UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
------------------------
COMMISSION FILE NUMBER: 000-22007
------------------------
SOUTHWEST BANCORPORATION OF TEXAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0519693
(STATE OR OTHER JURISDICTION (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)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1.00 par value
(TITLE OF CLASS)
------------------------
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 [ ]
------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
------------------------
There were 11,562,797 shares of the Registrant's Common Stock outstanding
as of the close of business on February 27, 1998. The aggregate market value of
the Registrant's Common Stock held by non-affiliates was approximately $367
million (based upon the closing price of $36.00 on February 27, 1998, as
reported on the NASDAQ National Market System).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the 1998 Annual
Meeting of Shareholders, which will be filed within 120 days after December 31,
1997, are incorporated by reference into Part III of this Report.
<PAGE>
PART I
ITEM 1. BUSINESS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Southwest Bancorporation of Texas, Inc. (the "Company") to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. The words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate," and similar
expressions are intended to identify such forward-looking statements. The
Company's actual results may differ materially from the results anticipated in
these, forward-looking statements due to a variety of factors, including,
without limitation: the effects of future economic conditions; governmental
monetary and fiscal policies, as well as legislative and regulatory changes; the
risks of changes in interest rates on the level and composition of deposits,
loan demand, and the values of loan collateral, securities and interest rate
protection agreements, as well as interest rate risks; the effects of
competition from other commercial banks, thrifts, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market and other mutual funds and other financial institutions
operating in the Company's market area and elsewhere, including institutions
operating locally, regionally, nationally and internationally, together with
such competitors offering banking products and services by mail, telephone,
computer and the Internet; and the failure of assumptions underlying the
establishment of reserves for loan losses and estimations of values of
collateral and various financial assets and liabilities. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements.
THE COMPANY
The Company was incorporated as a business corporation under the laws of
the State of Texas on March 28, 1996, for the purpose of serving as a bank
holding company for Southwest Bank of Texas National Association (the "Bank").
The holding company formation was consummated and the Company acquired all of
the outstanding shares of capital stock of the Bank as of the close of business
on June 30, 1996. Based upon total assets as of December 31, 1997, the Company
ranks as the largest independent bank holding company headquartered in the
metropolitan Houston area. The Company's headquarters are located at 4400 Post
Oak Parkway, Houston, Texas 77027, and its telephone number is (713) 235-8800.
The Company provides an array of sophisticated products typically found
only in major regional banks. These services are provided to middle market
businesses in the metropolitan Houston area through sixteen full service banking
facilities. Each banking office has seasoned management with significant lending
experience who exercises substantial autonomy over credit and pricing decisions,
subject to loan committee approval for larger credits. This decentralized
management approach, coupled with the continuity of service by the same staff
members, enables the Company to develop long-term customer relationships,
maintain high quality service and provide quick responses to customer needs. The
Company believes that its emphasis on local relationship banking, together with
its conservative approach to lending and resultant strong asset quality, are
important factors in the success and the growth of the Company.
The Company seeks credit risks of good quality within its target market
that exhibit good historical trends, stable cash flows and secondary sources of
repayment from tangible collateral. The Company extends credit for the purpose
of obtaining and continuing long term relationships. Lenders are provided with
detailed underwriting policies for all types of credit risks accepted by the
Company and must obtain appropriate approvals for credit extensions in excess of
conservatively assigned individuals' lending limits.
1
<PAGE>
The Company also maintains strict documentation requirements and extensive
credit quality assurance practices in order to identify credit portfolio
weaknesses as early as possible so any exposures that are discovered might be
reduced.
The Company has a three-part strategy for growth. First, the Company will
continue to actively target the "middle market" and private banking customers
in Houston for loan and deposit opportunities as it has successfully done for
the past eight years. The "middle market" is generally characterized by
privately owned companies having annual revenues ranging from $1 million to $250
million and borrowings ranging from $50,000 to $10 million, but primarily in the
$150,000 to $5 million range. Typical middle market customers seek a
relationship with a local independent bank that is sensitive to their needs and
understands their business philosophy. These customers desire a long-term
relationship with a decision-making loan officer who is responsive and
experienced and has ready access to a bank's senior management. In implementing
this part of its strategy, the Company continues to explore opportunities (i) to
solidify its existing customer relationships and build new customer
relationships by providing new services required by its middle market customers
and (ii) to expand its base of services in the professional and executive market
to meet the demands of that sector.
Second, the Company intends to establish branches in areas that
demographically complement its existing or targeted customer base. As other
local banks are acquired by out-of-state organizations, the Company believes
that the establishment of branches will better meet the needs of customers in
many Houston area neighborhoods who feel disenfranchised by larger regional or
national organizations.
Third, the Company may pursue selected acquisitions of other financial
institutions. The Company intends to conduct thorough studies and reviews of any
possible acquisition candidates to assure that they are consistent with the
Company's existing goals, both from an economic and strategic perspective. The
Company believes market and regulatory factors may present opportunities for the
Company to acquire other financial institutions.
THE BANK
The Bank, a national banking association, was chartered in January 1982 and
commenced business operations in October 1982. In July 1989, the Bank hired as
its President and Chief Executive Officer, Walter E. Johnson who had worked in
the banking industry for over 30 years. From 1972 to 1988 Mr. Johnson had been
president of Allied Bank of Texas, a premier Houston middle market lender whose
total assets approached $4 billion at the time it was acquired by First
Interstate Bancorp in 1988. Mr. Johnson also improved the Bank's credit review
practices and lending policies and assembled an experienced team of loan
officers, consisting primarily of individuals with whom he had worked at Allied
Bank of Texas and First Interstate Bank. The Bank's 11 senior loan officers
average more than 20 years of lending experience in the metropolitan Houston
area. As a result of Mr. Johnson's leadership, the Bank's assets have grown from
$43.4 million at June 30, 1989 to $1.8 billion at December 31, 1997.
The Bank provides a complete range of retail and commercial banking
services that compete directly with major regional banks. Loans consist of
commercial loans to middle market businesses, loans to individuals, commercial
real estate loans, residential mortgages and construction loans. In addition,
the Bank offers a broad array of fee income products including merchant card
services, letters of credit, customized cash management services, brokerage and
mutual funds and drive-in banking services.
The Bank maintains a staff of professional treasury management marketing
officers who consult with middle market companies to design custom
cost-effective cash management systems. The Bank offers a full product line of
cash concentration, disbursement and automated information reporting services
comparable to those offered by any major regional bank. Through the Bank's
continued investment in new technology and people, the Bank has been able to
attract some of Houston's largest middle market companies to utilize the Bank's
treasury management products. The Bank has also been able to attract new loan
customers through their use of the Bank's treasury management products, such as
an image-based lock box service and controlled disbursement and sweep products,
which allow borrowers to minimize interest expense and convert excess operating
funds into interest income. Through the use of an interactive terminal or
personal
2
<PAGE>
computer, the Bank's STAR system provides customers with instant access to all
bank account information with multiple intraday updates. The Bank makes business
communication more efficient through Electronic Data Interchange ("EDI"),
which is an inter-organizational computer-to-computer exchange of business
documentation in a standard computer-processable format. Through the use of EDI
and electronic payments, the Bank can provide the customer with a paperless
funds management system. Positive Pay, a service under which the Bank only pays
checks listed on a legitimate "company issue" file, is another product which
helps prevent check fraud. The Bank's average commercial customer uses five
treasury management services. Because these services help customers improve
their treasury operations and achieve new efficiencies in cash management, they
are extremely useful in building and maintaining long-term relationships.
The Bank maintains a strong community orientation by, among other things,
supporting active participation of all employees in local charitable, civic,
school and church activities. Each banking office also appoints selected
customers to a business development board that assists in introducing
prospective customers to the Bank and in developing or modifying products and
services to better meet customer needs.
COMPETITION
The banking business is highly competitive, and the profitability of the
Company will depend principally upon the Company's ability to compete in its
market area. The Company competes with other commercial and savings banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking firms, asset-based
non-bank lenders and certain other non-financial institutions, including certain
governmental organizations which may offer subsidized financing at lower rates
than those offered by the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing technology and
customer service, including local office decision-making on loans, establishing
long-term customer relationships and building customer loyalty, and by providing
products and services designed to address the specific needs of its customers.
The success of the Company is also highly dependent on the economic
strength of the Company's general market area. Significant deterioration in the
local economy or economic problems in the greater Houston area could
substantially impact the Company's performance.
EMPLOYEES
As of December 31, 1997, the Company had 583 full-time employees, 187 of
whom were officers of the Bank. The Company provides medical and hospitalization
insurance to its full-time employees. The Company has also provided most of its
employees with the benefit of Common Stock ownership through the Company's
contributions to a 401(k) plan, in which 320 of its employees are currently
participating. The Company considers its relations with its employees to be
excellent.
SUPERVISION AND REGULATION
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of the Company and the Bank. The
following description of references herein to applicable statutes and
regulations, which are not intended to be complete descriptions of these
provisions or their effects on the Company or the Bank, are brief summaries and
are qualified in their entirety by reference to such statutes and regulations.
THE BANK
As a national banking association, the Bank is principally supervised,
examined and regulated by the Office of the Comptroller of the Currency (the
"OCC"). The OCC regularly examines such areas as capital adequacy, reserves,
loan portfolio, investments and management practices. The Bank must also furnish
quarterly and annual reports to the OCC, and the OCC may exercise cease and
desist and other enforcement powers over the Bank if its actions represent
unsafe or unsound practices or violations of law. Since the deposits of the Bank
are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance
3
<PAGE>
Corporation (the "FDIC"), the Bank is also subject to regulation and
supervision by the FDIC. Because the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") regulates the Company, the Federal
Reserve Board has supervisory authority which affects the Bank.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. The Bank is
subject to certain federal statutes limiting transactions with the Company and
its nonbanking affiliates. One set of restrictions is found in Section 23A of
the Federal Reserve Act, which affects loans or other credit extensions to,
asset purchases with and investments in affiliates of the Bank. Such
transactions with the Company or any of its nonbanking subsidiaries are limited
in amount to ten percent of the Bank's capital and surplus and, with respect to
the Company and all of its nonbanking subsidiaries together, to an aggregate of
twenty percent of the Bank's capital and surplus. Furthermore, such loans and
extensions of credit, as well as certain other transactions, are required to be
secured in specified amounts.
Another set of restrictions is found in Section 23B of the Federal Reserve
Act. Among other things, Section 23B requires that certain transactions between
the Bank, including its subsidiaries, and its affiliates must be on terms
substantially the same, or at least as favorable to the Bank or its
subsidiaries, as those prevailing at the time for comparable transactions with
or involving other nonaffiliated persons. In the absence of such comparable
transactions, any transaction between the Bank and its affiliates must be on
terms and under circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated persons. The Bank is also
subject to certain prohibitions against any advertising that indicates the Bank
is responsible for the obligations of its affiliates. The Bank does not have any
nonbanking affiliates as of the date of this Annual Report.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O now apply to
all insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such loans can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the OCC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
INTEREST RATE LIMITS. Interest rate limitations for the Bank are primarily
governed by the National Bank Act which generally defers to the laws of the
state where the bank is located. Under the laws of the State of Texas, the
maximum annual interest rate that may be charged on most loans made by the Bank
is based on doubling the average auction rate, to the nearest 0.25%, for United
States Treasury Bills, as computed by the Office of the Consumer Credit
Commissioner of the State of Texas. However, the maximum rate does not decline
below 18% or rise above 24% (except for loans in excess of $250,000 that are
made for business, commercial, investment or other similar purposes (excluding
agricultural loans), in which case the maximum annual rate may not rise above
28%, rather than 24%). On fixed rate closed-end loans, the maximum non-usurious
rate is to be determined at the time the rate is contracted, while on floating
rate and open-end loans (such as credit cards), the rate varies over the term of
the indebtedness. State usury laws (but not late charge limitations) have been
preempted by federal law for loans secured by a first lien on residential real
property.
EXAMINATIONS. The OCC periodically examines and evaluates national banks.
Based upon such an evaluation, the OCC may revalue the assets of a national bank
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets. Onsite
examinations are to be conducted every 12 months, except that certain well
capitalized banks may be examined every 18 months. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") authorizes the OCC to assess
the institution for its costs of conducting the examinations.
PROMPT CORRECTIVE ACTION. In addition to the capital adequacy guidelines,
FDICIA requires the OCC to take "prompt corrective action" with respect to any
national bank which does not meet specified minimum capital requirements. The
applicable regulations establish five capital levels, ranging from "well
capitalized" to "critically undercapitalized," which authorize, and in
certain cases require, the OCC to take
4
<PAGE>
certain specified supervisory action. Under regulations implemented under
FDICIA, a national bank is considered well capitalized if it has a total
risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio
of 8.0% or greater, and a leverage ratio of 5.0% or greater, and it is not
subject to an order, written agreement, capital directive, or prompt corrective
action directive to meet and maintain a specific capital level for any capital
measure. A national bank is considered adequately capitalized if it has a total
risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio
of at least 4% and a leverage capital ratio of 4.0% or greater (or a leverage
ratio of 3.0% or greater if the institution is rated composite 1 in its most
recent report of examination, subject to appropriate federal banking agency
guidelines), and the institution does not meet the definition of an
undercapitalized institution. A national bank is considered undercapitalized if
it has a total risk-based capital ratio that is less than 8.0%, a Tier 1
risk-based capital ratio that is less than 4.0%, or a leverage ratio that is
less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is
rated composite 1 in its most recent report of examination, subject to
appropriate federal banking agency guidelines). A significantly undercapitalized
institution is one which has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, or a leverage
ratio that is less than 3.0%. A critically undercapitalized institution is one
which has a ratio of tangible equity to total assets that is equal to or less
than 2.0%. Under certain circumstances, a well capitalized, adequately
capitalized or undercapitalized institution may be treated as if the institution
were in the next lower capital category.
With certain exceptions, national banks will be prohibited from making
capital distributions or paying management fees to a holding company if the
payment of such distributions or fees will cause them to become
undercapitalized. Furthermore, undercapitalized national banks will be required
to file capital restoration plans with the OCC. Such a plan will not be accepted
unless, among other things, the banking institutions's holding company
guarantees the plan up to a certain specified amount. Any such guarantee from a
depository institution's holding company is entitled to a priority of payment in
bankruptcy. Undercapitalized national banks also will be subject to restrictions
on growth, acquisitions, branching and engaging in new lines of business unless
they have an approved capital plan that permits otherwise. The OCC also may,
among other things, require an undercapitalized national bank to issue shares or
obligations, which could be voting stock, to recapitalize the institution or,
under certain circumstances, to divest itself of any subsidiary.
The OCC is authorized by FDICIA to take various enforcement actions against
any significantly undercapitalized national bank and any national bank that
fails to submit an acceptable capital restoration plan or fails to implement a
plan accepted by the OCC. These powers include, among other things, requiring
the institution to be recapitalized, prohibiting asset growth, restricting
interest rates paid, requiring primary approval of capital distributions by any
bank holding company which controls the institution, requiring divestiture by
the institution of its subsidiaries or by the holding company of the institution
itself, requiring new election of directors, and requiring the dismissal of
directors and officers.
Significantly and critically undercapitalized national banks may be subject
to more extensive control and supervision. The OCC may prohibit any such
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of a
national bank becoming critically undercapitalized, the OCC must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued viability.
As of December 31, 1997, the Bank met the capital requirements of a
"well-capitalized" institution.
DIVIDENDS. There are certain statutory limitations on the payment of
dividends by national banks. Without approval of the OCC, dividends may not be
paid by the Bank in an amount in any calendar year which exceeds the Bank's
total net profits for that year, plus its retained profits for the preceding two
years, less any required transfers to capital surplus. In addition, a national
bank may not pay dividends in excess of total retained profits, including
current year's earnings after deducting bad debts in excess of reserves for
losses. In some cases, the OCC may find a dividend payment that meets these
statutory requirements to be
5
<PAGE>
an unsafe or unsound practice. Under FDICIA, the Bank cannot pay a dividend if
it will cause the Bank to be "undercapitalized."
DEPOSIT INSURANCE. The deposits of the Bank are insured by the FDIC
through the BIF to the extent provided by law. Under the FDIC's risk-based
insurance system, BIF-insured institutions are currently assessed premiums of
between zero and twenty seven cents per $100 of eligible deposits, depending
upon the institution's capital position and other supervisory factors. Congress
recently enacted legislation that, among other things, provides for assessments
against BIF-insured institutions that will be used to pay certain Financing
Corporation ("FICO") OBLIGATIONS. In addition to any BIF insurance
assessments, BIF-insured banks are expected to make payments for the FICO
obligations equal to $0.01296 per $100 of eligible deposits each year during
1997 through 1999, and an estimated $0.024 per $100 of eligible deposits
thereafter.
CONSERVATOR AND RECEIVERSHIP POWERS. FDICIA significantly expanded the
authority of the federal banking regulators to place depository institutions
into conservatorship or receivership to include, among other things, appointment
of the FDIC as conservator or receiver of an undercapitalized institution under
certain circumstances. In the event the Bank is placed into conservatorship or
receivership, the FDIC is required, subject to certain exceptions, to choose the
method for resolving the institution that is least costly to the BIF, such as
liquidation.
BROKERED DEPOSIT RESTRICTIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA generally limit institutions
which are not well capitalized from accepting brokered deposits. In general,
undercapitalized institutions may not solicit, accept or renew brokered
deposits. Adequately capitalized institutions may not solicit, accept or renew
brokered deposits unless they obtain a waiver from the FDIC. Even in that event,
they may not pay an effective yield of more than 75 basis points over the
effective yield paid on deposits of comparable size and maturity in the
institution's normal market area for deposits accepted from within that area, or
the national rate paid on deposits of comparable size and maturity for deposits
accepted from outside the institution's normal market area.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Community Reinvestment
Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others.
These laws and regulations mandate certain disclosure requirements and regulate
the manner in which financial institutions must deal with customers when taking
deposits or making loans to such customers. The Bank must comply with the
applicable provisions of these consumer protection laws and regulations as part
of their ongoing customer relations.
THE COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956 (the "BHCA"), and is subject to supervision and regulation
by the Federal Reserve Board. The BHCA and other Federal laws subject bank
holding companies to particular restrictions on the types of activities in which
they may engage, and to a range of supervisory requirements and activities,
including regulatory enforcement actions for violations of laws and regulations.
As a bank holding company, the Company's activities and those of its banking and
nonbanking subsidiaries are limited to the business of banking and activities
closely related or incidental to banking, and the Company may not directly or
indirectly acquire the ownership or control of more than five percent of any
class of voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the Federal Reserve Board.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of the Bank, the claims of depositors and other general or
subordinated creditors of the Bank are entitled to a priority of payment over
the claims of holders of any obligation of the institution to its shareholders,
6
<PAGE>
including any depository institution holding company (such as the Company) or
any shareholder or creditor thereof.
SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. For example, the Federal
Reserve Board's Regulation Y requires a holding company to give the Federal
Reserve Board prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10%
or more of the company's consolidated net worth. The Federal Reserve Board may
oppose the transaction if it believes that the transaction would constitute an
unsafe or unsound practice or would violate any law or regulation. As another
example, a holding company could not impair its subsidiary bank's soundness by
causing it to make funds available to nonbanking subsidiaries or their customers
if the Federal Reserve Board believed it not prudent to do so.
FIRREA expanded the Federal Reserve Board's authority to prohibit
activities of bank holding companies and their nonbanking subsidiaries which
represent unsafe and unsound banking practices or which constitute violations of
laws or regulations. Notably, FIRREA increased the amount of civil money
penalties which the Federal Reserve Board can assess for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1,000,000 for each day the activity continues. FIRREA also expanded the scope
of individuals and entities against which such penalties may be assessed.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
ANNUAL REPORTING; EXAMINATIONS. The Company is required to file an annual
report with the Federal Reserve Board, and such additional information as the
Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve
Board may examine a bank holding company or any of its subsidiaries, and charge
the company for the cost of such an examination.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets and
certain off-balance sheet assets such as letters of credit are assigned
different risk weights, based generally on the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements).
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital divided
by its total consolidated assets. Bank holding companies must maintain a minimum
leverage ratio of at least 3.0%, although most organizations are expected to
maintain leverage ratios that are 100 to 200 basis points above this minimum
ratio.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve Board guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. In addition, the regulations
of the Federal Reserve Board provide that concentration of credit risk and
certain risks arising from nontraditional activities, as well as an
institution's ability to manage these risks, are important factors to be taken
into account by regulatory agencies in assessing an organization's overall
capital adequacy.
7
<PAGE>
The Federal Reserve Board recently adopted amendments to its risk-based
capital regulations to provide for the consideration of interest rate risk in
the agencies' determination of a banking institution's capital adequacy.
The Bank is subject to capital adequacy guidelines of the OCC that are
substantially similar to the Federal Reserve Board's guidelines.
ENFORCEMENT POWERS OF THE FEDERAL BANKING AGENCIES
The Federal Reserve Board and the OCC have broad enforcement powers,
including the power to terminate deposit insurance, impose substantial fines and
other civil and criminal penalties and appoint a conservator or receiver.
Failure to comply with applicable laws, regulations and supervisory agreements
could subject the Company or the Bank, as well as officers, directors and other
institution-affiliated parties of these organizations, to administrative
sanctions and potentially substantial civil money penalties. In addition to the
grounds discussed above under " -- The Bank -- Prompt Corrective Action," the
appropriate federal banking agency may appoint the FDIC as conservator or
receiver for a banking institution (or the FDIC may appoint itself, under
certain circumstances) if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or materially
fails to implement an accepted capital restoration plan.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. FDICIA requires
bank regulators to take "prompt corrective action" to resolve problems
associated with insured depository institutions whose capital declines below
certain levels. In the event an institution becomes "undercapitalized," it
must submit a capital restoration plan. The capital restoration plan will not be
accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary's compliance with the
capital restoration plan. Under FDICIA, the aggregate liability of all companies
controlling an undercapitalized bank is limited to the lesser of 5% of the
institution's assets at the time it became undercapitalized or the amount
necessary to cause the institution to be "adequately capitalized." The
guarantee and limit on liability expire after the regulators notify the
institution that it has remained adequately capitalized for each of four
consecutive calendar quarters. FDICIA grants greater powers to the bank
regulators in situations where an institution becomes "significantly" or
"critically" undercapitalized or fails to submit a capital restoration plan.
For example, a bank holding company controlling such an institution can be
required to obtain prior Federal Reserve Board approval of proposed dividends,
or might be required to consent to a consolidation or to divest the troubled
institution or other affiliates. At December 31, 1997, however, the Bank
satisfied the requirements of a "well capitalized" institution and, therefore,
these requirements are presently inapplicable to the Company.
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or direct or
indirect ownership or control of more than 5% of any class of voting shares of
any bank.
The Federal Reserve Board will allow the acquisition by a bank holding
company of an interest in any bank located in another state only if the laws of
the state in which the target bank is located expressly authorize such
acquisition. Texas law permits, in certain circumstances, out-of-state bank
holding companies to acquire banks and bank holding companies in Texas.
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996. On
September 30, 1996, President Clinton signed into law the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the "Regulatory Reduction Act").
The Regulatory Reduction Act's principal provisions relate to capitalization of
the Savings Association Insurance Fund of the FDIC, but it also contains
numerous regulatory relief measures, including provisions to reduce regulatory
burdens associated with compliance with various consumer and other laws
applicable to the Bank, including, for example, provisions designed to
coordinate
8
<PAGE>
the disclosure and other requirements under the Truth-in-Lending Act and the
Real Estate Settlement Procedures Act and modify certain insider lending
restrictions and anti-tying prohibitions.
Congress has been considering legislation in various forms that would
require federal thrifts to convert their charters to national or state bank
charters. The Regulatory Reduction Act required the Treasury Department to
prepare for Congress by March 31, 1997 a comprehensive study on development of a
common charter for federal savings associations and commercial banks; and, in
the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single Deposit Insurance Fund
on that date. The Company cannot determine whether, or in what form, such
legislation may eventually be enacted.
EXPANDING ENFORCEMENT AUTHORITY
One of the major effects of FDICIA was the increased ability of banking
regulators to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve Board and FDIC have extensive authority to police
unsafe or unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC may
terminate the deposit insurance of any institution which it determines has
engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties, issue cease and desist or removal orders, seek injunctions, and
publicly disclose such actions.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Company and its subsidiaries
cannot be predicted.
9
<PAGE>
ITEM 2. PROPERTIES
FACILITIES
The Company currently maintains sixteen locations, ten of which are leased.
The following table sets forth specific information on each branch, each of
which offers full service banking. The Company's headquarters are located at
4400 Post Oak Parkway, in a 35-story office tower located in the Galleria area.
<TABLE>
<CAPTION>
BRANCH DEPOSITS
AT
BRANCH SQ. FT. LOCATION DECEMBER 31, 1997
- ---------------------------------------- --------- -------------------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Galleria/Corporate...................... 109,000 4400 Post Oak Parkway $ 813,644
Downtown -- 1100 Louisiana.............. 10,000 1100 Louisiana 125,909
Northwest Crossing...................... 8,134 Hwy 290 at Tidwell 134,241
Memorial City........................... 3,554 899 Frostwood 75,092
Greenway Plaza.......................... 2,669 12 Greenway Plaza 62,040
Medical Center.......................... 2,437 6602 Fannin 8,651
Downtown -- Two Houston Center.......... 2,219 909 Fannin 53,244
Hempstead............................... 17,000 12130 Hempstead Hwy. 105,143
Tanglewood.............................. 5,625 5791 Woodway 12,728
Pasadena................................ 4,900 4207 Fairmont Parkway 14,183
Memorial West........................... 1,700 14803 Memorial 7,733
Spring.................................. 6,300 2000 Spring Cypress Road 32,459
Bell Tower.............................. 4,500 1330 Wirt Road 16,279
Kingwood................................ 5,500 29805 Loop 494 32,768
Porter.................................. 2,450 23741 Highway 59, #2 5,229
North Port.............................. 5,000 9191 North Loop East 12,998
-----------------
$ 1,512,341
=================
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is currently involved in any material
legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this Annual Report to a vote of the Company's security holders.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the NASDAQ Stock Market on
January 28, 1997, and is quoted in such Market under the symbol "SWBT". The
Company's Common Stock was not publicly traded, nor was there an established
market therefor, prior to January 28, 1997. On February 27, 1998, there were
approximately 790 holders of record of the Company's Common Stock.
No cash dividends have ever been paid by the Company on its Common Stock,
and the Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company's principal source of funds to pay
cash dividends on its Common Stock would be cash dividends from the Bank. There
are certain statutory limitations on the payment of dividends by national banks.
Without approval of the OCC, dividends in any calendar year may not exceed the
Bank's total net profits for that year, plus its retained profits for the
preceding two years, less any required transfers to capital surplus or to a fund
for the retirement of any preferred stock. In addition, a dividend may not be
paid in excess of a bank's cumulative net profits after deducting bad debts in
excess of the allowance for loan losses. As of December 31, 1997, approximately
$37.7 million was available for payment of dividends by the Bank to the Company
under these restrictions without regulatory approval. See "Item 1.
Business -- Supervision and Regulation."
The following table presents the range of high, low and closing sale prices
reported on the NASDAQ during the year ended December 31, 1997, the Company's
first year as a public company.
1997
-------------------------------------------
FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR.
--------- -------- --------- ---------
Common stock sale price:
High...................... $ 32 1/8 $ 301/8 $ 27 5/8 $ 20 1/2
Low....................... 28 1/4 255/8 18 3/8 17 7/8
Close..................... 31 1/8 291/2 27 5/8 19 1/4
RECENT SALES OF UNREGISTERED SECURITIES
No securities were sold by the Company during the fiscal year ended
December 31, 1997 that were not registered under the Securities Act of 1933.
11
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in this Annual Report, and the information
contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected historical consolidated
financial data as of the end of and for each of the five years in the period
ended December 31, 1997 are derived from the Company's Consolidated Financial
Statements which have been audited by independent public accountants. Historical
results have been restated to reflect the operations of Pinemont Bank prior to
August 1, 1997, the date on which it was merged into the Bank in a transaction
accounted for as a pooling-of-interests.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income.................. $ 108,932 $ 78,257 $ 61,695 $ 42,063 $ 30,903
Interest expense................. 45,729 32,275 25,509 13,848 9,970
--------- --------- --------- --------- ---------
Net interest income.......... 63,203 45,982 36,186 28,215 20,933
Provision for loan losses........ 3,886 2,090 1,121 1,349 1,037
--------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses..................... 59,317 43,892 35,065 26,866 19,896
Noninterest income............... 10,573 6,847 4,867 3,986 3,352
Noninterest expenses............. 44,013 32,210 25,684 20,903 17,366
--------- --------- --------- --------- ---------
Income before taxes.......... 25,877 18,529 14,248 9,949 5,882
Provision for income taxes....... 9,072 6,468 4,919 3,462 2,002
Cumulative effect of change in
accounting principle........... -- -- -- -- 16
--------- --------- --------- --------- ---------
Net income before preferred
dividend....................... 16,805 12,061 9,329 6,487 3,896
Preferred stock dividend......... 36 457 50 -- --
--------- --------- --------- --------- ---------
Net income available to common
shareholders................... $ 16,769 $ 11,604 $ 9,279 $ 6,487 $ 3,896
========= ========= ========= ========= =========
PER SHARE DATA:
Basic earnings per common
share(1)....................... $ 1.53 $ 1.24 $ 1.03 $ 0.75 0.45
Diluted earnings per common
share(1)....................... $ 1.44 $ 1.14 $ 0.95 $ 0.70 $ 0.43
Book value per share............. $ 10.27 $ 7.81 $ 6.45 $ 5.21 $ 4.43
Average common shares............ 10,959 9,395 9,032 8,613 8,597
Average common share
equivalents.................... 662 802 687 626 542
PERFORMANCE RATIOS:
Return on average assets......... 1.15% 1.09% 1.15% 1.04% 0.77%
Return on average common
equity......................... 16.46% 17.58% 17.50% 15.43% 10.65%
Net interest margin.............. 4.67% 4.69% 4.81% 4.86% 4.58%
Efficiency ratio(3).............. 59.66% 60.97% 62.56% 64.91% 71.51%
BALANCE SHEET DATA(2):
Total assets..................... $1,807,604 $1,272,141 $1,007,616 $ 703,497 $ 579,909
Securities....................... 555,398 345,398 347,908 196,333 189,961
Loans............................ 986,150 731,655 531,770 417,601 327,396
Allowance for loan losses........ 10,335 7,400 6,024 4,991 3,802
Total deposits................... 1,512,341 1,041,447 840,174 603,481 516,164
Total shareholders' equity....... 114,835 73,415 58,304 46,969 38,091
ASSET QUALITY RATIOS(2):
Nonperforming assets to loans and
other real estate.............. 0.37% 0.26% 0.19% 0.18% 0.25%
Net charge-offs to average
loans.......................... 0.11% 0.13% 0.09% 0.04% 0.00%
Allowance for loan losses to
total loans.................... 1.05% 1.01% 1.13% 1.20% 1.16%
Allowance for loan losses to
nonperforming loans(4)......... 332.64% 452.05% 675.34% 1250.88% 1604.22%
</TABLE>
- ------------
(1) Basic earnings per common share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per common share is computed by
dividing net income available to common shareholders by the sum of the
weighted average number of common shares outstanding and common share
equivalents for the period.
(2) At period end, except net charge-offs to average loans.
(3) Calculated by dividing total noninterest expenses, by net interest income
plus noninterest income.
(4) Nonperforming loans consist of nonaccrual loans and loans contractually past
due 90 days or more.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements and accompanying notes and other detailed information
appearing elsewhere in this Annual Report.
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
OVERVIEW
Total assets at December 31, 1997, 1996 and 1995 were $1.8 billion, $1.3
billion, and $1.0 billion, respectively. This growth was a result of a strong
local economy, the addition of new loan officers, and the Company's style of
relationship banking. Loans were $986.2 million at December 31, 1997, an
increase of $254.5 million or 34.8% from $731.7 million at the end of 1996.
Loans were $531.8 million at year end 1995. Deposits experienced similar growth,
increasing to $1.5 billion at year end 1997 from $1.0 billion at year end 1996
and $840.2 million at year end 1995. Shareholders' equity was $114.8 million,
$73.4 million and $58.3 million at December 31, 1997, 1996 and 1995,
respectively.
Net income available for common shareholders was $16.8 million, $11.6
million, and $9.3 million and diluted earnings per common share was $1.44,
$1.14, and $0.95 for the years ended 1997, 1996 and 1995, 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 1.15%, 1.09%, and 1.15% and returns on average common equity
of 16.46%, 17.58%, and 17.50% for the years ended 1997, 1996 and 1995,
respectively.
On August 1, 1997, the Company completed its merger with Pinemont Bank,
resulting in the issuance of approximately 1.7 million shares of the Company's
common stock valued at approximately $45 million. The Company accounted for this
combination as a pooling of interests and accordingly the consolidated financial
information included herein has been restated to include the accounts and
operations of Pinemont Bank for all reported periods.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
1997 VERSUS 1996. Net interest income totaled $63.2 million in 1997
compared to $46.0 million in 1996, an increase of $17.2 million or 37.4%. This
resulted in net interest margins of 4.67% and 4.69% and net interest spreads of
3.43% and 3.52% for 1997 and 1996, respectively.
The increase in net interest income was due primarily to a $372.7 million
or 38.0% increase in average earning assets. Average loans grew $251.3 million
or 41.7% during 1997 while average securities grew $51.5 million or 14.8% during
the same period. The yield earned on average loans outstanding decreased 7 basis
points to 9.19% in 1997 and was partially offset by a 24 basis point increase in
the yield earned on average securities. Overall, the yield earned on average
earning assets increased 7 basis points to 8.05% in 1997 compared to a 16 basis
point increase in the rate paid on average interest-bearing liabilities.
1996 VERSUS 1995. Net interest income totaled $46.0 million in 1996
compared to $36.2 million in 1995, an increase of $9.8 million or 27.1%. This
resulted in net interest margins of 4.69% and 4.81% and net interest spreads of
3.52% and 3.63% for 1996 and 1995, respectively.
The primary reason for higher net interest income was strong growth in
average earning assets. Average loans grew $139.7 million for the year ended
December 31, 1996, which was partially offset by a
13
<PAGE>
decrease in yield of 47 basis points. Similarly, investment securities for the
year ended December 31, 1996 grew $98.3 million and the yield improved 28 basis
points to 5.98%. Offsetting these increases was a large increase in interest
expense due to the growth in savings and money market account balances from
$322.3 million to $405.7 million, an increase of $83.4 million, which was
partially offset by a decrease in the rate paid from 4.07% to 3.93% for the year
ended 1996 versus 1995. Also, interest expense increased due to additional
volume on certificates of deposit and repurchase agreements and borrowed funds.
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. The yield on the
securities portfolio is based on average historical cost balances and does not
give effect to changes in fair value that are reflected as a component of
consolidated shareholders' equity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- ----------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID
----------- -------- ------- ----------- -------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans................................. $ 853,829 $78,509 9.19% $ 602,484 $55,771 9.26% $ 462,810 $45,014
Securities............................ 400,748 24,908 6.22 349,214 20,892 5.98 250,886 14,290
Federal funds sold and other earning
assets.............................. 99,278 5,515 5.56 29,471 1,594 5.41 38,935 2,391
----------- -------- ------- ----------- -------- ------- ----------- --------
Total interest-earning assets..... 1,353,855 108,932 8.05% 981,169 78,257 7.98% 752,631 61,695
----------- -------- ------- ----------- -------- ------- ----------- --------
Less allowance for loan losses.......... (8,654) (6,593) (5,532)
----------- ----------- -----------
Total earning assets, net of
allowance............................. 1,345,201 974,576 747,099
Nonearning assets....................... 111,283 89,343 62,981
----------- ----------- -----------
Total assets...................... $1,456,484 $1,063,919 $ 810,080
=========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits..... $ 548,666 22,688 4.14% $ 405,711 15,955 3.93% $ 322,283 13,116
Certificates of deposit............... 296,416 15,733 5.31 201,072 10,557 5.25 162,929 8,485
Repurchase agreements and borrowed
funds............................... 144,881 7,308 5.04 117,073 5,763 4.92 72,578 3,908
----------- -------- ------- ----------- -------- ------- ----------- --------
Total interest-bearing
liabilities..................... 989,963 45,729 4.62% 723,856 32,275 4.46% 557,790 25,509
----------- -------- ------- ----------- -------- ------- ----------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 357,697 260,782 189,070
Other liabilities..................... 6,964 5,941 9,394
----------- ----------- -----------
Total liabilities................. 1,354,624 990,579 756,254
----------- ----------- -----------
Bank preferred stock.................... -- 7,323 804
Shareholders' equity.................... 101,860 66,017 53,022
----------- ----------- -----------
Total liabilities and
shareholders' equity............ $1,456,484 $1,063,919 $ 810,080
=========== =========== ===========
Net interest income..................... $63,203 $45,982 $36,186
======== ======== ========
Net interest spread..................... 3.43% 3.52%
======= =======
Net interest margin..................... 4.67% 4.69%
======= =======
</TABLE>
AVERAGE
YIELD/
RATE
-------
ASSETS
Interest-earning assets:
Loans................................. 9.73%
Securities............................ 5.70
Federal funds sold and other earning
assets.............................. 6.14
-------
Total interest-earning assets..... 8.20%
-------
Less allowance for loan losses..........
Total earning assets, net of
allowance.............................
Nonearning assets.......................
Total assets......................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits..... 4.07%
Certificates of deposit............... 5.21
Repurchase agreements and borrowed
funds............................... 5.38
-------
Total interest-bearing
liabilities..................... 4.57%
-------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...
Other liabilities.....................
Total liabilities.................
Bank preferred stock....................
Shareholders' equity....................
Total liabilities and
shareholders' equity............
Net interest income.....................
Net interest spread..................... 3.63%
=======
Net interest margin..................... 4.81%
=======
14
<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 higher 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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
---------------------------------------- ---------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------------- ---------------------------
VOLUME RATE DAYS TOTAL VOLUME RATE DAYS TOTAL
------- --------- ----- --------- ------- --------- ---- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................................... $23,419 $ (529) $(152) $ 22,738 $13,462 $ (2,828) $123 $ 10,757
Securities.............................. 3,140 933 (57) 4,016 5,562 1,001 39 6,602
Federal funds sold and other............ 3,792 134 (5) 3,921 (588) (216) 7 (797)
------- --------- ----- --------- ------- --------- ---- ---------
Total increase (decrease) in
interest income................... 30,351 538 (214) 30,675 18,436 (2,043) 169 16,562
------- --------- ----- --------- ------- --------- ---- ---------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits....... 5,666 1,111 (44) 6,733 3,359 (556) 36 2,839
Certificates of deposit................. 5,035 170 (29) 5,176 1,963 86 23 2,072
Repurchase agreements and borrowed
funds................................. 1,385 176 (16) 1,545 2,385 (541) 11 1,855
------- --------- ----- --------- ------- --------- ---- ---------
Total increase (decrease) in
interest expense.................. 12,086 1,457 (89) 13,454 7,707 (1,011) 70 6,766
------- --------- ----- --------- ------- --------- ---- ---------
Increase in net interest income......... $18,265 $ (919) $(125) $ 17,221 $10,729 $ (1,032) $ 99 $ 9,796
======= ========= ===== ========= ======= ========= ==== =========
</TABLE>
PROVISION FOR LOAN LOSSES
The 1997 provision for loan losses increased to $3.9 million from $2.1
million in 1996, an increase of $1.8 million or 85.7%. The provision for the
year ended 1996 increased by $969,000 or 86.4% from $1.1 million for the year
ended December 31, 1995. The increased provision in 1997 and 1996 resulted from
strong loan growth rather than higher nonperforming assets.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1997 was $10.6 million,
an increase of $3.7 million or 54.4% over the same period in 1996. Noninterest
income of $6.8 million earned in the year ended December 31, 1996 represented an
increase of $2.0 milllion or 40.7% over the same period in 1995. The following
table presents for the periods indicated the major changes in noninterest
income.
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts..... $ 6,025 $ 4,473 $ 3,319
Retail services income.................. 304 276 247
Corporate services income............... 48 26 11
Loan operations......................... 833 599 446
Investment services..................... 2,339 1,215 695
Other noninterest income................ 526 258 149
Gain on sale of securities, net......... 498
--------- --------- ---------
Total noninterest income...... $ 10,573 $ 6,847 $ 4,867
========= ========= =========
15
<PAGE>
Service charges were $6.0 million for the year ended December 31, 1997,
compared to $4.5 million for the year ended December 31, 1996, an increase of
$1.5 million or 34.7%, and increased $1.2 million or 34.8% from 1995 to 1996.
During this three year period the Company introduced several new products which
contributed to the increase in service charge income. In addition, the number of
deposit accounts grew from 31,221 at December 31, 1995 to 35,258 at December 31,
1996 to 39,311 at December 31, 1997.
Other significant increases in noninterest income were recognized in the
categories of loan operations and investment services. Fee income from
investment services has increased significantly in each of the past three years.
For the year ended December 31, 1997 investment services income grew to $2.3
million, an increase of $1.1 million or 92.5% over the 1996 level, and increased
to $1.2 million for the year ended 1996, an increase of $520,000 or 74.8% from
1995. These increases are the result of a strategic focus by the Company to
increase its competitive position in providing investment services.
NONINTEREST EXPENSES
For the year ended December 31, 1997, noninterest expenses totaled $44.0
million, an increase of $11.8 million, or 36.6%, from $32.2 million during 1996,
which had increased from $25.7 million during 1995. The increase in noninterest
expenses during these periods was due primarily to salaries and employee
benefits, and occupancy expenses. Additionally, $2.0 million in merger related
expenses were incurred in 1997. The efficiency ratio was 59.66%, 60.97% and
62.56% for the years ended December 31, 1997, 1996 and 1995 respectively. The
improvement was due primarily to a large increase in earning assets and the
Company's continued efforts to control overhead expenses.
Salary and benefit expense for the year ended December 31, 1997 was $25.0
million, an increase of $6.0 million or 31.4% from $19.0 million for the year
ended December 31, 1996. Salary and benefit expense for the year ended December
31, 1996 was up $4.9 million or 34.5% from the same period in 1995. This
increase was due primarily to hiring of additional personnel required to
accommodate the Company's growth. Total full-time equivalent employees for the
years ended December 31, 1997, 1996 and 1995 were 559, 434, and 359,
respectively.
Occupancy expense rose $1.9 million and $1.5 million or 39.6% and 44.4% in
1997 and 1996, respectively. Major categories included within occupancy expense
are building lease expense, depreciation expense, and maintenance contract
expense. Building lease expense increased to $1.8 million in 1997 from $1.2
million in 1996, an increase of $600,000 or 50% and increased $328,000 or 39.6%
for the year ended 1996. The Company increased the rentable square feet of the
Galleria location by moving to a larger facility in November 1996. Depreciation
expense increased $885,000 and $678,000 or 42.7% and 48.6% in 1997 and 1996
respectively. This increase was due primarily to depreciation on equipment
provided to new employees and expense related to technology upgrades throughout
the Company. Maintenance contract expense for the year ended December 31, 1997
was $707,000, an increase of $295,000 or 71.6% compared to $412,000 in 1996 and
$336,000 in 1995. The Company has purchased maintenance contracts for major
operating systems throughout the organization.
During the third quarter of 1997, the Company expensed approximately $2.0
million in merger-related expenses and other charges, including $344,000 in
losses associated with restructuring the Pinemont Bank securities portfolio.
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. In 1997 income
tax expense was $9.1 million, an increase of $2.6 million or 40.3% from the $6.5
million of income tax expense in 1996. In 1996 income tax expense was $6.5
million, an increase of $1.6 million or 31.5% from the $4.9 million of income
tax expense in 1995.
16
<PAGE>
IMPACT OF INFLATION
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities. See " -- Financial
Condition -- Interest Rate Sensitivity and Liquidity" below.
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 $986.2 million at December 31, 1997, an increase of $254.5
million, or 34.8% from December 31, 1996. Total loans were $731.7 million at
December 31, 1996, an increase of $199.9 million, or 37.6%, from $531.8 million
at December 31, 1995.
The following table summarizes the loan portfolio of the Company by major
category as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- ------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial............ $448,348 45.46 % $330,566 45.18 % $218,074 41.01 % $166,798 39.94%
Real estate
Construction & land development.... 128,985 13.08 89,803 12.27 62,560 11.76 53,116 12.72
1-4 family residential............. 171,551 17.40 130,407 17.83 99,340 18.68 81,149 19.43
Commercial owner occupied.......... 132,052 13.39 97,116 13.27 63,649 11.97 41,753 10.00
Farmland........................... 8,384 0.85 8,879 1.21 5,327 1.00 3,097 0.74
Consumer............................. 88,631 8.99 71,640 9.79 59,480 11.19 46,643 11.17
Other................................ 8,199 0.83 3,244 0.45 23,340 4.39 25,046 6.00
-------- ------- -------- ------- -------- ------- -------- -------
Total Loans...................... $986,150 100.00 % $731,655 100.00 % $531,770 100.00 % 417,602 100.00%
======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
DECEMBER 31, 1993
-------------------
AMOUNT PERCENT
-------- -------
Commercial and industrial............ $135.851 41.49 %
Real estate
Construction & land development.... 42,388 12.95
1-4 family residential............. 64,764 19.78
Commercial owner occupied.......... 28,945 8.84
Farmland........................... 2,998 0.92
Consumer............................. 37,958 11.59
Other................................ 14,492 4.43
-------- -------
Total Loans...................... $327,396 100.00 %
======== =======
The primary lending focus of the Company is on small- and medium-sized
commercial, residential mortgage and consumer loans. The Company offers a
variety of commercial lending products including term loans, lines of credit and
equipment financing. A broad range of short- to medium-term commercial loans,
both collateralized and uncollateralized, are made available to businesses for
working capital (including inventory and receivables), business expansion
(including acquisitions of real estate and improvements) and the purchase of
equipment and machinery. The purpose of a particular loan generally determines
its structure.
17
<PAGE>
Generally, the Company's commercial loans are underwritten in the Company's
primary market area on the basis of the borrower's ability to service such debt
from income. As a general practice, the Company takes as collateral a lien on
any available real estate, equipment or other assets. Working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets.
A substantial portion of the Company's real estate loans consists of loans
collateralized by real estate and other assets of commercial customers.
Additionally, a portion of the Company's lending activity consists of the
origination of single-family residential mortgage loans collateralized by
owner-occupied properties located in the Company's primary market area. The
Company offers a variety of mortgage loan products which generally are amortized
over five to 30 years.
Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 90% of appraised value. The
Company requires mortgage title insurance and hazard insurance in the amount of
the loan. Although the contractual loan payment periods for single-family
residential real estate loans are generally for a three to seven year period,
such loans often remain outstanding for significantly shorter periods than their
contractual terms.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 84 months and vary based
upon the nature of collateral and size of loan.
The contractual maturity ranges of the commercial and industrial and real
estate construction loan portfolio and the amount of such loans with fixed
interest rates and floating rates in each maturity range as of December 31, 1997
are summarized in the following table:
DECEMBER 31, 1997
---------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial........ $ 297,304 $ 139,497 $ 11,547 $ 448,348
Real estate construction......... 67,595 58,585 2,805 128,985
---------- ---------- --------- ----------
Total..................... $ 364,899 $ 198,082 $ 14,352 $ 577,333
========== ========== ========= ==========
Loans with a fixed interest rate. $ 90,239 $ 76,364 $ 3,857 $ 170,460
Loans with a floating interest
rate........................... 274,660 121,718 10,495 406,873
---------- ---------- --------- ----------
Total..................... $ 364,899 $ 198,082 $ 14,352 $ 577,333
========== ========== ========= ==========
NONPERFORMING ASSETS
The Company has well developed procedures in place to maintain a high
quality loan portfolio. These procedures include a Credit Quality Assurance
Process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors, an independent loan review department
staffed with OCC experienced personnel, low individual lending limits for
officers, Senior Loan Committee approval for large credit relationships and
quality loan documentation procedures. The loan review department has
consistently identified and analyzed weaknesses in the portfolio and reports
credit risk grade changes on a monthly basis to Bank management and directors.
The Company also maintains a well developed monitoring process for credit
extensions in excess of $100,000. The Company performs monthly and quarterly
concentration analyses based on various factors such as industries, collateral
types, business lines, large credit sizes, international investments and officer
portfolio loads. The Company has established underwriting guidelines to be
followed by its officers. The Company also monitors its delinquency levels for
any negative or adverse trends. There can be no assurance, however, that the
Company's loan portfolio will not become subject to increasing pressures from
deteriorating borrower credit due to general economic conditions.
18
<PAGE>
The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory. All
loans past due 90 days, however, are placed on nonaccrual status, unless the
loan is both well collateralized and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring.
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets were $3.7 million at December 31, 1997, compared
with $1.9 million at December 31, 1996 and $994,000 at December 31, 1995. This
resulted in a ratio of nonperforming assets to loans plus other real estate of
0.37%, 0.26%, and 0.19% for the years ended 1997, 1996, and 1995, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans..................... $ 2,724 $ 1,615 $ 869 $ 397 $ 202
Accruing loans 90 or more days past
due................................ 383 22 23 2 35
Restructured loans................... -- -- -- -- --
Other real estate and foreclosed
property........................... 546 297 102 371 590
--------- --------- --------- --------- ---------
Total nonperforming assets.... $ 3,653 $ 1,934 $ 994 $ 770 $ 827
========= ========= ========= ========= =========
Nonperforming assets to total loans
and other real estate.............. 0.37% 0.26% 0.19% 0.18% 0.25%
</TABLE>
The Company regularly updates appraisals on loans collateralized by real
estate, particularly those categorized as nonperforming loans and potential
problem loans. In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible writedowns or appropriate additions to
the allowance for loan losses.
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 December 31, 1997
is adequate to cover losses inherent in the portfolio as of such date. There can
be no assurance, however, that the Company will not sustain losses in future
periods, which could be greater than the size of the allowance at December 31,
1997.
19
<PAGE>
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses beginning
balance............................ $ 7,400 $ 6,024 $ 4,991 $ 3,802 $ 2,753
Provision for loan losses............ 3,886 2,090 1,121 1,349 1,037
Charge-offs.......................... (1,078) (807) (440) (243) (82)
Recoveries........................... 127 93 24 83 94
Increase from acquisition............ -- -- 328 -- --
--------- --------- --------- ---------- ----------
Allowance for loan losses ending
balance............................ $ 10,335 $ 7,400 $ 6,024 $ 4,991 $ 3,802
========= ========= ========= ========== ==========
Allowance to period-end loans........ 1.05% 1.01% 1.13% 1.20% 1.16%
Net charge-offs to average loans..... 0.11 0.13 0.09 0.04 0.00
Allowance to period-end nonperforming
loans.............................. 332.64 452.05 675.34 1250.88 1604.22
</TABLE>
The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future loan losses may occur.
The total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial........ $ 922 45.46% $ 468 45.18% $ 109 41.01%
Real estate:
Construction and land
development............... 25 13.08% 53 12.27% 1 11.76%
1-4 family residential...... 17.40% 7 17.83% 6 18.68%
Commercial owner occupied... 13.39% 29 13.27% 75 11.97%
Farmland.................... 0.85% -- 1.21% -- 1.00%
Other....................... 0.83% 1 0.45% 5 4.39%
Consumer......................... 38 8.99% 54 9.79% 31 11.19%
Unallocated...................... 9,350 6,788 5,797
--------- --------- ---------
Total allowance for loan losses...... $ 10,335 $ 7,400 $ 6,024
========= ========= =========
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1993
------------------------- -------------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial........ $ 140 39.94% $ 115 41.49%
Real estate:
Construction and land
development............... 24 12.72% 140 12.95%
1-4 family residential...... 10 19.43% 15 19.78%
Commercial owner
occupied.................. 63 10.00% 23 8.84%
Farmland.................... -- 0.74% -- 0.92%
Other....................... 4 6.00% -- 4.43%
Consumer......................... 53 11.17% 62 11.59%
Unallocated...................... 4,697 3,447
----------- -----------
Total allowance for loan losses...... $ 4,991 $ 3,802
=========== ===========
</TABLE>
SECURITIES
At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held to maturity, trading or available for sale.
At each reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities are classified as held to maturity and measured
at
20
<PAGE>
amortized cost in the financial statements only if management has the positive
intent and ability to hold those securities to maturity. Securities that are
bought and held principally for the purpose of selling them in the near term are
classified as trading and measured at fair value in the financial statements
with unrealized gains and losses included in earnings. Securities not classified
as either held to maturity or trading are classified as available for sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, in a separate component of shareholders' equity
until realized. Gains and losses on sales of securities are determined using the
specific-identification method. Since December 31, 1995, the Company has
classified all securities as available for sale. This allows the Company to
manage its investment portfolio more effectively and to enhance the average
yield on the portfolio.
The following table summarizes the amortized cost of securities held by the
Company as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Government securities........... $ 163,230 $ 126,966 $ 136,294 $ 123,426 $ 120,763
Mortgage-backed securities........... 323,434 169,399 165,853 70,430 66,183
Federal Reserve Bank Stock........... 1,791 950 946 718 716
Federal Home Loan Bank Stock......... 37,942 39,386 38,348 2,037 1,612
Other securities..................... 26,281 8,827 6,494 2,465 686
---------- ---------- ---------- ---------- ----------
Total securities................ $ 552,678 $ 345,528 $ 347,935 $ 199,076 $ 189,960
========== ========== ========== ========== ==========
</TABLE>
The following table summarizes the carrying value and classification of
securities as of the dates shown:
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Available for sale at fair value........ $ 555,398 $ 345,398 $ 347,908
Held to maturity........................ -- -- --
Securities at amortized cost............ -- -- --
---------- ---------- ----------
Total securities................... $ 555,398 $ 345,398 $ 347,908
========== ========== ==========
The following table presents the amortized cost of securities classified as
available for sale and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------------- -----------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS VALUE COST GAIN LOSS
--------- ---------- ---------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities........... $163,230 $ 536 $ (4) $163,762 $126,966 $372 $ (484)
Mortgage-backed securities........... 323,434 2,275 (151) 325,558 169,399 571 (617)
Federal Reserve Bank Stock........... 1,791 -- -- 1,791 950 -- --
Federal Home Loan Bank Stock......... 37,942 -- -- 37,942 39,386 -- --
Other securities..................... 26,281 64 -- 26,345 8,827 31 (3)
--------- ---------- ---------- -------- --------- --- ----------
Total securities.................. $552,678 $2,875 $ (155) $555,398 $345,528 $974 $ (1,104)
========= ========== ========== ======== ========= === ==========
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
GROSS GROSS
FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
VALUE COST GAIN LOSS VALUE
-------- --------- ---------- ---------- --------
U.S. Government securities........... $126,854 $136,294 $ 561 $ (590) $136,265
Mortgage-backed securities........... 169,353 165,853 510 (538) 165,825
Federal Reserve Bank Stock........... 950 946 -- -- 946
Federal Home Loan Bank Stock......... 39,386 38,348 -- -- 38,348
Other securities..................... 8,855 6,494 32 (2) 6,524
-------- --------- ---------- ---------- --------
Total securities.................. $345,398 $347,935 $1,103 $ (1,130) $347,908
======== ========= ========== ========== ========
</TABLE>
No securities were classified as held to maturity at December 31, 1997,
1996, or 1995.
Securities totaled $555.4 million at December 31, 1997, an increase of
$210.0 million from $345.4 million at December 31, 1996. During 1996, securities
decreased $2.5 million from $347.9 million at
21
<PAGE>
December 31, 1995. The yield on the securities portfolio for 1997 was 6.22%
while the yield was 5.98% in 1996.
The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortgage-backed securities at
December 31, 1997 were $66.9 million in agency issued collateral mortgage
obligations.
At December 31, 1997, 62.8% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. At December 31, 1997,
approximately $172.8 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase.
The following table summarizes the contractual maturity of investments
(including securities, federal funds sold and interest-bearing deposits) and
their weighted average yields at December 31, 1997. The yield on the securities
portfolio is based on average historical cost balances and does not give effect
to changes in fair value that are reflected as a component of consolidated
shareholders' equity.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------------------
AFTER FIVE
AFTER ONE YEARS BUT WITHIN
WITHIN YEAR BUT WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
----------------- ----------------- ---------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ----- -------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities.............. $100,767 5.70 % $ 62,463 6.39 % $ -- -- $ -- --
Mortgage-backed securities.............. 1,459 6.80 42,982 6.04 76,034 6.59 % 202,959 5.98%
Federal Reserve Bank
Stock................................. 1,791 6.00 -- -- -- -- -- --
Federal Home Loan Bank Stock............ 37,942 6.00 -- -- -- -- -- --
Other securities........................ 25,022 5.70 180 7.71 577 7.20 502 8.26
Federal funds sold...................... 132,247 5.63 -- -- -- -- -- --
Interest-bearing deposits............... 369 5.38 -- -- -- -- -- --
-------- ----- -------- ----- ------- ----- -------- -----
Total investments................... $299,597 5.72 % $105,625 6.25 % $76,611 6.59 % $203,461 5.98%
======== ===== ======== ===== ======= ===== ======== =====
</TABLE>
TOTAL YIELD
-------- -----
U.S. Government securities.............. $163,230 5.96 %
Mortgage-backed securities.............. 323,434 6.13
Federal Reserve Bank
Stock................................. 1,791 6.00
Federal Home Loan Bank Stock............ 37,942 6.00
Other securities........................ 26,281 5.79
Federal funds sold...................... 132,247 5.63
Interest-bearing deposits............... 369 5.38
-------- -----
Total investments................... $685,294 5.97 %
======== =====
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
customer service, advertising, and competitive pricing policies to attract and
retain these deposits. As of December 31, 1997, the Company had less than five
percent of its deposits classified as brokered funds and does not anticipate any
significant increase. Deposits provide generally all the 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 years ended December 31, 1997, 1996, and 1995 was 29.88%, 30.06%, and
28.04%, respectively.
Average total deposits during 1997 increased to $1.2 billion from $867.6
million in 1996, an increase of $332.4 million or 38.3%. Average
noninterest-bearing deposits increased to $357.7 million in 1997 from $260.8
million in 1996 due to the increase in the number of deposit accounts. Average
deposits in 1996 rose to $867.6 million from $674.3 million in 1995, an increase
of $193.3 million or 28.7%.
22
<PAGE>
The average daily balances and weighted average rates paid on deposits for
each of the years ended December 31, 1997, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995
----------------------- --------------------- ---------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts......................... $ 36,944 1.73% $ 51,854 1.51% $ 43,186 2.06%
Regular savings...................... 11,373 2.29 9,952 2.35 9,597 2.58
Treasury Plus........................ 278,448 4.91 172,597 4.84 91,396 5.35
Money market......................... 221,901 3.66 171,308 3.84 178,104 3.98
CD's less than $100,000.............. 80,835 5.14 69,532 5.09 56,112 5.18
CD's $100,000 and over............... 198,202 5.38 115,510 5.34 92,952 5.20
IRA's & QRP's & Other................ 17,379 5.26 16,030 5.28 13,865 5.34
------------ --------- ---------- --------- ---------- ---------
Total interest-bearing
deposits........................ 845,082 4.55% 606,783 4.37% 485,212 4.45%
========= ========= =========
Noninterest-bearing deposits......... 357,697 260,782 189,070
------------ ---------- ----------
Total deposits.................. $ 1,202,779 $ 867,565 $ 674,282
============ ========== ==========
</TABLE>
The following table sets forth the maturity of the Company's certificates
of deposit that are $100,000 or greater as of the dates indicated:
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
3 months or less..................... $ 179,422 $ 75,044 $ 55,936
Between 3 months and 12 months....... 79,624 52,370 38,695
Over 12 months....................... 12,684 12,265 11,063
---------- ---------- ----------
Total CD's $100,000 and over.... $ 271,730 $ 139,679 $ 105,694
========== ========== ==========
On March 10, 1997, the Bank restructured its interest-bearing transaction
accounts into master accounts containing a checking subaccount and a savings
subaccount. The allocation of funds between such subaccounts has resulted in a
$34.8 million decrease in the amount of NOW accounts and a corresponding
increase in noninterest-bearing money market accounts at December 31, 1997.
Funds in the checking subaccount are swept into the savings subaccount on a
periodic basis, and then swept back into the checking subaccount as needed to
cover checks or other withdrawls. In order to avoid having the savings
subaccount reclassified as a "transaction account" for purposes of Regulation
D, the number of transfers from the savings subaccount to the checking
subaccount is limited to six per month, with the sixth such transfer sweeping
all funds from the savings subaccount to the checking subaccount. The purpose of
this restructuring is to reduce the required noninterest-bearing balances held
at the Federal Reserve.
23
<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:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $ 129,460 $ 103,927
Period-end...................... 155,832 136,119
Maximum month-end balance during
period........................ 155,832 136,119
Interest Rate:
Average......................... 4.97% 4.88%
Period-end...................... 5.02% 4.93%
Other short-term borrowings:
Average......................... $ 14,843 $ 13,137
Period-end...................... 17,243 10,027
Maximum month-end balance during
period........................ 50,645 60,044
Interest rate:
Average......................... 5.60% 5.30%
Period-end...................... 6.54% 5.16%
Securities sold under repurchase agreements are maintained in safekeeping
by correspondent banks.
INTEREST RATE SENSITIVITY AND LIQUIDITY
Asset and liability management is concerned with the timing and magnitude
of repricing assets compared to liabilities. It is the objective of the Company
to generate stable growth in net interest income and to attempt to control risks
associated with interest rate movements. In general, management's strategy is to
reduce the impact of changes in interest rates on its net interest income by
maintaining a favorable match between the maturities or repricing dates of its
interest-earning assets and interest-bearing liabilities. The Company's asset
and liability management strategy is formulated and monitored by the Asset
Liability Committee, which is composed of senior officers of the Bank, in
accordance with policies approved by the Bank's Board of Directors. This
Committee meets regularly to review, among other things, the sensitivity of the
Bank's assets and liabilities to interest rate changes, the book and market
values of assets and liabilities, unrealized gains and losses, purchase and sale
activity, and maturities of investments and borrowings. The Asset Liability
Committee also approves and establishes pricing and funding decisions with
respect to the Bank's overall asset and liability composition. The Committee
reviews the Bank's liquidity, cash flow flexibility, maturities of investments,
deposits and borrowings, retail and institutional deposit activity, current
market conditions, and interest rates on both a local and national level.
The Company's policy is to maintain rate sensitive assets minus rate
sensitive liabilities divided by total assets within 15% on a cumulative basis
for one year. At December 31, 1997, this ratio was a negative 4.02%. The Company
estimates that a 100 basis point adverse change in interest rates would have no
significant impact on its net interest income over a twelve-month period.
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the Asset Liability Committee could undertake in
response to changes in interest rates. The Committee regularly reviews interest
rate risk exposure by forecasting the impact of alternative interest rate
environments on net interest income. The Bank adjusts interest sensitivity
accordingly during the year through changes in the mix of assets and liabilities
and may use interest rate products such as interest rate swap and cap
agreements.
24
<PAGE>
The interest rate sensitivity ("GAP") is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A GAP is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A GAP is considered negative when the amount of interest
rate sensitive liabilities exceeds interest rate sensitive assets. During a
period of rising interest rates, a negative GAP would tend to adversely affect
net interest income, while a positive GAP would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative GAP
would tend to result in an increase in net interest income, while a positive GAP
would tend to affect net interest income adversely. While the GAP is a useful
measurement and contributes toward effective asset and liability management, it
is difficult to predict the effect of changing interest rates solely on that
measure. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. The Bank's
management continuously monitors its net interest rate sensitivity position and
the effect of various interest rate fluctuations on future earnings.
The following table sets forth an interest rate sensitivity analysis for
the Company as of December 31, 1997:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
-------------------------------------------------------------------
AFTER
0-30 DAYS 31-180 DAYS 181-360 DAYS ONE YEAR TOTAL
--------- ----------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Money market funds.............. $ 24,967 $ -- $ -- $ -- $ 24,967
Securities...................... 112,311 41,616 68,541 305,174 527,642
Loans........................... 613,777 51,050 39,223 279,843 983,893
Overdrafts...................... 4,243 -- -- -- 4,243
Federal funds sold.............. 132,616 -- -- -- 132,616
--------- ----------- ------------ ---------- ------------
Total interest-earning assets... 887,914 92,666 107,764 585,017 1,673,361
--------- ----------- ------------ ---------- ------------
Interest-bearing liabilities
Demand, money market and savings
deposits...................... 654,370 -- -- -- 654,370
Certificates of deposit and
other time deposits........... 158,135 114,028 57,539 35,426 365,128
Short-term borrowings........... 176,960 -- -- -- 176,960
--------- ----------- ------------ ---------- ------------
Total interest-bearing
liabilities................... 989,465 114,028 57,539 35,426 1,196,458
--------- ----------- ------------ ---------- ------------
Period GAP........................... $(101,551) $ (21,362) $ 50,225 $ 549,591 $ 476,903
========= =========== ============ ========== ============
Cumulative GAP....................... $(101,551) $ (122,913) $(72,688) $ 476,903
========= =========== ============ ==========
Period GAP to total assets........... -5.62% -1.18% 2.78% 30.40%
Cumulative GAP to total assets....... -5.62% -6.80% -4.02% 26.38%
</TABLE>
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 year ended December 31, 1997, the Company's
liquidity needs have primarily been met by growth in core deposits, as
previously discussed. 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. In January 1997, the Company completed an initial public
offering of its common stock. Substantially all of the net proceeds
(approximately $20.3 million) from the
25
<PAGE>
sale of 1,322,500 shares of common stock were contributed to the Bank.
Approximately $7.5 million was used to redeem the 750,000 outstanding shares of
the Bank's preferred stock, and the balance was used for general corporate
purposes.
Subject to certain limitations, the Bank may borrow funds from the Federal
Home Loan Bank ("FHLB") in the form of advances. Credit availability from the
FHLB to the Bank is based on the Bank's financial and operating condition.
Borrowings from the FHLB to the Bank was approximately $17.2 million at December
31, 1997. In addition to creditworthiness, the Bank must own a minimum amount of
FHLB capital stock. This minimum is 5.00% of outstanding FHLB advances. Unused
borrowing capacity at December 31, 1997 was $113.2 million. The Bank uses FHLB
advances for both long-term and short-term liquidity needs. Other than normal
banking operations, the Bank has no long-term liquidity needs. The Bank has
never been involved with highly leveraged transactions that may cause unusual
potential long-term liquidity needs.
CAPITAL RESOURCES
Capital management consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve Board and the Bank is subject to capital adequacy
requirements imposed by the OCC. Both the Federal Reserve Board and the OCC have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure,
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
Bank regulatory authorities in the United States have issued risk-based
capital standards by which all bank holding companies and banks are evaluated in
terms of capital adequacy. The risk-based capital standards issued by the
Federal Reserve Board apply to the Company, and the OCC guidelines apply to the
Bank. These guidelines relate a financial institution's capital to the risk
profile of its assets. The risk-based capital standards require all financial
organizations to have "Tier 1 capital" of at least 4.0% of risk-adjusted
assets and "total risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of
risk-adjusted assets. "Tier 1 capital" includes, generally, common
shareholders' equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings, qualifying perpetual preferred stock
and minority interest in equity accounts of consolidated subsidiaries less
deductions for goodwill and various other intangibles. "Tier 2 capital" may
consist of a limited amount of subordinated debt, certain hybrid capital
instruments and other debt securities, preferred stock not qualifying as Tier 1
capital, and a limited amount of the general valuation allowance for loan losses
("Tier 2 capital"). The sum of Tier 1 capital and Tier 2 capital is "total
risk-based capital."
The agencies have also adopted guidelines which supplement the risk-based
capital guidelines with a minimum leverage ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with
well diversified risk, including no undue interest rate exposure; excellent
asset quality; high liquidity; good earnings; and that are generally considered
to be strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.
Shareholders' equity increased to $114.8 million at December 31, 1997 from
$73.4 million at December 31, 1996, an increase of $41.4 million, or 56.4%. This
increase was primarily the result of the
26
<PAGE>
initial public offering in January, 1997, which netted proceeds of $20.3
million. During 1996, shareholders' equity increased by $15.1 million, or 25.9%,
from $58.3 million at December 31, 1995.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1997 and December
31, 1996 to the minimum regulatory standards:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------------- ---------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- --------- -------------- ----- --------------- ---------
As of December 31, 1997
Total capital (to risk weighted
<S> <C> <C> <C> <C> <C> <C>
assets)......................... $ 119,151,000 10.10% $ 94,401,440 8.00 % $ 118,001,800 10.00%
Tier I capital
(to risk weighted assets)....... 108,816,000 9.22% 47,200,720 4.00 % 94,401,440 8.00%
Tier I capital
(to total average assets)....... 108,816,000 7.47% 43,703,269 3.00 % 72,838,781 5.00%
As of December 31, 1996
Total capital (to risk weighted
assets)......................... 86,341,000 10.75% 64,095,760 8.00 % 80,119,700 10.00%
Tier I capital
(to risk weighted assets........ 78,941,000 9.83% 32,047,880 4.00 % 64,095,760 8.00%
Tier I capital
(to total average assets)....... 78,941,000 7.42% 31,917,570 3.00 % 53,195,950 5.00%
</TABLE>
- ------------
(1) The OCC has the authority to require the Bank to maintain a leverage ratio
of up to 200 basis points above the required minimum.
Pursuant to Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency revised its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multifamily mortgages. Also pursuant to FDICIA, each federal banking agency has
promulgated regulations setting the levels at which an insured institution would
be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under the Federal Reserve Board's regulations, the Bank is
classified "well capitalized" for purposes of prompt corrective action. See
"Supervision and Regulation."
OTHER MATTERS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
finanical statement that is displayed with the same prominence as other
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997 and will have no impact on the Company's consolidated
financial position, results of operations or cash flows.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS 131") which establishes the
way that public business enterprises report information about operating segments
in annual and interim financial statements issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement is
27
<PAGE>
effective for financial statements for periods beginning after December 15, 1997
and will have no impact on the Company's consolidated financial position,
results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Interest
Rate Sensitivity and Liquidity" which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the reports thereon, the
notes thereto and supplementary data commencing at page F-1 of this Form 10-K,
which financial statements, reports, notes and data are incorporated herein by
reference.
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for each of the quarters in
fiscal 1997 and 1996 (in thousands, except earnings per share). Historical
results have been restated to reflect the operations of Pinemont Bank prior to
August 1, 1997, the date on which it was merged into the Bank in a transaction
accounted for as a pooling-of-interests.
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $31,189 $29,285 $25,870 $22,588 $21,298 $19,876 $18,745 $18,338
Interest expense..................... 13,354 12,585 10,458 9,332 8,746 8,193 7,748 7,588
------- ------- ------- ------- ------- ------- ------- -------
Net interest income.............. 17,835 16,700 15,412 13,256 12,552 11,683 10,997 10,750
Provision for loan losses............ 1,150 1,158 1,036 542 1,000 410 340 340
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses...... 16,685 15,542 14,376 12,714 11,552 11,273 10,657 10,410
Noninterest income................... 2,923 2,556 2,791 2,303 1,863 1,694 1,737 1,553
Noninterest expenses................. 11,832 12,805 10,072 9,304 9,134 8,164 7,592 7,320
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes.............. 7,776 5,293 7,095 5,713 4,281 4,803 4,802 4,643
Provision for income taxes........... 2,721 1,855 2,490 2,006 1,477 1,682 1,682 1,627
------- ------- ------- ------- ------- ------- ------- -------
Net income before bank preferred
stock dividends.................... 5,055 3,438 4,605 3,707 2,804 3,121 3,120 3,016
Bank preferred stock dividends....... -- -- -- 36 116 115 111 115
------- ------- ------- ------- ------- ------- ------- -------
Net income available to common
shareholders....................... $ 5,055 $ 3,438 $ 4,605 $ 3,671 $ 2,688 $ 3,006 $ 3,009 $ 2,901
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per common share...... $ 0.45 $ 0.31 $ 0.42 $ 0.35 $ 0.29 $ 0.32 $ 0.32 $ 0.31
Diluted earnings per common share.... $ 0.43 $ 0.29 $ 0.39 $ 0.33 $ 0.26 $ 0.29 $ 0.29 $ 0.30
Weighted average common shares and
common share equivalents
outstanding (in 000's)............. 11,844 11,849 11,770 11,328 10,392 10,327 10,300 10,277
</TABLE>
- ------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with accountants on any matter of
accounting principles or practices or financial statement disclosures during the
two year period ended December 31, 1997.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the directors and persons nominated to become
directors of the Company, reference is made to the information presented in the
Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders
to be filed with the Commission pursuant to Regulation 14A under the Securities
and Exchange Act of 1934 (the "1998 Proxy Statement"). All of such information
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning the compensation paid by the Company during the
year ended December 31, 1997 to its executive officers, reference is made to the
information presented in the 1998 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning the beneficial ownership of the common stock of
the Company by its directors and officers and by certain other beneficial
owners, reference is made to the information presented in the Company's 1998
Proxy Statement. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding certain business relationships and related
transactions involving the Company's officers and directors, reference is made
to the information presented in the 1998 Proxy Statement. Such information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) AND (D) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedule listed on the
accompanying Index to Financial Statements and Schedule (see page F-1) are filed
as part of this Form 10-K.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
29
<PAGE>
(c) *Exhibits:
<TABLE>
<CAPTION>
<S> <C>
3.1 -- Articles of Incorporation of the Company
3.2 -- Bylaws of the Company (Restated as of December 31, 1996)
3.3 -- Amendment dated December 18, 1996 to Articles of Incorporation of the Company
4.1 -- Specimen Common Stock certificate
10.1 -- 1989 Stock Option Plan
10.2 -- 1993 Stock Option Plan
10.3 -- Form of Stock Option Agreement under 1989 Stock Option Plan and 1993 Stock
Option Plan
**10.4 -- 1996 Stock Option Plan, as amended February 23, 1998
10.5 -- Form of Incentive Stock Option Agreement under 1996 Stock Option Plan
10.6 -- Form of Non-qualified Stock Option Agreement under 1996 Stock Option Plan
10.7 -- Directors Stock Option Plan, adopted October, 1993
10.8 -- Form of Stock Option Agreement under Directors Stock Option Plan
10.9 -- Form of Change in Control Agreement between the Company and each of Walter E.
Johnson, Paul B. Murphy, Jr., Joseph H. Argne, David C. Farries, Sharon K.
Sokol, Yale Smith, Steve D. Stephens and Anthony Torentinos
10.10 -- Form of Employment Contract between the Company and J. Nolan Bedford
(incorporated by reference to Exhibit B-1 to Exhibit 2.1 to the Registrant's
Form S-4 Registration Statement No. 333-27897).
**21.1 -- List of subsidiaries of the Company
**23.1 -- Consent of Coopers & Lybrand L.L.P.
**27.1 -- Financial Data Schedule
</TABLE>
- ------------
* All Exhibits except for those filed herewith and as otherwise indicated are
incorporated herein by reference to the Exhibits bearing the same Exhibit
numbers in the Registrant's Form S-1 Registration Statement No. 333-16509.
** Filed herewith.
30
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SOUTHWEST BANCORPORATION
OF TEXAS, INC.
By: /s/ WALTER E. JOHNSON
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Date: March 13, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- ---------------------------------------- ---------------
<C> <S> <C>
/s/WALTER E. JOHNSON Chairman of the Board and Chief March 13, 1998
WALTER E. JOHNSON Executive Officer (Principal Executive
Officer)
/s/DAVID C. FARRIES Executive Vice President, Treasurer and March 13, 1998
DAVID C. FARRIES Secretary (Principal Financial Officer)
/s/R. JOHN McWHORTER Vice President and Controller (Principal March 13, 1998
R. JOHN MCWHORTER Accounting Officer)
/s/JOHN W. JOHNSON Director and Chairman of the Executive March 13, 1998
JOHN W. JOHNSON Committee of the Board
/s/PAUL B. MURPHY, JR. Director, President and Chief Operating March 13, 1998
PAUL B. MURPHY, JR. Officer
/s/JOHN B. BROCK III Director March 13, 1998
JOHN B. BROCK III
/s/ERNEST H. COCKRELL Director March 13, 1998
ERNEST H. COCKRELL
/s/J. DAVID HEANEY Director March 13, 1998
J. DAVID HEANEY
/s/WILHELMINA R. MORIAN Director March 13, 1998
WILHELMINA R. MORIAN
/s/ANDRES PALANDJOGLOU Director March 13, 1998
ANDRES PALANDJOGLOU
/s/ADOLPH A. PFEFFER, JR. Director March 13, 1998
ADOLPH A. PFEFFER, JR.
/s/STANLEY D. STEARNS, JR. Director March 13, 1998
STANLEY D. STEARNS, JR.
/s/MICHAEL T. WILLIS Director March 13, 1998
MICHAEL T. WILLIS
</TABLE>
31
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements
Report of Independent
Accountants.................... F-2
Consolidated Balance Sheet as of
December 31, 1997 and 1996..... F-3
Consolidated Statement of Income
for the Years Ended December
31, 1997, 1996 and 1995........ F-4
Consolidated Statement of
Changes in Shareholders' Equity
for the Years Ended
December 31, 1997, 1996 and
1995........................... F-5
Consolidated Statement of Cash
Flows for the Years Ended
December 31, 1997, 1996 and
1995........................... F-6
Notes to Consolidated Financial
Statements..................... F-7
Financial Statement Schedule
Report of Independent
Accountants.................... F-23
Schedule I -- Parent Company
Condensed Financial
Statements..................... F-24
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Southwest Bancorporation of Texas, Inc.:
We have audited the accompanying consolidated balance sheet of Southwest
Bancorporation of Texas, Inc. and Subsidiary (the "Company") as of December
31, 1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southwest
Bancorporation of Texas, Inc. and Subsidiary as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 10, 1998
F-2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
ASSETS
Cash and due from banks.............. $ 104,363 $ 91,384
Federal funds sold and other interest
earning assets..................... 132,616 81,479
------------ ------------
Total cash and cash
equivalents............. 236,979 172,863
Securities -- available for sale..... 555,398 345,398
Loans receivable, net................ 975,815 724,255
Premises and equipment, net.......... 21,348 16,468
Accrued interest receivable.......... 11,159 8,127
Prepaid expenses and other assets.... 6,905 5,030
------------ ------------
Total assets............... $ 1,807,604 $ 1,272,141
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing... $ 492,843 $ 373,025
Demand -- interest-bearing...... 58,915 53,819
Money market accounts........... 580,605 377,240
Savings......................... 14,850 10,699
Time, $100 and over............. 267,533 137,164
Other time...................... 97,595 89,500
------------ ------------
Total deposits............. 1,512,341 1,041,447
Securities sold under repurchase
agreements......................... 155,832 136,119
Other short-term borrowings.......... 17,243 10,027
Accrued interest payable............. 1,259 1,123
Other liabilities.................... 6,094 2,687
------------ ------------
Total liabilities.......... 1,692,769 1,191,403
------------ ------------
Commitments and contingencies
Bank preferred stock................. 7,323
------------ ------------
Shareholders' equity:
Common stock -- $1 par value,
50,000,000 shares authorized;
11,185,263 and 9,403,582 shares
issued and outstanding at
December 31, 1997 and 1996,
respectively................... 11,185 9,403
Additional paid-in capital...... 49,549 28,536
Retained earnings............... 52,333 35,564
Net unrealized appreciation
(depreciation) on securities
available for sale, net of
deferred taxes of $952 and
$(47) at December 31, 1997 and
1996, respectively............. 1,768 (88)
------------ ------------
Total shareholders'
equity.................. 114,835 73,415
------------ ------------
Total liabilities and
shareholders' equity.... $ 1,807,604 $ 1,272,141
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Interest income:
Loans........................... $ 78,509 $ 55,771 $ 45,014
Securities...................... 24,908 20,892 14,290
Federal funds sold and other.... 5,515 1,594 2,391
---------- --------- ---------
Total interest income...... 108,932 78,257 61,695
Interest expense on deposits and
other borrowings................... 45,729 32,275 25,509
---------- --------- ---------
Net interest income........ 63,203 45,982 36,186
Provision for loan losses............ 3,886 2,090 1,121
---------- --------- ---------
Net interest income after
provision for loan
losses.................. 59,317 43,892 35,065
---------- --------- ---------
Noninterest income:
Service charges................. 6,025 4,473 3,319
Other operating income.......... 4,050 2,374 1,548
Gain on sale of securities,
net........................... 498
---------- --------- ---------
Total noninterest income... 10,573 6,847 4,867
---------- --------- ---------
Noninterest expenses:
Salaries and employee
benefits...................... 24,950 18,984 14,111
Occupancy expense............... 6,814 4,881 3,380
Loss on sale of securities,
net........................... 112 639
Merger-related expenses and
other charges................. 2,011
Other operating expenses........ 10,238 8,233 7,554
---------- --------- ---------
Total noninterest
expenses................ 44,013 32,210 25,684
---------- --------- ---------
Income before income
taxes................... 25,877 18,529 14,248
Provision for income taxes........... 9,072 6,468 4,919
---------- --------- ---------
Net income before bank
preferred stock
dividend................ 16,805 12,061 9,329
Bank preferred stock dividend........ 36 457 50
---------- --------- ---------
Net income available for
common shareholders..... $ 16,769 $ 11,604 $ 9,279
========== ========= =========
Earnings per common share:
Basic...................... $ 1.53 $ 1.24 $ 1.03
========== ========= =========
Diluted.................... $ 1.44 $ 1.14 $ 0.95
========== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
(DEPRECIATION)
COMMON STOCK ADDITIONAL ON SECURITIES TOTAL
------------------- PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS FOR SALE EQUITY
--------- ------- ---------- -------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994........... 9,021,183 $ 9,021 $ 25,081 $ 14,681 $ (1,810) $ 46,973
Issuance of common stock to
benefit plan.................. 18,172 18 109 127
Exercise of stock options....... 3,225 3 (1) 2
Deferred compensation
amortization.................. 132 132
Net change in unrealized
depreciation on securities
available for sale, net of
deferred taxes of $(965)...... 1,792 1,792
Cash dividends on bank preferred
stock ($.07 per share)........ (50) (50)
Net income...................... 9,329 9,329
--------- ------- ---------- -------- -------------- -------------
BALANCE, DECEMBER 31, 1995........... 9,042,580 9,042 25,321 23,960 (18) 58,305
Issuance of common stock to
benefit plan.................. 17,435 17 151 168
Liquidation of partial shares... (54) (1) (1)
Proceeds from sale of common
stock......................... 343,621 344 2,930 3,274
Deferred compensation
amortization.................. 135 135
Net change in unrealized
depreciation on securities
available for sale, net of
deferred taxes of $38......... (70) (70)
Cash dividends on bank preferred
stock ($.61 per share)........ (457) (457)
Net income...................... 12,061 12,061
--------- ------- ---------- -------- -------------- -------------
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 of
common stock.................. 1,322,500 1,323 18,487 19,810
Redemption premium on Bank
preferred stock............... (177) (177)
Deferred compensation
amortization.................. 156 156
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $(999)...... 1,856 1,856
Cash dividends on bank preferred
stock ($.05 per share)........ (36) (36)
Net income...................... 16,805 16,805
--------- ------- ---------- -------- -------------- -------------
BALANCE, DECEMBER 31, 1997........... 11,185,263 $11,185 $ 49,549 $ 52,333 $ 1,768 $ 114,835
========= ======= ========== ======== ============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income......................... $ 16,805 $ 12,061 $ 9,329
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses....... 3,886 2,090 1,121
Depreciation.................... 3,715 2,832 1,824
Compensation expense............ 36 168 127
Deferred compensation
amortization.................... 156 135 132
Deferred tax (benefit)
expense......................... (67) 340 (449)
Loss on sale of other assets.... 559 4 23
Realized (gain) loss on
securities available for sale... (142) 112 639
Net amortization of premiums and
discounts....................... 1,424 1,994 380
Dividends on Federal Home Loan
Bank stock...................... (2,861) (1,694) (957)
(Increase) decrease in accrued
interest receivable, prepaid
expenses and other assets..... (5,341) 659 (3,915)
Increase (decrease) in accrued
interest payable and other
liabilities................... 5,651 (1,144) 2,633
------------ ------------ ------------
Net cash provided by
operating activities.... 23,821 17,557 10,887
Cash flows from investing activities:
Proceeds from maturity of
securities available for sale... 42,080 53,657 66,495
Proceeds from maturity of
securities held to maturity..... 8,000
Principal paydowns of
mortgage-backed securities
available for sale.............. 47,139 50,138 6,691
Principal paydowns of
mortgage-backed securities held
to maturity..................... 8,208
Proceeds from sale of securities
available for sale.............. 93,109 43,011 60,249
Purchase of securities available
for sale........................ (387,894) (144,811) (211,658)
Purchase of securities held to
maturity........................ (78,546)
Proceeds from sale of other real
estate and other loan related
assets.......................... 56 24 500
Net increase in loans receivable... (255,748) (201,215) (99,509)
Purchase of premises and
equipment....................... (9,157) (7,205) (5,369)
------------ ------------ ------------
Net cash used in investing
activities.............. (470,415) (206,401) (244,939)
Cash flows from financing activities:
Net increase in noninterest-bearing
demand deposits................. 119,818 117,381 56,377
Net increase in time deposits...... 138,464 60,357 11,159
Net increase in other
interest-bearing deposits....... 212,612 23,536 142,901
Net increase in securities sold
under repurchase agreements..... 19,713 40,480 53,190
Net increase (decrease) in other
short-term borrowings........... 7,216 8,739 (7,531)
Net proceeds from sale of common
stock........................... 20,539 3,275
Net proceeds from issuance of bank
preferred stock................. 7,323
Payment of dividends on bank
preferred stock................. (152) (391)
Redemption of bank preferred
stock........................... (7,500)
------------ ------------ ------------
Net cash provided by
financing activities.... 510,710 253,377 263,419
------------ ------------ ------------
Net increase in cash and cash
equivalents........................ 64,116 64,533 29,367
Cash and cash equivalents at
beginning of year.................. 172,863 108,330 78,963
------------ ------------ ------------
Cash and cash equivalents at end of
year............................... $ 236,979 $ 172,863 $ 108,330
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The 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.
Substantially all of the Company's revenue and income is derived from the
operation of the Bank. The Bank provides a full range of commercial and private
banking services to small and middle market businesses and individuals in the
Houston metropolitan area.
On June 30, 1996, the Company acquired the Bank through a one for one
exchange of common shares and assumed the Bank's stock option plans.
Shareholders' equity has been restated for all periods presented to reflect the
recapitalization. Accordingly, Bank preferred stock (See Note 10.), whose
holders are other than the Company, was segregated from shareholders' equity in
the accompanying consolidated balance sheet and consolidated statement of
changes in shareholders' equity. In addition, certain other amounts in the
financial statements have been reclassified to conform to current financial
statement presentation. These other reclassifications had no effect on
consolidated net income, shareholders' equity or cash flows. In November 1996,
the Company effected a 2.5 for 1 common stock split in the form of a common
stock dividend (the "Stock Split"). All share and per share information for
common stock has been retroactively restated to reflect the Stock Split.
Effective August 1, 1997, the Company and the Bank consummated their merger
with Pinemont Bank, whereby Pinemont Bank, another Houston area metropolitan
bank, was merged into the Bank. In accordance with the Agreement and Plan of
Merger, the Company exchanged 0.625 of a share of the Company's common shares
for each share of Pinemont Bank stock, resulting in the issuance of 1,668,621
shares of the Company's common shares. The transaction was accounted for as a
pooling of interests; therefore the Company's consolidated financial statements
have been restated to include the accounts and operations of Pinemont Bank for
all periods presented. See Note 17.
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers its federal funds sold, due from bank demand accounts
and other highly liquid investments purchased with a maturity of three months or
less to be cash equivalents. The Company classifies its investments in money
market funds as securities and not cash equivalents.
The Company is required to maintain noninterest-bearing cash reserve
balances with the Federal Reserve Bank. The average balance was approximately
$10,800 and $18,700 for the years ended December 31, 1997 and 1996,
respectively.
SECURITIES
Securities which management intends and has the ability to hold to maturity
are classified as held to maturity. Securities held to maturity are stated at
cost, increased by accretion of discounts and reduced by
F-7
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortization of premiums, both computed by the interest method. The Company held
no securities classified as held to maturity at December 31, 1997 or 1996.
Securities to be held for indefinite periods of time, including securities
that management intends to use as part of its asset/liability strategy, or that
may be sold in response to changes in interest rates, changes in prepayment
risk, the need to increase regulatory capital or other similar factors, are
classified as available for sale and are carried at fair value. Fair values of
securities are estimated based on available market quotations. Unrealized
holding gains and losses, net of taxes, on available for sale securities are
reported as a net amount in a separate component of shareholders' equity until
realized. The amortized cost of securities available for sale is increased by
accretion of discounts and reduced by amortization of premiums, both computed by
the interest method. Gains and losses on the sale of available for sale
securities are determined using the specific identification method.
Trading securities are carried at market value. Realized and unrealized
gains and losses on trading securities are recognized in the statement of income
as they occur. The Company held no trading securities during 1997, 1996 or 1995.
The Company reviews its financial position, liquidity and future plans in
evaluating the criteria for classifying investment securities. Securities are
classified among categories at the time the securities are purchased. Declines
in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary would result in
write-downs of the individual securities to their fair value. The Company
believes that none of the unrealized losses should be considered other than
temporary.
LOANS
Loans are reported at the principal amount outstanding, net of unearned
discount, deferred loan fees and the allowance for loan losses.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Loans are designated as nonaccrual when reasonable doubt
exists as to the full, timely collection of interest or principal. When a loan
is placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of interest and principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
A loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. A loan is not considered impaired during a period of delay in payment
if the Company expects to collect all amounts due, including interest past due.
The Company generally considers a period of delay in payment to include
delinquency up to 90 days. Accordingly, impaired loans have been defined as all
nonaccrual loans. The measurement of impaired loans is based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or the loan's observable market price or based on the fair value of the
collateral if the loan is collateral-dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, an impairment is
recognized through a valuation allowance and a corresponding charge to
operations.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for such
losses charged against operations. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to reflect the risks inherent in the existing loan portfolio and commitments to
extend credit and is
F-8
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on evaluations of the collectibility and prior loss experience of loans.
The evaluations are based on a number of subjective factors including current
and anticipated economic conditions, changes in the loan portfolio, adequacy of
loan collateral and other relevant factors.
The evaluation of the adequacy of loan collateral is often based upon
estimates and appraisals. Because of changing economic conditions, the
valuations determined from such estimates and appraisals may also change.
Accordingly, the Company may ultimately incur losses which vary from
management's current estimates. Adjustments to the allowance for loan losses
will be reported in the period such adjustments become known or are reasonably
estimable.
LOAN FEES AND COSTS
Nonrefundable loan origination and commitment fees and direct costs
associated with originating loans are deferred and recognized over the lives of
the related loans as an adjustment to the loans' yield.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost. Expenditures for renewals and
improvements are capitalized, while repairs and maintenance are charged to
expense as incurred. Any gain or loss from disposition of such assets is
reflected in current operations. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED
Real estate acquired through foreclosure is carried at the lower of the
recorded investment in the property or its fair value less estimated selling
costs. Prior to foreclosure, the value of the underlying collateral of the loan
is written down to its estimated fair value less estimated selling costs by a
charge to the allowance for loan losses, if necessary. Any subsequent
write-downs are charged against operations. Operating expenses of such
properties, net of related income is included in other operating expenses.
EARNINGS PER COMMON SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). SFAS 128
simplifies the computation of earnings per common share by replacing the primary
and fully diluted presentations with the new basic and diluted presentations.
Basic earnings per common share is computed by dividing income available for
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per common share is computed by dividing income
available for common shareholders by the sum of the weighted average number of
common shares outstanding and the effect of all dilutive potential common shares
outstanding for the period. All prior period earnings per common share data have
been restated. See Note 11.
INCOME TAX
The Company provides for deferred income taxes utilizing the liability
method whereby deferred income taxes are recognized for the tax consequences in
future years of differences in the tax bases of assets and liabilities and their
financial reporting amounts based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
F-9
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1997 and will have no
impact on the Company's consolidated financial position, results of operations
or cash flows.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS 131") which establishes the
way that public business enterprises report information about operating segments
in annual and interim financial statements issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The statement is effective for financial
statements for periods beginning after December 15, 1997 and will have no impact
on the Company's consolidated financial position, results of operations or cash
flows.
2. SECURITIES:
The amortized cost and approximate fair value of securities classified as
available for sale is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- FAIR
COST GAINS LOSSES VALUE
--------- ------ ------- ----------
<S> <C> <C> <C> <C>
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
========= ====== ======= ==========
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- FAIR
COST GAINS LOSSES VALUE
--------- ------ ------- ----------
U.S. Government securities........... $ 126,966 $ 372 $ (484) $ 126,854
Mortgage-backed securities........... 169,399 571 (617) 169,353
Federal Reserve Bank stock........... 950 950
Federal Home Loan Bank stock......... 39,386 39,386
Other securities..................... 8,827 31 (3) 8,855
--------- ------ ------- ----------
Total securities available for
sale.......................... $ 345,528 $ 974 $(1,104) $ 345,398
========= ====== ======= ==========
</TABLE>
F-10
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled maturities of securities classified as available for sale is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less.............. $ 100,767 $ 100,853 $ 50,990 $ 51,114
Due from one year to five years...... 62,463 62,909 75,976 75,740
---------- ---------- ---------- ----------
163,230 163,762 126,966 126,854
---------- ---------- ---------- ----------
Mortgage-backed securities........... 323,434 325,558 169,399 169,353
Federal Reserve Bank stock........... 1,791 1,791 950 950
Federal Home Loan Bank stock......... 37,942 37,942 39,386 39,386
Other securities..................... 26,281 26,345 8,827 8,855
---------- ---------- ---------- ----------
Total securities available for
sale.......................... $ 552,678 $ 555,398 $ 345,528 $ 345,398
========== ========== ========== ==========
</TABLE>
At December 31, 1997 and 1996, respectively, securities with a carrying
value of $354,896 and $167,872 have been pledged to collateralize repurchase
agreements, public deposits and other items.
3. LOANS:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Commercial........................... $ 448,575 $ 335,878
Real estate:
Construction.................... 129,932 86,200
1-4 family residential.......... 171,739 130,398
Other........................... 149,028 112,404
Consumer............................. 88,862 68,178
---------- ----------
988,136 733,058
Less:
Unearned fees and discounts..... (1,986) (1,403)
Allowance for loan losses....... (10,335) (7,400)
---------- ----------
$ 975,815 $ 724,255
========== ==========
An analysis of the allowance for loan losses is as follows:
1997 1996 1995
--------- --------- ---------
Balance, beginning of year........... $ 7,400 $ 6,024 $ 4,991
Provision charged against
operations......................... 3,886 2,090 1,121
Charge offs.......................... (1,078) (807) (440)
Recoveries........................... 127 93 24
Increase from Acquisition............ -- -- 328
--------- --------- ---------
Balance, end of year................. $ 10,335 $ 7,400 $ 6,024
========= ========= =========
The Company had approximately $2,724 and $1,615 in nonaccrual and impaired
loans at December 31, 1997 and 1996, respectively. The related allowance for
loan losses for impaired loans was approximately $600 and $385 at December 31,
1997 and 1996, respectively.
The Company has loans, deposits, and other transactions with its principal
shareholders, officers, directors and organizations with which such persons are
associated which were made in the ordinary course
F-11
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of business. At December 31, 1997 and 1996, the aggregate amount of loans and
unfunded lines of credit to such related parties was $12,993 and $9,227,
respectively.
Following is an analysis of activity with respect to these amounts:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Balance, beginning of year........... $ 9,227 $ 7,610
New loans............................ 5,366 3,374
Repayments........................... (1,600) (1,757)
--------- ---------
Balance, end of year................. $ 12,993 $ 9,227
========= =========
4. PREMISES AND EQUIPMENT:
Premises and equipment consists of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Land.................................... $ 3,998 $ 3,908
Premises and leasehold improvements..... 9,522 7,044
Furniture and equipment................. 18,393 13,669
--------- ---------
31,913 24,621
Less accumulated depreciation and
amortization............................ 10,565 8,153
--------- ---------
$ 21,348 $ 16,468
========= =========
5. PREPAID EXPENSES AND OTHER ASSETS:
Prepaid expenses and other assets consists of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Foreclosed real estate.................. $ 546 $ 297
Deferred income taxes................... 641 1,517
Goodwill................................ 1,641 1,772
Prepaid expenses........................ 629 582
Banker's acceptances.................... 70 322
Investment in unconsolidated investee... 1,925
Other................................... 1,453 540
--------- ---------
$ 6,905 $ 5,030
========= =========
6. DEPOSITS:
At December 31, 1997, scheduled maturities of time deposits are summarized
as follows:
1998.................................... $ 334,764
1999.................................... 24,092
2000.................................... 2,181
2001.................................... 2,579
2002.................................... 1,039
Thereafter.............................. 473
----------
$ 365,128
==========
At December 31, 1997 and 1996, the aggregate amount of deposits from
related parties was $43,673 and $36,383, respectively.
F-12
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM 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:
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Securities sold under repurchase
agreements:
Average......................... $129,460 $103,927
Year-end........................ 155,832 136,119
Maximum month-end balance during
year.......................... 155,832 136,119
Interest rate:
Average......................... 4.97% 4.88%
Year-end........................ 5.02% 4.93%
Other short-term borrowings:
Average......................... $ 14,843 $ 13,137
Year-end........................ 17,243 10,027
Maximum month-end balance during
year.......................... 50,645 60,044
Interest rate:
Average......................... 5.60% 5.30%
Year-end........................ 6.54% 5.16%
Securities sold under repurchase agreements generally include U.S.
Government securities and are maintained in safekeeping by correspondent banks.
The Company enters into these repurchase agreements as a service to its
customers.
8. INCOME TAXES:
The income tax provision (benefit) for the years ended December 31, 1997,
1996 and 1995 is composed of the following:
1997 1996 1995
--------- --------- ---------
Current.............................. $ 9,139 $ 6,128 $ 5,368
Deferred............................. (67) 340 (449)
--------- --------- ---------
$ 9,072 $ 6,468 $ 4,919
========= ========= =========
F-13
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to deferred
income tax assets and liabilities and their approximate tax effects are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- -----------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCES EFFECT DIFFERENCES EFFECT
------------ ------- ------------ -------
<S> <C> <C>
Premises and equipment............... $ 623 $ 218
Allowance for loan losses............ 9,609 3,364 $5,941 $ 2,079
Unearned fees........................ 43 15 66 23
Deferred compensation................ 692 242 1,381 483
Accruals............................. 163 57 138 48
Unrealized loss on securities
available for sale................. -- -- 117 41
Other................................ -- -- 657 230
------------ ------- ------------ -------
Deferred income tax asset....... $ 11,130 3,896 $8,300 2,904
============ ------- ============ -------
Premises and equipment............... $ 226 79
Unrealized gain on securities
available for sale................. $ 2,720 952 -- --
Market discounts on securities....... 369 129 255 89
Federal Home Loan Bank stock
dividend........................... 6,211 2,174 3,364 1,177
Other................................ -- -- 120 42
------------ ------- ------------ -------
Deferred income tax liability... $ 9,300 3,255 $3,965 1,387
============ ------- ============ -------
Net deferred income tax asset........ $ 641 $ 1,517
======= =======
</TABLE>
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Statutory federal income tax rate....... 35.0% 35.0% 35.0%
Permanent differences................... 1.5 0.6 0.7
Effect of utilization of graduated tax
rates................................. (0.7) (0.8)
Other................................... (1.5) 0.1 (0.4)
---- ---- ----
Effective income tax rate............... 35.0% 35.0% 34.5%
==== ==== ====
9. EMPLOYEE BENEFITS:
STOCK-BASED COMPENSATION PLAN
The Company sponsors, and currently grants awards under, the Southwest
Bancorporation of Texas, Inc. 1996 Stock Option Plan (the "Stock Option
Plan"), which is a stock-based compensation plan as described below. The
Company has also sponsored similar stock-based compensation plans in prior
years.
The Company applies Accounting Principles Board Opinion 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations, in
accounting for the Stock Option Plan and the Company's other prior stock-based
compensation plans. In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, ("SFAS 123") which, if fully adopted by the Company, would
change the method the Company applies in recognizing the expense of its
stock-based compensation plans for awards subsequent to 1994. Adoption of the
expense recognition provisions of SFAS 123 is optional and the Company decided
not to elect these
F-14
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions of SFAS 123. However, pro forma disclosures as if the Company adopted
the expense recognition provisions of SFAS 123 are required by SFAS 123 and are
presented below.
THE STOCK OPTION PLAN
Under the Stock Option Plan, the Company is authorized to issue up to
650,000 shares of common stock pursuant to "Awards" granted in the form of
incentive stock options which qualify under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), nonqualified stock options which do not
qualify under Section 422 of the Code, and stock appreciation rights. Awards may
be granted to selected employees and directors of the Company or any subsidiary.
The Stock Option Plan provides that the exercise price of any incentive stock
option may not be less than the fair market value of the common stock on the
date of grant, and that the exercise price of any nonqualified stock option may
be equal to, greater than or less than the fair market value of the common stock
on the date of grant.
The Company granted 110,037, 424,250 and 284,607 stock options in 1997,
1996 and 1995, respectively. These stock options were granted with an exercise
price, as determined in each individual grant agreement. Of the stock options
granted in 1997, 2,500 options were 100% vested at grant and the balance vest
over a five year period commencing on the date of grant (i.e., 60% vest on the
third anniversary of the date of grant and 20% vest on each of the next two
anniversaries of the date of grant). Of the stock options granted in 1996,
19,400 options were 100% vested at grant and the balance vest over a five year
period on the same terms as the vesting schedule applicable to the 1997 stock
options. Of the stock options granted in 1995, 18,050 options were 100% vested
at grant and the balance vest over a five-year period on the same terms as the
vesting schedule applicable to the 1997 stock options.
Included in the 1996 grants were 2,500 nonqualified stock options that will
vest only if a specified performance measure is attained. These
performance-based stock options were not vested at December 31, 1996, but for
purposes of the pro forma amounts shown below, are assumed to become fully
vested by the anniversary of the date of grant in 1997.
In accordance with APB 25, compensation expense is recognized for
discounted stock options granted and for performance-based stock options granted
(but not for the nondiscounted stock options granted). The Company has
recognized $156, $135 and $132 of compensation expense in connection with these
grants in 1997, 1996 and 1995, respectively.
A summary of the status of the Company's stock options as of December 31,
1997, 1996, and 1995 and the change during the years is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES AVERAGE # SHARES AVERAGE # SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the
year............................... 1,708,330 $ 6.70 1,308,455 $ 3.08 1,027,073 $ 2.54
Granted at a discount........... 15,000 $11.87 21,250 $ 9.46 26,250 $ 6.52
Granted at-the-money............ 95,037 $18.07 400,500 $16.13 240,307 $ 8.44
Granted at a premium............ 0 n/a 2,500 $10.00 18,050 $ 8.80
Total granted........................ 110,037 $17.34 424,250 $15.76 284,607 $ 8.29
Exercised............................ 463,560 $ 2.08 0 n/a 3,225 $ 0.40
Forfeited............................ 13,825 $ 4.85 24,375 $ 8.34 0 n/a
Expired.............................. 0 n/a 0 n/a 0 n/a
Outstanding at end of year........... 1,340,982 $ 9.25 1,708,330 $ 6.70 1,308,455 $ 3.08
Exercisable at end of year........... 438,803 $ 5.40 636,099 $ 2.54 538,649 $ 1.82
</TABLE>
F-15
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes stock option valuation model with the following
weighted-average assumptions for grants in 1997, 1996 and 1995: dividend yield
of 0.00%: risk-free interest rates are different for each grant and range from
6.00% to 6.48%; and the expected lives of options range from 5 to 6 years. The
weighted average fair value of options granted during the year is as follows:
1997 1996 1995
--------- --------- ---------
Weighted-average fair value of
options granted at a discount...... $ 14.12 $ 3.17 $ 2.91
Weighted-average fair value of
options granted at-the-money....... $ 7.36 $ 4.74 $ 2.22
Weighted-average fair value of
options granted at a premium....... n/a $ 2.40 $ 1.91
Weighted-average fair value of all
options granted during the year.... $ 8.28 $ 4.64 $ 2.26
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
$.40 to $10.40....................... 738,411 * $4.28 282,371 $2.41
$7.76 to $9.71**..................... 131,221 7.77 $9.34 125,596 $9.33
$15.00 to $22.31..................... 457,350 8.94 $16.71 30,836 $16.50
$25.09 to $30.69..................... 14,000 9.59 $9.24 0 n/a
----------- ----------- -------- ----------- --------
$.40 to $30.69....................... 1,340,982 * $9.25 438,803 $5.40
=========== ===========
</TABLE>
- ------------
* All options, with an exercise price between $.40 to $10.40, are exercisable
while the employee remains an employee at the Company and cease to be
exercisable three months after termination of employment.
** All options in this range were originally granted by Pinemont Bank prior to
the merger with the Company.
If the fair value based method of accounting under SFAS 123 had been
applied, the Company's net income available for common shareholders and earnings
per common share would have been reduced to the pro forma amounts indicated
below (assuming that the fair value of options granted during the year are
amortized over the vesting period):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net income available for common
shareholders
As reported..................... $ 16,769 $ 11,604 $ 9,279
Pro forma....................... 15,962 11,382 9,204
Basic earnings per common share......
As reported..................... $ 1.53 $ 1.24 $ 1.03
Pro forma....................... 1.46 1.21 1.02
Diluted earnings per common share
As reported..................... $ 1.44 $ 1.14 $ 0.95
Pro forma....................... 1.37 1.12 0.95
The effects of applying SFAS 123 in the above pro forma disclosure are not
indicative of future amounts. The Company anticipates making awards in the
future under its stock-based compensation plans.
F-16
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BENEFIT PLAN
The Company has adopted a contributory profit sharing plan pursuant to
Internal Revenue Code Section 401(k) covering substantially all employees (the
"401-K Plan"). Each year the Company determines, at its discretion, the amount
of matching contributions. The Company presently matches 50% of the employee
contributions not to exceed 3% of the employee's annual compensation. Total plan
expense charged to the Company's operations for the years ended December 31,
1997, 1996 and 1995 was $385, $336 and $253, respectively.
During April 1993, the 401-K Plan was amended to allow the Company to
contribute shares of common stock of the Company (valued at the approximate fair
market value on the date of contribution) instead of cash. Under the plan
250,000 shares of common stock are issuable. A total of 2,520, 17,435, and
18,172 shares at prices ranging from $14.00, $9.20 to $10.20, and $6.50 to $7.60
were issued to the 401-K Plan during the years ended December 31, 1997, 1996 and
1995, respectively.
10. PREFERRED STOCK:
The Bank authorized 1,500,000 shares of Series 1 Adjustable Rate First
Preferred Stock, $5 par value, ("Bank Preferred Stock") in October 1995 and
issued 750,000 shares in November 1995. The Bank Preferred Stock holders have no
voting rights except in certain circumstances. Each share of preferred stock is
entitled to a liquidation preference of $10.
Dividends on the Bank Preferred Stock are noncumulative. The Bank is
prohibited from paying any cash dividends on the common stock unless all
dividends on the Bank Preferred Stock have been paid in full for all completed
quarterly periods. Bank Preferred Stock dividends are payable quarterly in
arrears and are calculated on the $10 subscription price at a rate of 1% above
the United States Treasury bill rate.
The Bank Preferred Stock may be redeemed at any time on or after December
31, 1997, at the option of the Bank, in whole or in part, at $10.10 per share,
together with all unpaid dividends per share, whether or not declared (the
"Redemption Price"). Each quarter after December 31, 1999, the redemption
price increases by $.05 per share. If a change of control occurs prior to
December 31, 1997, the Bank Preferred Stock may be redeemed at the option of the
Bank at the redemption price. Ninety days after a change of control, each share
of Bank Preferred Stock is convertible, at the option of the holder, into the
number of common shares equal to the quotient of $10 divided by the book value
per common share.
In January 1997, upon written approval of the holders of the Bank Preferred
Stock, the Bank redeemed all of the outstanding shares for $7,500.
F-17
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EARNINGS PER COMMON SHARE:
Earnings per common share is computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net income available for common
shareholders....................... $ 16,769 $ 11,604 $ 9,279
============== ============== ==============
Divided by weighted average common
shares and common share
equivalents:
Weighted average common
shares........................ 10,959,156 9,395,026 9,032,299
Weighted average common share
equivalents................... 662,156 801,615 687,054
-------------- -------------- --------------
Total weighted average common shares
and common share equivalents....... 11,621,312 10,196,641 9,719,353
============== ============== ==============
Basic earnings per common share...... $ 1.53 $ 1.24 $ 1.03
============== ============== ==============
Diluted earnings per common share.... $ 1.44 $ 1.14 $ 0.95
============== ============== ==============
</TABLE>
12. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various litigation that arise in the normal
course of business. In the opinion of management of the Company, after
consultation with its legal counsel, such litigation will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
LEASES
At December 31, 1997, the Company has certain noncancelable operating
leases which cover the Company's premises with approximate future minimum annual
rental payments as follows:
1998................................. $ 2,234
1999................................. 2,244
2000................................. 2,256
2001................................. 2,013
2002................................. 1,852
Thereafter........................... 6,583
---------
$ 17,182
=========
Rent expense was $1,840, $1,145 and $830 for the years ended December 31,
1997, 1996 and 1995, respectively.
13. REGULATORY CAPITAL COMPLIANCE:
The Company and the Bank are subject to regulatory risk-based capital
requirements that assign risk factors to all assets, including off-balance sheet
items such as loan commitments and standby letters of credit. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Capital is separated into two categories, Tier 1 and Tier 2, which combine for
total capital. At December 31, 1997, the Company's and Bank's Tier 1 capital
consists of their respective shareholders' equity and Tier 2 consists of the
allowance for loans losses subject to certain limitations. The guidelines
require total capital of 8% of risk-weighted assets.
F-18
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with risk-based capital guidelines, the regulators have
issued capital leverage guidelines. The leverage ratio consists of Tier 1
capital as a percent of total assets. The minimum leverage ratio for all banks
is 3%, with a higher minimum ratio dependent upon the condition of the
individual bank. The 3% minimum was established to make certain that all banks
have a minimum capital level to support their assets, regardless of risk
profile.
As of December 31, 1997 and 1996, the most recent notification from the
regulators categorized the Company and Bank as "well capitalized" under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
category.
The regulatory capital position and leverage ratio of the Company and Bank
are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
COMPUTED COMPUTED COMPUTED COMPUTED
CAPITAL PERCENT CAPITAL PERCENT
--------- --------- --------- ---------
Total capital........... $ 119,151 10.10%(1) $86,341 10.75%(1)
Tier 1 capital.......... 108,816 9.22%(1) 78,941 9.83%(1)
Leverage ratio.......... 7.47% 7.42%
- ------------
(1) Stated as a percent of risk-weighted assets as defined in Office of Thrift
Supervision capital regulations.
The Company and the Bank are also subject to certain restrictions on the
amount of dividends that they may declare without prior regulatory approval.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK:
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business in order to meet the financing needs of its
customers. These financial instruments include loan commitments and letters of
credit that involve, to varying degrees, elements of credit risk in excess of
the amounts recognized in the financial statements.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the loan commitments and letters of credit is limited to the
contractual amount of those instruments. The Company uses the same credit
policies in evaluating loan commitments and letters of credit as it does for
on-balance sheet instruments.
The approximate amounts of financial instruments with off-balance sheet
risk are as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
CONTRACT CONTRACT
AMOUNT AMOUNT
------------ ------------
Financial instruments whereby whole
contract amounts represent credit
risk:
Loan commitments including
unfunded lines of credit...... $543,000 $286,000
Standby letters of credit....... 35,000 25,000
Commercial letters of credit.... 1,000 7,000
------------ ------------
$579,000 $318,000
============ ============
Loan commitments are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee.
F-19
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since many of the loan commitments and letters of credit may expire without
being drawn upon, the total commitment amount does not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments
by the Company to guarantee the performance of a customer to a third party.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include certificates of deposit,
accounts receivable, inventory, property, plant and equipment, and real
property.
The Company originates real estate, commercial and consumer loans primarily
to customers in the greater Houston, Texas area. Although the Company has a
diversified loan portfolio, a substantial portion of its customers' ability to
honor their contracts is dependent upon the local Houston economy and the real
estate market.
The Company maintains funds on deposit at correspondent banks which at
times exceed the federally insured limits. Management of the Company monitors
the balance in these accounts and periodically assesses the financial condition
of correspondent banks.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The fair value of financial instruments provided below represent estimates
of fair values at a point in time. Significant estimates regarding economic
conditions, loss experience, risk characteristics associated with particular
financial instruments and other factors were used for the purposes of this
disclosure. These estimates are subjective in nature and involve matters of
judgment. Therefore, they cannot be determined with precision. Changes in the
assumptions could have a material impact on the amounts estimated.
While the estimated fair value amounts are designed to represent estimates
of the amounts at which these instruments could be exchanged in a current
transaction between willing parties, many of the Company's financial instruments
lack an available trading market as characterized by willing parties engaging in
an exchange transaction. In addition, it is the Company's intent to hold most of
its financial instruments to maturity and, therefore, it is not probable that
the fair values shown will be realized in a current transaction.
The estimated fair values disclosed do not reflect the value of assets and
liabilities that are not considered financial instruments. In addition, the
value of long-term relationships with depositors (core deposit intangibles) and
other customers is not reflected. The value of these items is significant.
Because of the wide range of valuation techniques and the numerous
estimates which must be made, it may be difficult to make reasonable comparisons
of the Company's fair value information to that of other financial institutions.
It is important that the many uncertainties discussed above be considered when
using the estimated fair value disclosures and to realize that because of these
uncertainties, the aggregate fair value amount should in no way be construed as
representative of the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the
consolidated balance sheet for cash and cash equivalents approximate their
fair values.
SECURITIES: Fair values for investment securities are based on quoted
market prices.
FEDERAL HOME LOAN BANK STOCK: The fair value of stock in the Federal
Home Loan Bank of Dallas is estimated to be equal to its carrying amount
given it is not a publicly traded equity security, it has an adjustable
dividend rate, and all transactions in the stock are executed at the stated
par value.
LOAN RECEIVABLES AND ACCRUED INTEREST RECEIVABLE: For variable-rate
loans that reprice frequently and with no significant change in credit
risk, fair values are based on carrying values. The fair
F-20
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of all other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality. The carrying amount of accrued
interest approximates its fair value.
OFF-BALANCE-SHEET INSTRUMENTS: The fair values of the Company's
off-balance-sheet instruments (lending commitments and letters of credit)
are based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing.
DEPOSIT LIABILITIES AND ACCRUED INTEREST PAYABLE: The fair values
disclosed for demand deposits (e.g., interest and noninterest checking and
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date. Fair values for fixed-rate time deposits are
estimated using a discounted cash flow analysis, using interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits. The carrying amount of
accrued interest approximates its fair value.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings approximate their fair values.
The following table summarizes the carrying values and estimated fair
values of financial instruments (all of which are held for purposes other than
trading):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks......... $ 104,363 $ 104,363 $ 91,384 $ 91,384
Fed funds sold.................. 132,616 132,616 81,479 81,479
Securities available for sale... 555,398 555,398 345,398 345,398
Loans, net of allowance......... 975,815 988,217 724,255 733,924
Accrued interest receivable..... 11,159 11,159 8,127 8,127
Liabilities
Deposits........................ 1,512,341 1,512,385 1,041,447 1,041,698
Securities sold under repurchase
agreements.................... 155,832 155,832 136,119 136,119
Other short-term borrowings..... 17,243 17,243 10,027 10,027
Accrued interest payable........ 1,259 1,259 1,123 1,123
</TABLE>
The total fair value of the Company's loan commitments and letters of
credit was immaterial at December 31, 1997 and 1996.
16. SUPPLEMENTAL CASH FLOW INFORMATION:
The supplemental cash flow information for the years ended December 31,
1997, 1996, and 1995 is as follows:
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Cash paid for interest............... $ 45,593 $ 32,168 $ 24,117
Cash paid for income tax............. 7,875 6,037 5,011
Noncash financing activities during 1997 included an increase in additional
paid-in capital and a corresponding decrease in income taxes payable totaling
approximately $2.2 million related to the exercise of stock options.
F-21
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. MERGER-RELATED ACTIVITY:
Effective August 1, 1997, the Company and the Bank consummated their merger
with Pinemont Bank, whereby Pinemont Bank was merged into the Bank. The
transaction was accounted for as a pooling of interests. Separate interest
income and net income amounts of the merged entities are presented in the
following table:
FOR THE
SEVEN FOR THE YEAR ENDED
MONTHS ENDED DECEMBER 31,
JULY 31, ---------------------
1997 1997 1996
------------ ---------- ---------
Interest income:
Southwest Bancorporation........ $ 47,527 $ 93,489 $ 63,433
Pinemont Bank................... 10,418 15,443 14,824
------------ ---------- ---------
Total interest income...... 57,945 108,932 78,257
Net income available for common
shareholders:
Southwest Bancorporation........ 8,372 14,712 9,588
Pinemont Bank................... 1,582 2,057 2,016
------------ ---------- ---------
Total net income available
for common
shareholders............ $ 9,954 $ 16,769 $ 11,604
============ ========== =========
Certain nonrecurring expenses were incurred and paid by the Company and
Pinemont Bank in connection with the merger. These expenses, which include
professional fees, printing costs, contract buyouts, losses associated with
combining the entities, and other miscellaneous expenses, have been charged to
the Company's operations in 1997. No intercompany transactions existed between
the Company and Pinemont Bank during the periods presented.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Southwest Bancorporation of Texas, Inc.:
Our report on the consolidated financial statements of Southwest
Bancorporation of Texas, Inc. and Subsidiary is included on page F-2 of this
Form 10-K. In connection with our audits of such consolidated financial
statements, we have also audited the related financial statement schedule listed
in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 10, 1998
F-23
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
SCHEDULE I -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
---------------------
1997 1996
---------- ---------
ASSETS
Cash and cash equivalents............ $ 2,541 $ 55
Investment in subsidiary............. 112,223 73,306
Intercompany receivables............. -- 55
Other assets......................... 71 71
---------- ---------
Total assets............... $ 114,835 $ 73,487
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Intercompany payables........... $ -- $ 72
---------- ---------
Total liabilities.......... -- 72
---------- ---------
Shareholders' equity:
Common stock.................... 11,185 9,403
Additional paid-in capital...... 49,549 28,536
Retained earnings............... 52,333 35,564
Net unrealized appreciation
(depreciation) on securities
available for sale............. 1,768 (88)
---------- ---------
Total shareholders'
equity....................... 114,835 73,415
---------- ---------
Total liabilities and
shareholders' equity......... $ 114,835 73,487
========== =========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiary included herein.
F-24
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
SCHEDULE I -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Equity in undistributed income of
subsidiary......................... $ 14,907 $ 11,604
Dividends received from subsidiary... 2,000 --
Operating expenses................... 209 --
--------- ---------
Income before income taxes...... 16,698 11,604
Income taxes.................... (71) --
--------- ---------
Net income........................... $ 16,769 $ 11,604
========= =========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiary included herein.
F-25
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
SCHEDULE I -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net income...................... $ 16,769 $ 11,604
Adjustments to reconcile net
income to net cash used in
operating activities:
Equity in undistributed income
of subsidiary.................. (14,907) (11,604)
Decrease (increase) in other
assets......................... 55 (126)
Increase (decrease) in other
liabilities.................... (72) 72
---------- ----------
Net cash provided by (used
in) operating activities..... 1,845 (54)
---------- ----------
Cash flows from investing activities:
Investment in subsidiary........ (20,000) --
Return on investment in
subsidiary..................... -- 20
---------- ----------
Net cash provided by (used
in) investing activities..... (20,000) 20
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of
common stock................... 20,641 89
---------- ----------
Net cash provided by
financing activities.... 20,641 89
---------- ----------
Net increase in cash and cash
equivalents.......................... 2,486 55
Cash and cash equivalents at
beginning of year.................. 55 --
---------- ----------
Cash and cash equivalents at end of
year............................... $ 2,541 $ 55
========== ==========
Supplemental noncash financing and
investing activities:
Increase in investment in
subsidiary related to stock
options exercised.............. $ 2,154
==========
Common stock issued to acquire
subsidiary..................... $ 44,992
==========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiary included herein.
F-26
EXHIBIT 10.4
SOUTHWEST BANCORPORATION OF TEXAS, INC.
1996 STOCK OPTION PLAN
(AMENDED AND RESTATED AS OF FEBRUARY 23, 1998)
I. PURPOSE OF THE PLAN
The SOUTHWEST BANCORPORATION OF TEXAS, INC. 1996 STOCK OPTION PLAN (the
"Plan") is intended to provide a means whereby certain employees of SOUTHWEST
BANCORPORATION OF TEXAS, INC., a Texas corporation (the "Company"), and its
subsidiaries may develop a sense of proprietorship and personal involvement in
the development and financial success of the Company, and to encourage them to
remain with and devote their best efforts to the business of the Company,
thereby advancing the interests of the Company and its shareholders.
Accordingly, the Company may grant to certain employees ("Optionees") the option
("Option") to purchase shares of the common stock, $1.00 par value, of the
Company ("Stock"), as hereinafter set forth. Options granted under the Plan may
be either incentive stock options, within the meaning of section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), ("Incentive Stock
Options") or options which do not constitute Incentive Stock Options.
II. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") of, and
appointed by, the Board of Directors of the Company (the "Board"), and the
Committee shall be (a) comprised solely of two or more outside directors (within
the meaning of section 162(m) of the Code and applicable interpretive authority
thereunder), and (b) constituted so as to permit the Plan to comply with Rule
16b-3, as currently in effect or as hereinafter modified or amended ("Rule
16b-3"), promulgated under the Securities Exchange Act of 1934, as amended (the
"1934 Act"). The Committee shall have sole authority to select the Optionees
from among those individuals eligible hereunder and to establish the number of
shares which may be issued under each Option; provided, however, that,
notwithstanding any provision in the Plan to the contrary, the maximum number of
shares that may be subject to Options granted under the Plan to an individual
Optionee during any calendar year may not exceed 250,000 (subject to adjustment
in the same manner as provided in Paragraph VIII hereof with respect to shares
of Stock subject to Options then outstanding). The limitation set forth in the
preceding sentence shall be applied in a manner which will permit compensation
generated under the Plan to constitute "performance-based" compensation for
purposes of section 162(m) of the Code, including, without limitation, counting
against such maximum number of shares, to the extent required under section
162(m) of the Code and applicable interpretive authority thereunder, any shares
subject to Options that are canceled or repriced. In selecting the Optionees
from among individuals eligible hereunder and in establishing the number of
shares that may be issued under each Option, the Committee may take into account
the nature of the services rendered by such individuals,
<PAGE>
their present and potential contributions to the Company's success and such
other factors as the Committee in its discretion shall deem relevant. The
Committee is authorized to interpret the Plan and may from time to time adopt
such rules and regulations, consistent with the provisions of the Plan, as it
may deem advisable to carry out the Plan. All decisions made by the Committee in
selecting the Optionees, in establishing the number of shares which may be
issued under each Option and in construing the provisions of the Plan shall be
final. If a Committee is not appointed by the Board, the Board shall act as the
Committee for purposes of the Plan.
III. OPTION AGREEMENTS
(a) Each Option shall be evidenced by a written agreement between the
Company and the Optionee ("Option Agreement") which shall contain such terms and
conditions as may be approved by the Committee. The terms and conditions of the
respective Option Agreements need not be identical. Specifically, an Option
Agreement may provide for the surrender of the right to purchase shares under
the Option in return for a payment in cash or shares of Stock or a combination
of cash and shares of Stock equal in value to the excess of the fair market
value of the shares with respect to which the right to purchase is surrendered
over the option price therefor ("Stock Appreciation Rights"), on such terms and
conditions as the Committee in its sole discretion may prescribe; provided,
that, except as provided in Subparagraph VIII(c) hereof, the Committee shall
retain final authority (i) to determine whether an Optionee shall be permitted,
or (ii) to approve an election by an Optionee, to receive cash in full or
partial settlement of Stock Appreciation Rights. Moreover, an Option Agreement
may provide for the payment of the option price, in whole or in part, by the
delivery of a number of shares of Stock (plus cash if necessary) having a fair
market value equal to such option price.
(b) For all purposes under the Plan, the fair market value of a share of
Stock on a particular date shall be equal to the mean of the high and low sales
prices of the Stock (i) reported by the National Market System of NASDAQ on that
date or (ii) if the Stock is listed on a national stock exchange, reported on
the stock exchange composite tape on that date; or, in either case, if no prices
are reported on that date, on the last preceding date on which such prices of
the Stock are so reported. If the Stock is traded over the counter at the time a
determination of its fair market value is required to be made hereunder, its
fair market value shall be deemed to be equal to the average between the
reported high and low or closing bid and asked prices of Stock on the most
recent date on which Stock was publicly traded. In the event Stock is not
publicly traded at the time a determination of its value is required to be made
hereunder, the determination of its fair market value shall be made by the
Committee in such manner as it deems appropriate.
(c) Each Option and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of the Employee Retirement Income Security Act of 1974, as amended, or the
rules thereunder, and shall be exercisable during the Optionee's lifetime only
by the Optionee or the Optionee's guardian or legal representative.
<PAGE>
IV. ELIGIBILITY OF OPTIONEE
Options may be granted only to individuals who are employees (including
officers and directors who are also employees) of the Company or any parent or
subsidiary corporation (as defined in section 424 of the Code) of the Company at
the time the Option is granted; provided, however, that Options which do not
constitute Incentive Stock Options may be granted to individuals who are
directors (but not also employees) of the Company or any such parent or
subsidiary corporation. Options may be granted to the same individual on more
than one occasion. No Incentive Stock Option shall be granted to an individual
if, at the time the Option is granted, such individual owns stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company or of its parent or subsidiary corporation, within the meaning of
section 422(b)(6) of the Code, unless (i) at the time such Option is granted the
option price is at least 110% of the fair market value of the Stock subject to
the Option and (ii) such Option by its terms is not exercisable after the
expiration of five years from the date of grant. To the extent that the
aggregate fair market value (determined at the time the respective Incentive
Stock Option is granted) of stock with respect to which Incentive Stock Options
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such excess Incentive Stock Options
shall be treated as Options which do not constitute Incentive Stock Options. The
Committee shall determine, in accordance with applicable provisions of the Code,
Treasury Regulations and other administrative pronouncements, which of an
Optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Optionee of such determination
as soon as practicable after such determination.
V. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 1,000,000 shares of Stock. Such shares may
consist of authorized but unissued shares of Stock or previously issued shares
of Stock reacquired by the Company. Any of such shares which remain unissued and
which are not subject to outstanding Options at the termination of the Plan
shall cease to be subject to the Plan, but, until termination of the Plan, the
Company shall at all times make available a sufficient number of shares to meet
the requirements of the Plan. Should any Option hereunder expire or terminate
prior to its exercise in full, the shares theretofore subject to such Option may
again be subject to an Option granted under the Plan to the extent permitted
under Rule 16b-3. The aggregate number of shares which may be issued under the
Plan shall be subject to adjustment in the same manner as provided in Paragraph
VIII hereof with respect to shares of Stock subject to Options then outstanding.
Exercise of an Option in any manner, including an exercise involving a Stock
Appreciation Right, shall result in a decrease in the number of shares of Stock
which may thereafter be available, both for purposes of the Plan and for sale to
any one individual, by the number of shares as to which the Option is exercised.
Separate stock certificates shall be issued by the Company for those shares
acquired pursuant to the exercise of an Incentive Stock Option and for those
shares acquired pursuant to the exercise of any Option which does not constitute
an Incentive Stock Option.
<PAGE>
VI. OPTION PRICE
The purchase price of Stock issued under each Option shall be determined
by the Committee, but in the case of an Incentive Stock Option, such purchase
price shall not be less than the fair market value of Stock subject to the
Option on the date the Option is granted.
VII. TERM OF PLAN
The Plan shall be effective upon the date of its adoption by the Board,
provided the Plan is approved by the shareholders of the Company within twelve
months thereafter. Notwithstanding any provision in this Plan or in any Option
Agreement, no Option shall be exercisable prior to such shareholder approval.
Except with respect to Options then outstanding, if not sooner terminated under
the provisions of Paragraph IX, the Plan shall terminate upon and no further
Options shall be granted after the expiration of ten years from the date of its
adoption by the Board.
VIII. RECAPITALIZATION OR REORGANIZATION
(a) The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
(b) The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.
(c) If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of shares of Stock covered by an option theretofore granted shall be
adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the Optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of record of the number of
shares of Stock then covered by such Option. If (i) the Company shall not be the
surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity), (ii) the Company sells, leases or
exchanges all or substantially all of its assets to any other person or entity,
(iii) the Company is to be dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of the 1934 Act,
acquires
<PAGE>
or gains ownership or control (including, without limitation, power to vote) of
more than 50% of the outstanding shares of the Company's voting stock (based
upon voting power), or (v) as a result of or in connection with a contested
election of directors, the persons who were directors of the Company before such
election shall cease to constitute a majority of the Board (each such event is
referred to herein as a "Corporate Change"), then all outstanding Options shall
fully vest and become fully exercisable, effective as of the first business day
immediately preceding the effective date of such Corporate Change (or as of an
earlier date determined by the Committee pursuant to the following clause);
provided, however, that, subject to such acceleration of vesting of the
outstanding Options, no later than (a) ten days after the approval by the
shareholders of the Company of such merger, consolidation, reorganization, sale,
lease or exchange of assets or dissolution or such election of directors or (b)
thirty days after a change of control of the type described in Clause (iv), the
Committee, acting in its sole discretion without the consent or approval of any
Optionee, may, in its discretion, also act to effect one or more of the
following alternatives, which may vary among individual Optionees and which may
vary among Options held by any individual Optionee: (1) provide that the Options
may be exercised in full only for a limited period of time on or before a
specified date (before or after such Corporate Change) fixed by the Committee,
after which specified date all unexercised Options and all rights of Optionees
thereunder shall terminate, (2) require the mandatory surrender to the Company
by selected Optionees of some or all of the outstanding Options held by such
Optionees as of a date, before or after such Corporate Change, specified by the
Committee, in which event the Committee shall thereupon cancel such Options and
the Company shall pay to each Optionee an amount of cash per share equal to the
excess, if any, of the amount calculated in Subparagraph (d) below (the "Change
of Control Value") of the shares subject to such Option over the exercise
price(s) under such Options for such shares, (3) make such adjustments (other
than vesting) to Options then outstanding as the Committee deems appropriate to
reflect such Corporate Change or (4) provide that the number and class of shares
of Stock covered by an Option theretofore granted shall be adjusted so that such
Option shall thereafter cover the number and class of shares of stock or other
securities or property (including, without limitation, cash) to which the
Optionee would have been entitled pursuant to the terms of the agreement of
merger, consolidation or sale of assets and dissolution if, immediately prior to
such merger, consolidation or sale of assets and dissolution, the Optionee had
been the holder of record of the number of shares of Stock then covered by such
Option.
(d) For the purposes of clause (2) in Subparagraph (c) above, the "Change
of Control Value" shall equal the amount determined in clause (i), (ii) or
(iii), whichever is applicable, as follows: (i) the per share price offered to
shareholders of the Company in any such merger, consolidation, reorganization,
sale of assets or dissolution transaction, (ii) the price per share offered to
shareholders of the Company in any tender offer or exchange offer whereby a
Corporate Change takes place, or (iii) if such Corporate Change occurs other
than pursuant to a tender or exchange offer, the fair market value per share of
the shares into which such Options being surrendered are exercisable, as
determined by the Committee as of the date determined by the Committee to be the
date of cancellation and surrender of such Options. In the event that the
consideration offered to shareholders of the Company in any transaction
described in this Subparagraph (d) or Subparagraph (c) above consists of
anything other than cash, the Committee shall determine the fair cash equivalent
of the portion of the consideration offered which is other than cash.
<PAGE>
(e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be
subject to any required shareholder action.
(f) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Options theretofore granted or the purchase price per
share.
IX. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided, that no change in any Option theretofore granted may be
made which would impair the rights of the Optionee without the consent of such
Optionee; and provided, further, that (i) the Board may not make any alteration
or amendment which would decrease any authority granted to the Committee
hereunder in contravention of Rule 16b-3 and (ii) the Board may not make any
alteration or amendment which would materially increase the benefits accruing to
participants under the Plan, increase the aggregate number of shares which may
be issued pursuant to the provisions of the Plan, change the class of
individuals eligible to receive Options under the Plan or extend the term of the
Plan, without the approval of the shareholders of the Company.
X. SECURITIES LAWS
(a) The Company shall not be obligated to issue any Stock pursuant to any
Option granted under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of 1933
and such other state and federal laws, rules or regulations as the Company or
the Committee deems applicable and, in the opinion of legal counsel for the
Company, there is no exemption from the registration requirements of such laws,
rules or regulations available for the offering and sale of such shares.
It is intended that the Plan and any grant of an Option made to a person
subject to Section 16 of the 1934 Act meet all of the requirements of Rule
16b-3. If any provision of the Plan or any such Option would disqualify the Plan
or such Option under, or would otherwise not comply with, Rule 16b-3, such
provision or Option shall be construed or deemed amended to conform to Rule
16b-3.
EXHIBIT 21.1
SUBSIDIARIES OF SOUTHWEST BANCORPORATION OF TEXAS, INC.
JURISDICTION OF
NAME ORGANIZATION
---------------------------------------------- -------------------
1. Southwest Bank of Texas National Association United States
2. Southwest/Catalyst Capital, Ltd. Texas
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Southwest Bancorporation of Texas, Inc. and Subsidiary on Form S-8 (File Nos.
333-21619, 333-27891 and 333-33533) of our reports, dated February 10, 1998, on
our audits of the consolidated financial statements and financial statement
schedule of Southwest Bancorporation of Texas, Inc. and Subsidiary as of
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996, and
1995, which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 104,363
<INT-BEARING-DEPOSITS> 369
<FED-FUNDS-SOLD> 132,247
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 555,398
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 986,150
<ALLOWANCE> 10,335
<TOTAL-ASSETS> 1,807,604
<DEPOSITS> 1,512,341
<SHORT-TERM> 173,075
<LIABILITIES-OTHER> 7,353
<LONG-TERM> 0
0
0
<COMMON> 11,185
<OTHER-SE> 103,650
<TOTAL-LIABILITIES-AND-EQUITY> 1,807,604
<INTEREST-LOAN> 78,509
<INTEREST-INVEST> 24,908
<INTEREST-OTHER> 5,515
<INTEREST-TOTAL> 108,932
<INTEREST-DEPOSIT> 38,421
<INTEREST-EXPENSE> 45,729
<INTEREST-INCOME-NET> 63,203
<LOAN-LOSSES> 3,886
<SECURITIES-GAINS> 498
<EXPENSE-OTHER> 33,938
<INCOME-PRETAX> 25,877
<INCOME-PRE-EXTRAORDINARY> 16,805
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,805
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 4.67
<LOANS-NON> 2,724
<LOANS-PAST> 383
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,400
<CHARGE-OFFS> 1,078
<RECOVERIES> 127
<ALLOWANCE-CLOSE> 10,335
<ALLOWANCE-DOMESTIC> 10,335
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
