement
of Changes in Shareholders'
Equity for the
Year Ended December 31, 1997,
and for the Six Months Ended
June 30, 1998 (unaudited)...... 5
Condensed Consolidated Statement
of Cash Flows for the Six
Months Ended June 30,
1998 and 1997 (unaudited)..... 6
Notes to Condensed Consolidated
Financial Statements........... 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations...... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........... 20
Item 2. Changes in Securities....... 20
Item 3. Default upon Senior
Securities........................... 20
Item 4. Submission of Matters to a
Vote of Security Holders............. 20
Item 5. Other Information........... 20
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 Subsidiary (the "Company") as of
June 30, 1998 the related condensed consolidated statements of income for the
three- and six-month periods ended June 30, 1998 and 1997, the condensed
consolidated statement of changes in shareholders' equity for the six-month
period ended June 30, 1998 and the condensed consolidated statements of cash
flows for the six-month periods ended June 30, 1998 and 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. Accordingly, we do not
express an opinion or any form of assurance on such financial statements.
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 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.
PricewaterhouseCoopers LLP
Houston, Texas
July 31, 1998
2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
Cash and due from banks.............. $ 114,678 $ 104,363
Federal funds sold and other interest
earning assets....................... 101,531 132,616
------------ ------------
Total cash and cash
equivalents............ 216,209 236,979
Securities -- available for sale..... 499,018 555,398
Loans receivable, net................ 1,132,972 975,815
Premises and equipment, net.......... 23,804 21,348
Accrued interest receivable.......... 12,412 11,159
Prepaid expenses and other assets.... 16,663 6,905
------------ ------------
Total assets............... $ 1,901,078 $1,807,604
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing... $ 503,868 $ 492,843
Demand -- interest-bearing...... 64,667 58,915
Money market accounts........... 646,603 580,605
Savings......................... 11,785 14,850
Time, $100 and over............. 267,738 267,533
Other time...................... 93,352 97,595
------------ ------------
Total deposits............. 1,588,013 1,512,341
Securities sold under repurchase
agreements......................... 174,344 155,832
Other short-term borrowings.......... 5,042 17,243
Accrued interest payable............. 1,024 1,259
Other liabilities.................... 4,242 6,094
------------ ------------
Total liabilities.......... 1,772,665 1,692,769
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value,
100,000,000 shares authorized;
23,188,748 and 22,370,526
shares issued and outstanding
at June 30, 1998 and December
31, 1997, respectively......... 23,188 22,370
Additional paid-in capital...... 41,469 38,364
Retained earnings............... 62,959 52,333
Accumulated other comprehensive
income......................... 797 1,768
------------ ------------
Total shareholders'
equity................. 128,413 114,835
------------ ------------
Total liabilities and
shareholders' equity... $ 1,901,078 $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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans........................... $ 24,828 $ 19,062 $ 47,261 $ 35,842
Securities...................... 7,996 6,081 15,562 11,358
Federal funds sold and other.... 1,078 727 3,026 1,257
--------- --------- --------- ---------
Total interest income...... 33,902 25,870 65,849 48,457
Interest expense on deposits and
other borrowings................... 14,170 10,458 28,327 19,789
--------- --------- --------- ---------
Net interest income........ 19,732 15,412 37,522 28,668
Provision for loan losses............ 900 1,036 1,500 1,578
--------- --------- --------- ---------
Net interest income after
provision for loan
losses.................. 18,832 14,376 36,022 27,090
--------- --------- --------- ---------
Other income:
Service charges................. 1,766 1,482 3,760 2,836
Other operating income.......... 1,729 945 3,325 1,797
Gain on sale of securities,
net........................... 177 366 185 495
--------- --------- --------- ---------
Total other income......... 3,672 2,793 7,270 5,128
--------- --------- --------- ---------
Other expenses:
Salaries and employee
benefits...................... 8,404 5,808 16,343 11,332
Occupancy expense............... 2,223 1,686 4,360 3,303
Merger-related expenses......... 48 -- 67 --
Other operating expenses........ 3,323 2,580 6,051 4,774
--------- --------- --------- ---------
Total other expenses....... 13,998 10,074 26,821 19,409
--------- --------- --------- ---------
Income before income
taxes................... 8,506 7,095 16,471 12,809
Provision for income taxes........... 3,019 2,490 5,845 4,496
--------- --------- --------- ---------
Net income before bank
preferred stock
dividend................ 5,487 4,605 10,626 8,313
Bank preferred stock dividend........ -- -- -- 36
--------- --------- --------- ---------
Net income available for
common shareholders..... $ 5,487 $ 4,605 $ 10,626 $ 8,277
========= ========= ========= =========
Earnings per common share
Basic................. $ 0.24 $ 0.21 $ 0.46 $ 0.38
========= ========= ========= =========
Diluted............... $ 0.23 $ 0.20 $ 0.44 $ 0.36
========= ========= ========= =========
</TABLE>
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 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........... 18,807,164 $18,807 $ 19,132 $ 35,564 $ (88) $ 73,415
Issuance of common stock to
benefit
plan.......................... 5,040 5 31 36
Exercise of stock options....... 913,322 913 2,057 2,970
Proceeds of public offering..... 2,645,000 2,645 17,165 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........... 22,370,526 22,370 38,364 52,333 1,768 114,835
Common stock issued in
acquisition................... 280,000 280 304 584
Exercise of stock options....... 538,222 538 2,736 3,274
Deferred compensation
amortization.................. 65 65
Comprehensive income:
Net income for the six months
ended June 30, 1998........ 10,626 10,626
Net change in unrealized
appreciation on securities
available for sale, net
of deferred taxes of
$523....................... (971) (971)
-------------
Total comprehensive income.... 9,655
--------- ------- ---------- -------- -------------- -------------
BALANCE, JUNE 30, 1998............... 23,188,748 $23,188 $ 41,469 $ 62,959 $ 797 $ 128,413
========= ======= ========== ======== ============== =============
</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)
SIX MONTHS
ENDED JUNE 30,
--------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net income...................... $ 10,626 $ 8,313
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan
losses................... 1,500 1,578
Depreciation............... 2,236 1,831
Compensation expense....... -- 36
Deferred compensation
amortization............. 65 53
Realized gains on
securities available for
sale, net................ (185) (495)
Net amortization of
premiums and discounts... 922 729
Dividends on Federal Home
Loan Bank stock.......... (566) (1,168)
Decrease in accrued
interest receivable,
prepaid expenses and
other assets............. (11,073) (2,087)
Increase in accrued
interest payable and
other liabilities........ 258 7,474
------------ ------------
Net cash provided by
operating
activities.......... 3,783 16,264
------------ ------------
Cash flows from investing activities:
Proceeds from maturity of
securities available for
sale........................... 122,446 18,580
Principal paydowns of
mortgage-backed securities
available for sale............. 62,629 19,493
Proceeds from sale of securities
available for sale............. 112,077 66,467
Purchase of securities available
for sale....................... (242,438) (153,132)
Proceeds from sale of other real
estate and other loan related
assets......................... 347 43
Net increase in loans
receivable..................... (158,657) (126,277)
Purchase of premises and
equipment...................... (4,668) (3,809)
------------ ------------
Net cash used in
investing
activities.......... (108,264) (178,635)
------------ ------------
Cash flows from financing activities:
Net increase in
noninterest-bearing deposits... 11,025 624
Net (decrease) increase in time
deposits....................... (4,038) 83,844
Net increase in other
interest-bearing deposits...... 68,685 87,893
Net increase (decrease) in
securities sold under
repurchase agreements.......... 18,512 (21,168)
Net (decrease) increase in other
short-term borrowings.......... (12,201) 35,386
Net proceeds from public
offering of common stock....... -- 19,810
Net proceeds from exercise of
stock options.................. 1,728 338
Retirement of Bank preferred
stock.......................... -- (7,500)
Payment of dividends on Bank
preferred stock................ -- (152)
------------ ------------
Net cash provided by
financing
activities.......... 83,711 199,075
------------ ------------
Net (decrease) increase in cash and
cash equivalents................... (20,770) 36,704
Cash and cash equivalents at
beginning of period................ 236,979 172,863
------------ ------------
Cash and cash equivalents at end of
period............................. $ 216,209 $ 209,567
============ ============
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 financial statements
reflect all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the Company's financial position at June 30, 1998,
the Company's results of operations and cash flows for the six-month periods
ended June 30, 1998 and 1997 and the changes in shareholders' equity for the six
months ended June 30, 1998. 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.
On April 28, 1998 the Board of Directors declared a two-for-one split of
its common stock to be effected in the form of a 100% stock dividend. The common
stock distributed as a result of the stock split was distributed on May 29, 1998
to shareholders of record at the close of business on May 15, 1998. All common
shares and per common share amounts in the accompanying financial statements
have been adjusted to give retroactive effect to the stock split.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued by the
Financial Accounting Standards Board to establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 requires
that an entity recognize those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for the changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. The
standard is effective for all fiscal quarters beginning after June 15, 1999.
This pronouncement is not anticipated to have a material affect on the Company's
financial position, results of operations or cash flows.
7
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. EARNINGS PER COMMON SHARE:
Earnings per common share is computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income available for common
shareholders....................... $ 5,487 $ 4,605 $ 10,626 $ 8,277
========= ========= ========= =========
Divided by average common shares and
common share equivalents:
Average common shares........... 23,182 22,150 22,984 21,568
Average common share
equivalents................... 1,160 1,390 1,194 1,533
--------- --------- --------- ---------
Total average common shares and
common
share equivalents.................. 24,342 23,540 24,178 23,101
========= ========= ========= =========
Earnings per common share:
Basic........................... $ 0.24 $ 0.21 $ 0.46 $ 0.38
========= ========= ========= =========
Diluted......................... $ 0.23 $ 0.20 $ 0.44 $ 0.36
========= ========= ========= =========
</TABLE>
3. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
During the six months ended June 30, 1998, the Company reduced its federal
income tax liability by approximately $2.1 million and recorded a corresponding
increase to additional paid-in capital representing the tax benefit related to
the exercise of certain stock options.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Total assets at June 30, 1998, and December 31, 1997 were $1.90 billion,
and $1.81 billion, respectively. Loans were $1.14 billion at June 30, 1998, an
increase of $157.8 million or 16% 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 $1.59
billion at June 30, 1998 from $1.51 billion at December 31, 1997. Shareholders'
equity was $128.4 million and $114.8 million at June 30, 1998 and December 31,
1997, respectively.
Net income available for common shareholders was $5.5 million and $4.6
million and earnings per diluted common share was $0.23 and $0.20 for the three
months ended June 30, 1998 and 1997, respectively. For the six months ended June
30, 1998, net income was $10.6 million, or $0.44 per fully diluted common share,
an increase of 28% and 23%, respectively over the $8.3 million or $0.36 per
fully diluted common share for the first six months of 1997. 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
1.21% and 1.35% and returns on average common equity of 17.54% and 18.49% for
the three months ended June 30, 1998 and 1997, respectively. Return on average
assets was 1.20% and return on average common equity was 17.53% for the first
six months of 1998 compared to 1.28% and 17.62%, respectively for the same
period a year ago.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income for the three months ended June 30, 1998 was $33.9 million,
an increase of $8.0 million, or 31% from the three months ended June 30, 1997.
For the six months ended June 30, 1998, interest income was $65.8 million, a
$17.4 million, or 36% increase from the same period a year ago. This increase in
interest income is due to a $428.9 million increase in average earning assets of
$1.7 billion for the three months ended June 30, 1998, a 34% increase from the
same period last year.
Interest income on loans increased $5.8 million to $24.8 million for the
three months ended June 30, 1998. This was due to a $271.6 million increase in
average loans outstanding during the same period. Interest income on securities
increased to $8.0 million, a $2.0 million increase from the prior comparable
period. This increase was attributable to a $132.9 million increase in average
securities outstanding, up 34% when compared to the three months ended June 30,
1997.
For the six months ended June 30, 1998, interest income on loans increased
32% to $47.3 million, up from $35.8 million for the same period last year.
Interest income on securities increased to $15.6 million, an increase of $4.2
million or 37% from the prior period. These gains were principally related to an
increase of average earning assets to $1.67 billion for the six months ended
June 30, 1998, an increase of 37% from the same period last year.
INTEREST EXPENSE.
Interest expense on deposits and other borrowings was $14.1 million for the
three months ended June 30, 1998, compared to $10.5 million for the same period
in 1997. For the six months ended June 30, 1998, interest expense on deposits
and other borrowings was $28.3 million compared to $19.8 million for the same
period a year ago. The increase in interest expense was attributable to a $338.6
million and $359.8 million increase in average interest-bearing liabilities for
the three-and six-month comparable periods. The average balance on
interest-bearing liabilities was $1.26 billion and $1.24 billion, compared to
$918.9 million and $879.9 million for the three-and six-month periods ended June
30, 1998 and 1997, an increase of 41%, or $341.1 million and $360.1 million,
respectively.
NET INTEREST INCOME
Net interest income was $19.7 million for the three months ended June 30,
1998, compared with $15.4 million for the same period in 1997, an increase of
28%. For the six months ended June 30, 1998, net
9
<PAGE>
interest income increased 31% from the same period in 1997 to $37.5 million. The
increase in net interest income during the three- and six-months ended June 30,
1998 was largely due to growth in average interest-earning assets, primarily
loans.
The net interest margin was 4.65% for the three months ended June 30, 1998,
compared with 4.86% in the second quarter of 1997. The net interest margin was
4.53% for the six months ended June 30, 1998, down from 4.79% for the first six
months of 1997. The decrease in the net interest margin was primarily due to a
decrease in the yield on average earning assets which decreased sixteen basis
points to 7.99% for the three months ended June 30, 1998, and 15 basis points to
7.95% for the six months ended June 30, 1998.
10
<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
JUNE 30, 1998 JUNE 30, 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.............................. $ 1,102,185 $24,828 9.04% $ 830,565 $19,062 9.21%
Securities......................... 520,976 7,996 6.16 388,044 6,081 6.29
Federal funds sold and other....... 78,662 1,078 5.50 54,313 727 5.37
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets..................... 1,701,823 33,902 7.99% 1,272,922 25,870 8.15%
------- ------- ------- -------
Less allowance for loan losses.......... (11,324) (8,142)
----------- -----------
Total earning assets, net of
allowance............................. 1,690,499 1,264,780
Nonearning assets....................... 127,666 99,491
----------- -----------
Total assets.................. $ 1,818,165 $ 1,364,271
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits......................... $ 719,040 7,323 4.09% $ 536,749 5,480 4.10%
Certificates of deposits........... 342,493 4,426 5.18 239,794 3,162 5.29
Repurchase agreements and borrowed
funds............................ 195,925 2,421 4.96 142,312 1,816 5.12
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities................ 1,257,458 14,170 4.52% 918,855 10,458 4.57%
------- ------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 428,616 341,299
Other liabilities.................. 6,644 4,236
----------- -----------
Total liabilities............. 1,692,718 1,264,390
Bank preferred stock.................... -- --
Shareholders' equity.................... 125,447 99,881
----------- -----------
Total liabilities and
shareholders' equity....... $ 1,818,165 $ 1,364,271
=========== ===========
Net interest income..................... $19,732 $15,412
======= =======
Net interest spread..................... 3.47% 3.58%
======= =======
Net interest margin..................... 4.65% 4.86%
======= =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 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.............................. $ 1,052,468 $47,261 9.06% $ 789,459 $35,842 9.16%
Securities......................... 506,848 15,562 6.19 369,492 11,358 6.20
Federal funds sold and other....... 110,248 3,026 5.54 46,865 1,257 5.41
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets..................... 1,669,564 65,849 7.95% 1,205,816 48,457 8.10%
------- ------- ------- -------
Less allowance for loan losses.......... (11,045) (7,894)
----------- -----------
Total earning assets, net of
allowance............................. 1,658,519 1,197,922
Nonearning assets....................... 132,213 107,283
----------- -----------
Total assets.................. $ 1,790,732 $ 1,305,205
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits......................... $ 698,450 14,457 4.17% $ 503,012 10,128 4.06%
Certificates of deposits........... 345,619 8,976 5.24 234,043 6,133 5.28
Repurchase agreements and borrowed
funds............................ 195,511 4,894 5.05 142,759 3,528 4.98
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities................ 1,239,580 28,327 4.61% 879,814 19,789 4.54%
------- ------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 423,360 325,063
Other liabilities.................. 5,534 4,406
----------- -----------
Total liabilities............. 1,668,474 1,209,283
Bank preferred stock.................... -- 1,214
Shareholders' equity.................... 122,258 94,708
----------- -----------
Total liabilities and
shareholders' equity....... $ 1,790,732 $ 1,305,205
=========== ===========
Net interest income..................... $37,522 $28,668
======= =======
Net interest spread..................... 3.34% 3.56%
======= =======
Net interest margin..................... 4.53% 4.79%
======= =======
</TABLE>
12
<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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1998 VS. 1997 1998 VS. 1997
------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................................... $ 6,234 $ (468) $ 5,766 $ 11,941 $ (522) $ 11,419
Securities.............................. 2,059 (144) 1,915 4,222 (18) 4,204
Federal funds sold and other............ 331 20 351 1,700 69 1,769
--------- --------- --------- --------- --------- ---------
Total increase (decrease) in
interest income.................. 8,624 (592) 8,032 17,863 (471) 17,392
--------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits....... 1,861 (18) 1,843 3,935 394 4,329
Certificates of deposits................ 1,354 (90) 1,264 2,924 (81) 2,843
Repurchase agreements and borrowed
funds................................. 684 (79) 605 1,304 62 1,366
--------- --------- --------- --------- --------- ---------
Total increase (decrease) in
interest expense................. 3,899 (187) 3,712 8,163 375 8,538
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest
income................................ $ 4,725 $ (405) $ 4,320 $ 9,700 $ (846) $ 8,854
========= ========= ========= ========= ========= =========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $900,000 for the three months ended June
30, 1998 as compared to $1.04 million for the three months ended June 30, 1997.
The provision for loan losses was $1.5 million for the six months ended June 30,
1998 as compared to $1.6 million for the six months ended June 30, 1997. This
small decrease reflects improvement in net charge-offs for the periods
presented. 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 three months ended June 30, 1998 was $3.7
million, an increase of $879,000 or 31% over the same period in 1997.
Noninterest income for the six months ended June 30, 1998 was $7.3 million, an
increase of 43%, from $5.1 million during the comparable period in 1997. The
following table presents for the periods indicated the major changes in
noninterest income.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit
accounts.......................... $ 1,766 $ 1,482 $ 3,760 $ 2,836
Loan operations..................... 313 206 580 388
Investment services................. 803 524 1,575 1,032
Gain on sale of securities, net..... 177 366 185 495
Factoring fee income................ 396 -- 716 --
Other noninterest income............ 217 215 454 377
--------- --------- --------- ---------
Total noninterest income....... $ 3,672 $ 2,793 $ 7,270 $ 5,128
========= ========= ========= =========
13
<PAGE>
Except for gain on sale of securities, all categories of noninterest income
for the three- and six-months ended June 30, 1998 reflect increased income
compared to the three- and six-months ended June 30, 1997. The increase in
noninterest income is primarily due to the increase in deposit accounts, the
growth of the investment services department and the newly acquired factoring
company.
Service charges were $1.8 million for the three months ended June 30, 1998,
compared to $1.5 million for the three months ended June 30, 1997, an increase
of $300,000 or 20%. Service charges were $3.8 million for the six months ended
June 30, 1998 compared to $2.8 million for the same period in 1997. This was an
increase of $1.0 million, or 36%. The number of deposit accounts serviced
increased to 47,305 at June 30, 1998 from 37,555 at June 30, 1997.
Other changes in noninterest income were recognized in the categories of
investment services and factoring fee income. For the three months ended June
30, 1998 investment services income grew to $803,000, an increase of 53% over
the 1997 level. For the six months ended June 30, 1998 investment services
income grew to $1.6 million or 60% from the $1.0 million level during the 1997
period. This increase is attributable to the expanding international and foreign
exchange departments, as well as the continued strategic focus by the Company to
increase its competitive position in providing investment services. Factoring
fee income results from the recent merger of First Republic Capital Corp. and
City Financial Services, Inc. Due to the merger's immateriality, prior period
financial information was not restated.
NONINTEREST EXPENSES
For the three months ended June 30, 1998, noninterest expenses totaled
$14.0 million, an increase of $3.9 million, or 39%, from $10.1 million during
1997. For the six months ended June 30, 1998 noninterest expenses totaled $26.8
million, an increase of $7.4 million, or 38%, from the same period in 1997. The
increase in noninterest expenses during these periods was primarily due to
salaries and employee benefits. The efficiency ratio increased to 59.8% for the
three months ended June 30, 1998 from 55.3% for the comparable period in 1997.
For the six months ended June 30, the efficiency ratio increased to 59.9% for
1998 from 57.4% for 1997.
Salary and benefit expense for the three months ended June 30, 1998 was
$8.4 million, an increase of $2.6 million or 44% from the three months ended
June 30, 1997. Salary and benefit expense for the six months ended June 30, 1998
was $16.3 million, an increase of $5.1 million or 44% from the same period in
1997. This increase was due primarily to hiring of additional personnel required
to accommodate the Company's growth. Total full-time employees at June 30, 1998
and June 30, 1997 were 646 and 494, respectively.
Occupancy expense increased $500,000, or 32% to $2.2 million for the three
months ended June 30, 1998. For the six months ended June 30, 1998, occupancy
expense increased $1.1 million, or 33% from the same period a year ago to $4.4
million. Major categories within Occupancy Expense are building lease expense,
depreciation expense and maintenance contract expense. Building lease expense
increased to $520,000 for the three months ended June 30, 1998 from $439,000 for
the same period in 1997. For the six months ended June 30, 1998, building lease
expense was $1.1 million, an increase of 25%, or $218,000 from $879,000 for the
first six months of 1997. This increase was a result from opening a new branch
in Sugar Land, Ft. Bend County, Texas, and by increasing the rentable square
feet at the corporate office. Depreciation expense was $893,000 for the three
months ended June 30, 1998, an increase of 21% or $155,000 from the $738,000
level from the prior comparable period. For the six months ended June 30, 1998
depreciation expense increased $200,000, or 13%, to $1.7 million from $1.5
million in the first six months of 1997. This increase was primarily due 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 June 30, 1998 was $253,000, a 76% or $109,000 increase from
$144,000 for the same period last year. For the six months ended June 30, 1998,
maintenance contract expense was $499,000. This was a $221,000, or 80% increase
from the prior amount of $278,000. The Company has purchased maintenance
contracts for major operating systems throughout the organization.
14
<PAGE>
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 June 30, 1998, the provision for income taxes was $3.0 million, an
increase of $500,000 or 20% from the $2.5 million provided for the same period
in 1997. For the six months ended June 30, 1998, income tax expense was $5.8
million compared to $4.5 million during the same period in 1997.
YEAR 2000
The Company has established a Year 2000 Steering Committee to coordinate
the assessment, remediation, testing and development of changes to all computer
applications, hardware, and third party software to ensure there will be no
material adverse effect on customers or disruption to business operations as a
result of a failure of the Company or third parties to properly process any date
data, including dates on or after January 1, 2000. Major areas of potential
business impact have been assessed and remediation efforts have begun. The
recent upgrade of certain financial systems by the Company has mitigated concern
for those systems. Incremental costs for causing computer applications to be
Year 2000 compliant is presently estimated to be immaterial with costs of normal
software, upgrades, and replacements incurred through fiscal year 1999. The
estimated costs for hardware, embedded chips, and third party software are being
developed through the assessment process. While the Company's efforts also
include obtaining appropriate representations and assurances from third-party
vendors and other organizations that such entities will be able to meet all of
their obligations to the Company without disruption as a result of the Year 2000
issues, there can be no assurance that the Company will not be adversely
impacted by the failure of such third-party entities to achieve Year 2000
compliance.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans were $1.14 billion at June 30, 1998, an increase of $157.8
million or 16% 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.
The following table summarizes the loan portfolio of the Company by type of
loan as of June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial............... $ 516,985 45.2% $ 448,348 45.5%
Real estate.............................
Construction and land
development........................ 187,439 16.4 128,985 13.1
1-4 Family......................... 178,447 15.6 171,551 17.3
Commercial owner occupied.......... 151,520 13.2 132,052 13.4
Ranchland.......................... 8,180 0.7 8,384 0.9
Other................................... 12,642 1.1 8,199 0.8
Consumer................................ 89,402 7.8 88,631 9.0
------------ ------- ---------- -------
Total Loans............................. $ 1,144,615 100.0% $ 986,150 100.0%
============ ======= ========== =======
</TABLE>
15
<PAGE>
NONPERFORMING ASSETS
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets were $2.4 million at June 30, 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 0.21% and 0.37% at June 30, 1998 and
December 31, 1997, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $1,575 $2,724
Accruing loans 90 or more days past
due.................................. 601 383
ORE and OLRA......................... 225 546
-------- ------------
Total non-performing assets..... $2,401 $3,653
======== ============
Nonperforming assets to total loans
and other real estate.............. 0.21% 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 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 June 30, 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 June 30, 1998.
16
<PAGE>
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
JUNE 30, DECEMBER 31,
1998 1997
--------------- -------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses beginning
of period............................ $10,876 $ 7,400
Provision for loan losses............ 900 3,886
Charge-offs.......................... (145) (1,078)
Recoveries........................... 12 127
--------------- -------------
Allowance for loan losses end of
period............................... $11,643 $10,335
=============== =============
Allowance to period-end loans........ 1.02% 1.05%
Net charge-offs to average loans..... 0.05% 0.11%
Allowance to period-end nonperforming
loans.............................. 535.26% 332.64%
SECURITIES
The amortized cost and approximate fair value of securities classified as
available for sale is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAIN LOSS VALUE
--------- ------ ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U. S. Government securities.......... $ 151,965 $ 355 $ (284) $ 152,036
Mortgage-backed securities........... 326,379 1,317 (213) 327,483
Federal Reserve Bank stock........... 1,800 -- -- 1,800
Federal Home Loan Bank stock......... 5,984 -- -- 5,984
Other securities..................... 11,662 53 -- 11,715
--------- ------ ------ ----------
Total securities available for
sale.......................... $ 497,790 $1,725 $ (497) $ 499,018
========= ====== ====== ==========
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>
17
<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 June 30, 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 June 30, 1998 and December 31, 1997, was 29% and 30%,
respectively.
The average daily balances and weighted average rates paid on deposits for
the three months ended June 30, 1998 and the year ended December 31, 1997, are
presented below:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------- ----------------------
AMOUNT RATE AMOUNT RATE
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NOW accounts......................... $ 24,900 1.11% $ 36,944 1.73%
Regular savings...................... 11,575 2.11 11,373 2.29
Premium Yield........................ 412,781 4.63 278,448 4.91
Money market......................... 269,785 2.97 221,901 3.66
CD's less than $100,000.............. 74,751 5.24 80,835 5.14
CD's $100,000 and over............... 248,711 5.30 198,202 5.38
IRA's & QRP's........................ 19,031 5.27 17,379 5.26
---------- --------- ---------- ---------
Total interest-bearing
deposits...................... 1,061,534 4.31% 845,082 4.55%
========= =========
Noninterest-bearing deposits......... 432,855 357,697
---------- ----------
Total deposits.................. $1,494,389 $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:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(DOLLARS IN THOUSANDS)
3 months or less..................... $ 185,689 $ 179,422
Between 3 months and 12 months....... 68,256 79,624
Over 1 year.......................... 13,793 12,684
------------- -----------------
Total time deposits $100,000 and
over.......................... $ 267,738 $ 271,730
============= =================
18
<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:
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $ 173,973 $129,460
Period-end...................... 174,343 155,832
Maximum month-end balance during
period........................ 240,670 155,832
Interest rate:
Average......................... 4.97% 4.97%
Period-end...................... 4.96% 5.02%
Other short-term borrowings:
Average......................... $ 21,950 $ 14,843
Period-end...................... 5,042 17,243
Maximum month-end balance during
period........................ 55,043 50,645
Interest rate:
Average......................... 5.56% 5.60%
Period-end...................... 5.69% 6.54%
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 June 30, 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 June 30, 1998 with Leverage Capital, Tier 1
Risk-Based Capital and Risk-Based Capital Ratios of 6.87%, 8.95% and 9.78%,
respectively.
OTHER MATTERS
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, was issued by the Financial Accounting Standards Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires than an entity recognize those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The standard is effective for all
fiscal quarters beginning after June 15, 1999. This pronouncement is not
anticipated to have a material affect on the Company's financial position,
results of operations or cash flows.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On May 29, 1998, the Company issued 11,594,374 shares of its Common Stock,
$1.00 par value (the "Shares") in connection with a two-for-one stock split,
effectuated in the form of a 100% stock dividend, paid to shareholders of record
as of May 15, 1998. The transaction was not subject to the registration
requirements of the Securities Act of 1933 (the "Act"), since it was not a
"sale"of securities under the Act. No brokers or underwriters were involved in
connection with the transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
(a) The Company's Annual Meeting of Shareholders (the "Annual Meeting")
was held on May 26, 1998.
(b) The following Class II Directors were elected for a three year term at
the Annual Meeting: Ernest H. Cockrell, Paul B. Murphy, Jr., Adolph A. Pfeffer,
Jr. and Michael T. Willis. The following Class I Director was elected for a two
year term at the Annual Meeting: Stanley D. Stearns, Jr. The following Class II
and III Directors also continued in office after the Annual Meeting: John B.
Brock III, J. David Heaney, John W. Johnson, Walter E. Johnson, Wilhelmina R.
Morian and Andres Palandjoglou.
(c) (1) A total of 8,380,370 votes were cast in favor of, and 2,162 votes
abstained from voting on, each Director other than Paul B. Murphy, Jr. A
total of 8,380,320 votes were cast in favor of Mr. Murphy, with 2,212 votes
abstaining. No votes were cast against any of the Directors.
(2) At the Annual Meeting, the Company's shareholders also approved
an amendment to the Company's 1996 Stock Option Plan (the "Amendment") to
increase the number of shares of Common Stock issuable thereunder from
1,300,000 shares to 2,100,000 shares (after the two-for-one stock split
described in Item 2. above), with 8,030,537 shares voting in favor of the
Amendment, 293,743 shares voting against the Amendment, and 58,252 shares
abstaining from voting.
(3) At the Annual Meeting, the Company's shareholders also ratified
the selection of
PricewaterhouseCoopers LLP, the successor firm to Coopers & Lybrand L.L.P.,
as the Company's independent auditors for the year ending December 31,
1998. A total of 8,325,928 votes were cast in favor of such proposals with
47,654 votes being cast against the proposal and 8,950 votes abstaining
from voting on the proposal.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 15.1 Awareness Letter of PricewaterhouseCoopers LLP
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
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WALTER E. JOHNSON Chairman of the Board and Chief August 10, 1998
WALTER E. JOHNSON Executive Officer (Principal Executive
Officer)
/s/ DAVID C. FARRIES Executive Vice President, August 10, 1998
DAVID C. FARRIES Treasurer and Secretary (Principal
Financial Officer)
/s/ R. JOHN McWHORTER Vice President and Controller August 10, 1998
R. JOHN MCWHORTER (Principal Accounting Officer)
</TABLE>
21
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 July 31, 1998, on our review of interim
financial information of Southwest Bancorporation of Texas, Inc. and subsidiary
as of and for the three- and six-month periods ended June 30, 1998 and 1997, and
included in the Company's quarterly report on Form 10-Q for the quarter ended
June 30, 1998 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.
PricewaterhouseCoopers LLP
Houston, Texas
August 12, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 114,678
<INT-BEARING-DEPOSITS> 102
<FED-FUNDS-SOLD> 59,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 499,018
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,144,615
<ALLOWANCE> 11,643
<TOTAL-ASSETS> 1,901,078
<DEPOSITS> 1,588,012
<SHORT-TERM> 179,386
<LIABILITIES-OTHER> 5,267
<LONG-TERM> 0
0
0
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<INTEREST-LOAN> 47,261
<INTEREST-INVEST> 15,562
<INTEREST-OTHER> 3,026
<INTEREST-TOTAL> 65,849
<INTEREST-DEPOSIT> 23,433
<INTEREST-EXPENSE> 28,327
<INTEREST-INCOME-NET> 37,522
<LOAN-LOSSES> 1,500
<SECURITIES-GAINS> 185
<EXPENSE-OTHER> 25,582
<INCOME-PRETAX> 10,625
<INCOME-PRE-EXTRAORDINARY> 10,625
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,625
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 4.53
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<RECOVERIES> 61
<ALLOWANCE-CLOSE> 11,643
<ALLOWANCE-DOMESTIC> 11,643
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
