================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1999
[ ] 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)
<TABLE>
<S> <C>
TEXAS 76-0519693
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
</TABLE>
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 235-8800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
------------------------
There were 27,517,118 shares of the Registrant's Common Stock outstanding
as of the close of business on April 30, 1999.
================================================================================
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent
Accountants.................... 2
Condensed Consolidated Balance
Sheet as of March 31, 1999 and
December 31, 1998 unaudited)... 3
Condensed Consolidated Statement
of Income for the Three Months
Ended March 31, 1999 and 1998
(unaudited).................... 4
Condensed Consolidated Statement
of Changes in Shareholders'
Equity for the Three Months
Ended March 31, 1999
(unaudited).................... 5
Condensed Consolidated Statement
of Cash Flows for the Three
Months Ended March 31, 1999
and 1998 (unaudited)........... 6
Notes to Condensed Consolidated
Financial Statements
unaudited)..................... 7
Item 2. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................. 9
Item 3. Quantitative and Qualitative
Disclosures about Market
Risk........................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........... 21
Item 2. Changes in Securities....... 21
Item 3. Defaults upon Senior
Securities.................. 21
Item 4. Submission of Matters to a
Vote of Security Holders.... 21
Item 5. Other Information........... 22
Item 6. Exhibits and Reports on Form
8-K......................... 23
Signatures........................... 24
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Southwest Bancorporation of Texas, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Southwest Bancorporation of Texas, Inc. and Subsidiary (the "Company") as of
March 31, 1999, the related condensed consolidated statements of income and cash
flows for the three-month periods ended March 31, 1999 and 1998 and the
condensed consolidated statement of changes in shareholders' equity for the
three-month period ended March 31, 1999. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the aforementioned financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the year then ended (not presented herein); and, in our report
dated February 12, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1998 is
fairly stated, in all material respects, in relation to the consolidated
financial statements from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
April 12, 1999
2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks.............. $ 92,488 $ 119,916
Federal funds sold and other cash
equivalents.......................... 34,301 27,535
------------ ------------
Total cash and cash
equivalents............ 126,789 147,451
Securities -- trading................ 53,198 --
Securities -- available for sale..... 574,925 647,462
Loans receivable, net................ 1,341,744 1,325,877
Premises and equipment, net.......... 27,361 26,329
Accrued interest receivable.......... 12,895 13,558
Prepaid expenses and other assets.... 57,742 44,844
------------ ------------
Total assets............... $ 2,194,654 $2,205,521
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing... $ 495,503 $ 539,922
Demand -- interest-bearing...... 53,438 65,933
Money market accounts........... 711,462 710,852
Savings......................... 13,260 12,469
Time, $100 and over............. 344,479 310,951
Other time...................... 98,161 89,259
------------ ------------
Total deposits............. 1,716,303 1,729,386
Securities sold under repurchase
agreements......................... 204,504 181,696
Other short-term borrowings.......... 105,925 138,388
Accrued interest payable............. 1,620 1,292
Other liabilities.................... 17,726 11,025
------------ ------------
Total liabilities.......... 2,046,078 2,061,787
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value,
50,000,000 shares authorized;
23,434,091 and 23,353,414
shares issued and outstanding
at March 31, 1999 and December
31, 1998, respectively......... 23,434 23,353
Additional paid-in capital...... 42,306 41,828
Retained earnings............... 81,110 74,805
Accumulated other comprehensive
income......................... 1,726 3,748
------------ ------------
Total shareholders'
equity................. 148,576 143,734
------------ ------------
Total liabilities and
shareholders' equity... $ 2,194,654 $2,205,521
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Interest income:
Loans........................... $ 27,477 $ 22,433
Securities...................... 9,775 7,566
Federal funds sold and other.... 360 1,948
--------- ---------
Total interest income...... 37,612 31,947
Interest expense on deposits and
other borrowings................... 15,612 14,157
--------- ---------
Net interest income........ 22,000 17,790
Provision for loan losses............ 1,500 600
--------- ---------
Net interest income after
provision for loan
losses.................. 20,500 17,190
--------- ---------
Other income:
Service charges................. 2,432 1,994
Other operating income.......... 2,947 1,596
Gain on sale of securities,
net............................ 93 8
--------- ---------
Total other income......... 5,472 3,598
--------- ---------
Other expenses:
Salaries and employee
benefits....................... 10,014 7,940
Occupancy expense............... 2,512 2,137
Merger-related expenses and
other charges.................. -- 19
Other operating expenses........ 3,669 2,727
--------- ---------
Total other expenses....... 16,195 12,823
--------- ---------
Income before income
taxes................... 9,777 7,965
Provision for income taxes........... 3,472 2,826
--------- ---------
Net income................. $ 6,305 $ 5,139
========= =========
Earnings per common share
Basic................. $ 0.27 $ 0.23
========= =========
Diluted............... $ 0.26 $ 0.21
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS INCOME EQUITY
--------- ------- ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998........... 23,353,414 $23,353 $ 41,828 $ 74,805 $3,748 $ 143,734
Common stock issued to benefit
plan.......................... 4,431 4 73 77
Exercise of stock options....... 76,246 77 368 445
Deferred compensation
amortization.................. 37 37
Comprehensive income:
Net income for the three
months ended March 31,
1999....................... 6,305 6,305
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $1,088... (2,022) (2,022)
---------
Total comprehensive income.... 4,283
---------- ------- -------- -------- ------ ---------
BALANCE, MARCH 31, 1999.............. 23,434,091 $23,434 $ 42,306 $ 81,110 $1,726 $ 148,576
========== ======= ======== ======== ====== =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................... $ 6,305 $ 5,139
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan
losses................... 1,500 600
Depreciation............... 1,357 1,081
Proceeds from sale of
trading securities....... 115,849 --
Purchase of trading
securities............... (107,545) --
Compensation expense....... 78 --
Deferred compensation
amortization............. 37 33
Gain on sale of other
assets................... (14) --
Realized gains on
securities available for
sale, net................ (93) (8)
Net amortization of
premiums and discounts... 353 458
Dividends on Federal Home
Loan Bank stock.......... (98) (566)
Increase in accrued
interest receivable,
prepaid expenses and
other assets............. (11,297) (3,639)
Increase (decrease) in
accrued interest payable
and other liabilities.... 7,326 (729)
------------ ------------
Net cash provided by
operating
activities.......... 13,758 2,369
------------ ------------
Cash flows from investing activities:
Proceeds from maturity of
securities available for
sale........................... 36,000 95,808
Principal paydowns of
mortgage-backed securities
available for sale............. 25,655 30,661
Proceeds from sale of securities
available for sale............. 24,469 4,186
Purchase of securities available
for sale....................... (78,336) (153,584)
Proceeds from sale of other real
estate and other loan related
assets......................... 242 14
Net increase in loans
receivable..................... (17,495) (69,372)
Purchase of premises and
equipment...................... (2,363) (2,413)
------------ ------------
Net cash provided
(used) in investing
activities.......... (11,828) (94,700)
------------ ------------
Cash flows from financing activities:
Net decrease in
noninterest-bearing deposits... (44,419) (51,157)
Net increase (decrease) in time
deposits....................... 42,430 (19,122)
Net (decrease) increase in other
interest-bearing deposits...... (11,094) 86,498
Net increase in securities sold
under repurchase agreements.... 22,808 17,084
Net (decrease) increase in other
short-term borrowings.......... (32,463) 3,411
Net proceeds from exercise of
stock options.................. 146 1,684
------------ ------------
Net cash provided by
(used in) financing
activities.......... (22,592) 38,398
------------ ------------
Net decrease in cash and cash
equivalents........................ (20,662) (53,933)
Cash and cash equivalents at
beginning of period................ 147,451 236,979
------------ ------------
Cash and cash equivalents at end of
period............................. $ 126,789 $ 183,046
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Southwest Bancorporation of Texas, Inc. (the "Company") and its wholly-owned
subsidiary Southwest Bank of Texas National Association (the "Bank"). All
material intercompany accounts and transactions have been eliminated. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the Company's consolidated financial position at
March 31, 1999, consolidated results of operations for the three months ended
March 31, 1999 and 1998, consolidated cash flows for the three months ended
March 31, 1999 and 1998 and consolidated changes in shareholders' equity for the
three months ended March 31, 1999. Interim period results are not necessarily
indicative of results of operations or cash flows for a full-year period. The
1998 year-end condensed consolidated balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued by the
Financial Accounting Standards Board to establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 requires
that an entity recognize those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for the changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. The
standard is effective for all fiscal years beginning after June 15, 1999. This
pronouncement is not anticipated to have a material effect on the Company's
financial position, results of operations or cash flows.
7
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. EARNINGS PER COMMON SHARE:
Earnings per common share is computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Net income........................... $ 6,305 $ 5,139
========= =========
Divided by average common shares and
common share equivalents:
Average common shares........... 23,403 22,782
Average common share
equivalents................... 852 1,220
--------- ---------
Total average common shares and
common
share equivalents.................. 24,255 24,002
========= =========
Earnings per common share:
Basic........................... $ 0.27 $ 0.23
========= =========
Diluted......................... $ 0.26 $ 0.21
========= =========
</TABLE>
3. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
During the three months ended March 31, 1999, the Company reduced its
federal income tax liability by approximately $297,000 and recorded a
corresponding increase to additional paid-in capital representing the tax
benefit related to the exercise of certain stock options.
4. SUBSEQUENT EVENT:
On April 1, 1999, the Company consummated its merger with Fort Bend Holding
Corp. ("Fort Bend"), whereby Fort Bend merged into the Company. Fort Bend is
the parent company of Fort Bend Federal Savings and Loan Association of
Rosenberg (which also was merged into the Bank on April 1, 1999) and the
majority owner of Mitchell Mortgage Co., L.L.C. of The Woodlands, Texas. In
accordance with the Agreement and Plan of Merger, the Company exchanged 1.45
shares of the Company's common shares for each share of Fort Bend common stock.
At March 31, 1999, Fort Bend had total assets of approximately $316 million and
total deposits of $269 million. The transaction has been accounted for as a
pooling of interests.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Total assets at March 31, 1999, and December 31, 1998 were $2.19 billion,
and $2.21 billion, respectively. Gross loans were $1.36 billion at March 31,
1999, an increase of $17.0 million or 1% from $1.34 billion at December 31,
1998. Deposits decreased to $1.72 billion at March 31, 1999 from $1.73 billion
at December 31, 1998. Shareholders' equity was $148.6 million and $143.7 million
at March 31, 1999 and December 31, 1998, respectively.
Net income was $6.3 million and $5.1 million and earnings per diluted
common share was $0.26 and $0.21 for the three months ended March 31, 1999 and
1998, respectively. Increases in net income were primarily the result of strong
loan growth, maintaining strong asset quality and expense control and resulted
in returns on average assets of 1.18% and 1.18% and returns on average common
equity of 17.68% and 17.51% for the three months ended March 31, 1999 and 1998,
respectively.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income for the three months ended March 31, 1999 was $37.6
million, an increase of $5.7 million, or 18%, from the three months ended March
31, 1998. This increase in interest income is due to a $354.8 million increase
in average earning assets to $1.99 billion for the three months ended March 31,
1999, a 22% increase from the same period last year.
Interest income on loans increased $5.0 million to $27.5 million for the
three months ended March 31, 1999. This was due to a $330.0 million increase in
average loans outstanding over the same period in 1998. Interest income on
securities increased to $9.8 million, a $2.2 million increase from the prior
comparable period. This increase was attributable to a $135.2 million increase
in average securities, up 27% when compared to the three months ended March 31,
1998.
INTEREST EXPENSE.
Interest expense on deposits and other borrowings was $15.6 million for the
three months ended March 31, 1999, compared to $14.2 million for the same period
in 1998. The increase in interest expense was attributable to a $303.7 million
increase in average interest-bearing liabilities in 1999 over the same period in
1998.
NET INTEREST INCOME
Net interest income was $22.0 million for the three months ended March 31,
1999, compared with $17.8 million for the same period in 1998, an increase of
24%. The increase in net interest income during the three-months ended March 31,
1999 was largely due to growth in average interest-earning assets, primarily
loans.
The net interest margin was 4.48% for the three months ended March 31,
1999, compared with 4.41% in the first quarter of 1998. This increase in the net
interest margin was primarily due to a decrease in the cost of interest-bearing
liabilities which decreased 55 basis points to 4.15% for the three months ended
March 31, 1999.
9
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are daily average balances. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans.............................. $ 1,332,179 $27,477 8.36% $ 1,002,199 $22,433 9.08%
Securities......................... 627,773 9,775 6.31 492,562 7,566 6.23
Federal funds sold and other....... 31,784 360 4.59 142,186 1,948 5.56
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets..................... 1,991,736 37,612 7.66% 1,636,947 31,947 7.91%
------- ------- ------- -------
Less allowance for loan losses.......... (14,056) (10,764)
----------- -----------
Total earning assets, net of
allowance............................. 1,977,680 1,626,183
Nonearning assets....................... 197,787 136,811
----------- -----------
Total assets.................. $ 2,175,467 $ 1,762,994
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits......................... $ 784,719 7,088 3.66% $ 677,630 7,134 4.27%
Certificates of deposits........... 433,745 5,145 4.81 348,779 4,550 5.29
Repurchase agreements and borrowed
funds............................ 306,724 3,379 4.47 195,091 2,473 5.14
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities................ 1,525,188 15,612 4.15% 1,221,500 14,157 4.70%
------- ------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 487,900 418,039
Other liabilities.................. 17,786 4,422
----------- -----------
Total liabilities............. 2,030,874 1,643,961
Shareholders' equity.................... 144,593 119,033
----------- -----------
Total liabilities and
shareholders' equity....... $ 2,175,467 $ 1,762,994
=========== ===========
Net interest income..................... $22,000 $17,790
======= =======
Net interest spread..................... 3.51% 3.21%
======= =======
Net interest margin..................... 4.48% 4.41%
======= =======
</TABLE>
10
<PAGE>
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates.
For purposes of this table, changes attributable to both rate and volume which
cannot be segregated have been allocated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 VS. 1998
-------------------------------
INCREASE (DECREASE)
DUE TO
-------------------------------
VOLUME RATE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $ 7,386 $ (2,342) $ 5,044
Securities.............................. 2,077 132 2,209
Federal funds sold and other............ (1,513) (75) (1,588)
--------- --------- ---------
Total increase (decrease) in
interest income.................. 7,950 (2,285) 5,665
--------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits....... 1,127 (1,173) (46)
Certificates of deposits................ 1,107 (513) 594
Repurchase agreements and borrowed
funds................................. 1,416 (509) 907
--------- --------- ---------
Total increase (decrease) in
interest expense................. 3,650 (2,195) 1,455
--------- --------- ---------
Increase (decrease) in net interest
income................................ $ 4,300 $ (90) $ 4,210
========= ========= =========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1.5 million for the three months ended
March 31, 1999 as compared to $600,000 for the three months ended March 31,
1998. Although no assurance can be given, management believes that the present
allowance for loan losses is adequate considering loss experience, delinquency
trends and current economic conditions. Management constantly reviews the
Company's loan loss allowance policy as its loan portfolio grows and
diversifies. (See -- Financial Condition -- Loan Review and Allowance for Loan
Losses.)
NONINTEREST INCOME
The following table presents for the periods indicated the major changes in
noninterest income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Service charges on deposit
accounts........................... $ 2,432 $ 1,994
Loan operations...................... 373 267
Investment services.................. 1,218 772
Gain on sale of securities, net...... 93 8
Factoring fee income................. 576 320
Other noninterest income............. 780 237
--------- ---------
Total noninterest income........ $ 5,472 $ 3,598
========= =========
</TABLE>
Noninterest income for the three months ended March 31, 1999, increased
$1.9 million or 52%, compared with the first quarter of 1998. This increase was
due primarily to significant increases from investment services fee income, up
$447,000 or 58%; service charges on deposit accounts, up $438,000, or 22%;
factoring fee income, up $256,000 or 80%; and other non-interest income up
$543,000 or 229%. Significant components of other non-interest income include
earnings from investment arbitrage activities
11
<PAGE>
$255,000, earnings from an investment in a small business investment partnership
$238,000 and earnings from bank owned life insurance $283,000.
NONINTEREST EXPENSES
For the three months ended March 31, 1999, noninterest expenses totaled
$16.2 million, an increase of $3.4 million, or 26%, from $12.8 million during
1998. The increase in noninterest expenses was primarily due to salaries and
employee benefits. The efficiency ratio decreased to 58.95% for the three months
ended March 31, 1999 from 59.95% for the comparable period in 1998.
Salaries and employee benefits for the three months ended March 31, 1999
was $10.0 million, an increase of $2.1 million, or 26%, from the three months
ended March 31, 1998. This increase was due primarily to hiring of additional
personnel required to accommodate the Company's growth. Total full-time
employees at March 31, 1999 and March 31, 1998 were 708 and 606, respectively.
Occupancy expense increased $375,000, or 18%, to $2.5 million for the three
months ended March 31, 1999. Major categories within occupancy expense are
building lease expense, depreciation expense and maintenance contract expense.
Building lease expense increased to $696,000 for the three months ended March
31, 1999 from $598,000 for the same period in 1998. This increase resulted from
increasing the rentable square feet at the corporate office to accommodate the
Company's growth. Depreciation expense was $1.4 million for the three months
ended March 31, 1999, an increase of $300,000 or 27%, from the $1.1 level from
the prior comparable period. This increase was primarily due to depreciation on
equipment provided to new employees and expense related to technology upgrades
throughout the Company. Maintenance contract expense for the three months ended
March 31, 1999 was $251,000, a 2% or $5,000 increase from $246,000 for the same
period last year. The Company has purchased maintenance contracts for major
operating systems throughout the organization.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory
rate, plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of nondeductible interest expense, and
the amount of other nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officers' salaries, less interest income from federal securities. For the three
months ended March 31, 1999, the provision for income taxes was $3.5 million, an
increase of $646,000, or 23%, from the $2.8 million provided for the same period
in 1998.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total gross loans were $1.36 billion at March 31, 1999, an increase of
$17.0 million or 1% from $1.34 billion at December 31, 1998. This moderate
growth follows significant growth in the fourth quarter of 1998 where loans grew
$133.1 million or 11% from the previous quarter.
12
<PAGE>
The following table summarizes the loan portfolio of the Company by type of
loan as of March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial and industrial............... $ 624,332 46.0% $ 634,558 47.4%
Real estate:
Construction and land
development..................... 251,795 18.5 231,353 17.3
1-4 family residential............. 193,508 14.3 189,439 14.1
Commercial owner occupied.......... 167,274 12.3 157,356 11.8
Farmland........................... 8,879 0.7 8,314 0.6
Other.............................. 14,489 1.1 14,698 1.1
Consumer................................ 95,926 7.1 103,440 7.7
------------ ------- ------------ -------
Total loans............................. $ 1,356,203 100.0% $ 1,339,158 100.0%
============ ======= ============ =======
</TABLE>
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.
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 are 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.
13
<PAGE>
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 March 31, 1999
are summarized in the following table:
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial and industrial............... $ 358,726 $ 242,085 $ 23,521 $ 624,332
Real estate construction................ 141,415 95,181 15,199 251,795
---------- ----------- --------- ----------
Total.............................. $ 500,141 $ 337,266 $ 38,720 $ 876,127
========== =========== ========= ==========
Loans with a fixed interest rate........ $ 161,850 $ 79,750 $ 12,555 $ 254,155
Loans with a floating interest rate..... 338,291 257,516 26,165 621,972
---------- ----------- --------- ----------
Total.............................. $ 500,141 $ 337,266 $ 38,720 $ 876,127
========== =========== ========= ==========
</TABLE>
LOAN REVIEW AND ALLOWANCE FOR LOAN LOSSES
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 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.
Historically, Houston has been affected by the state of the energy
business, but since the mid 1980's the economic impact has been reduced by a
combination of increased industry diversification and less reliance on debt to
finance expansion. Nevertheless, slowdowns in the industry caused by declining
oil prices continue to affect the Houston economy. When energy prices drop, as
they did in 1998, it is the Company's practice to review and adjust underwriting
standards with respect to companies affected by oil and gas price volatility,
and to continuously monitor existing credit exposure to companies which are
impacted by this price volatility. To date, the Company has not deemed it
necessary to increase its allowance for loan losses due to conditions in this
industry but no assurance can be given that such an increase in the allowance
will not be necessary in the future.
The allowance for loan losses is 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.
14
<PAGE>
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 March 31, 1999 is
adequate to cover losses inherent in the portfolio as of such date. There can be
no assurance, however, that the Company will not sustain losses in future
periods, which could be greater than the size of the allowance at March 31,
1999.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1999 1998
--------------- -------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Allowance for loan losses beginning
of period.......................... $13,281 $10,335
Provision for loan losses............ 1,500 3,900
Charge-offs.......................... (361) (1,087)
Recoveries........................... 39 133
--------------- -------------
Allowance for loan losses end of
period............................. $14,459 $13,281
=============== =============
Allowance to period-end loans........ 1.07% 0.99%
Net charge-offs to average loans..... 0.10% 0.08%
Allowance to period-end nonperforming
loans.............................. 856.52% 578.19%
</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 majority of the unallocated portion below represents
management's estimates of the amounts needed to cover economic and portfolio
trends, commitments, etc. 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>
MARCH 31, 1999 DECEMBER 31, 1998
---------------------- ----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial....... $ 1,628 46.0% $ 1,732 47.4%
Real estate:
Construction and loan
development................... -- 18.5 -- 17.3
1-4 family residential.......... -- 14.3 -- 14.1
Commercial owner occupied....... -- 12.3 -- 11.8
Farmland........................ -- 0.7 -- 0.6
Other........................... -- 1.1 -- 1.1
Consumer............................. 46 7.1 -- 7.7
Unallocated.......................... 12,785 -- 11,549 --
------- ----------- ------- -----------
Total allowance for loan
losses.................. $14,459 100.0% $13,281 100.0%
======= =========== ======= ===========
</TABLE>
15
<PAGE>
NONPERFORMING ASSETS
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.
Nonperforming assets were $2.0 million at March 31, 1999 compared with $2.8
million at December 31, 1998. This resulted in a ratio of nonperforming assets
to loans plus other real estate of 0.15% and 0.21% at March 31, 1999 and
December 31, 1998, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $ 999 $1,616
Accruing loans 90 or more days past
due............................... 689 681
ORE and OLRA......................... 353 464
---------- ------------
Total nonperforming assets...... $2,041 $2,761
========== ============
Nonperforming assets to total loans
and other real estate.............. 0.15% 0.21%
</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.
A loan is considered impaired when, based upon current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due according to the contractual terms
of the loan agreement. The Company's impaired loans were approximately $15.8
million and $14.0 million at March 31, 1999 and December 31, 1998, respectively.
The largest component of impaired loans is a commercial energy related loan of
approximately $11.3 million. The average recorded investment in impaired loans
during the three months ended March 31, 1999 and the year ended December 31,
1998 was $14.9 million and $6.0 million, respectively. The total required
allowance for loan losses related to these loans was $0 for each reported
period. Interest income on impaired loans of $318,000 and $415,000 was
recognized for cash payments received during the three months ended March 31,
1999 and the year ended December 31, 1998, respectively.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
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 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 as a component of accumulated other
comprehensive income until realized. Gains and losses on sales of securities are
determined using the specific-identification method. The Company has classified
all securities as trading or available for sale. This allows the Company to
manage its investment portfolio more effectively and to enhance the average
yield on the portfolio.
16
<PAGE>
The amortized cost and approximate fair value of securities classified as
trading and available for sale is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- FAIR
COST GAIN LOSS VALUE
--------- ------ ------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. Government securities........... $ 87,544 $ 786 $ -- $ 88,330
Mortgage-backed securities........... 463,152 2,932 (1,119) 464,965
Federal Reserve Bank stock........... 1,869 -- -- 1,869
Federal Home Loan Bank stock......... 7,512 -- -- 7,512
Other securities..................... 12,172 77 -- 12,249
--------- ------ ------- ----------
TOTAL SECURITIES AVAILABLE FOR
SALE.......................... $ 572,249 $3,795 $(1,119) $ 574,925
========= ====== ======= ==========
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- FAIR
COST GAIN LOSS VALUE
--------- ------ ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government securities........... $ 143,570 $1,575 $ -- $ 145,145
Mortgage-backed securities........... 488,641 4,549 (452) 492,738
Federal Reserve Bank stock........... 1,869 -- -- 1,869
Federal Home Loan Bank stock......... 6,271 -- -- 6,271
Other securities..................... 1,346 94 (1) 1,439
--------- ------ ------- ----------
TOTAL SECURITIES AVAILABLE FOR
SALE.......................... $ 641,697 $6,218 $ (453) $ 647,462
========= ====== ======= ==========
</TABLE>
Securities totaled $628.1 million at March 31, 1999, a decrease of $19.3
million from $647.5 million at December 31, 1998. The yield on the securities
portfolio for the three months ended March 31, 1999 was 6.31% while the yield
was 6.23% in 1998.
The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortgage-backed securities at
March 31, 1999 were $269.2 million in agency issued collateral mortgage
obligations.
At March 31, 1999, 82% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. At March 31, 1999,
approximately $51 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.
17
<PAGE>
The following table summarizes the contractual maturity of investments
(including securities, federal funds sold and interest-bearing deposits) and
their weighted average yields at March 31, 1999. 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, 1998
-----------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
----------------- ----------------- ----------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
--------- ----- --------- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government
securities......................... $ 32,059 5.71 % $ 40,485 5.77 % $ 15,000 6.45 % $ -- 0.00 % $ 87,544
Mortgage-backed
securities......................... 148 6.74 % 22,995 6.70 % 58,027 6.41 % 381,979 6.35 % 463,152
Federal Reserve Bank
stock.............................. 1,869 6.00 % -- -- -- -- -- -- 1,869
Federal Home Loan Bank stock......... 7,513 5.49 % -- -- -- -- -- -- 7,512
Other securities..................... 11,142 6.00 % 217 8.18 % 516 7.05 % 299 8.06 % 12,172
Federal funds sold................... 32,096 4.52 % -- -- -- -- -- -- 32,096
Interest-bearing deposits............ 2,205 5.38 % -- -- -- -- -- -- 2,205
--------- ----- --------- ----- --------- ----- --------- ----- ---------
Total investments................ $ 87,032 5.29 % $ 63,697 6.11 % $ 73,543 6.42 % $ 382,278 6.35 % $ 606,550
========= ===== ========= ===== ========= ===== ========= ===== =========
<CAPTION>
YIELD
-----
<S> <C>
U.S. Government
securities......................... 5.86 %
Mortgage-backed
securities......................... 6.38 %
Federal Reserve Bank
stock.............................. 6.00 %
Federal Home Loan Bank stock......... 5.49 %
Other securities..................... 6.13 %
Federal funds sold................... 4.52 %
Interest-bearing deposits............ 5.38 %
-----
Total investments................ 6.18 %
=====
</TABLE>
PREPAID EXPENSES AND OTHER ASSETS
Total prepaid expenses and other assets were $57.7 million at March 31,
1999, an increase of $12.9 from $44.8 million at December 31, 1998. Significant
components within prepaid expenses and other assets include the cash value of
bank owned life insurance, $20.7 million and accounts receivable purchased. At
March 31, 1999 the balance of accounts receivable purchased was $14.2 million an
increase of $5.3 million from December 31, 1998.
DEPOSITS
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings, NOW
accounts, money market and time accounts. The Company relies primarily on
advertising, competitive pricing policies and customer service to attract and
retain these deposits. As of March 31, 1999, the Company had less than 5% of its
deposits classified as brokered funds and does not anticipate any significant
increase. Deposits provide the primary source of funding for the Company's
lending and investment activities, and the interest paid for deposits must be
managed carefully to control the level of interest expense.
The Company's ratio of average demand deposits to average total deposits
for the periods ended March 31, 1999 and December 31, 1998, was 29% for each
respective period.
18
<PAGE>
The average daily balances and weighted average rates paid on deposits for
the three months ended March 31, 1999 and the year ended December 31, 1998, are
presented below:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
BALANCE RATE BALANCE RATE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
NOW accounts......................... $ 16,667 1.22% $ 20,621 1.48%
Regular savings...................... 13,000 2.00 11,715 2.05
Premium Yield........................ 454,165 4.17 426,034 4.69
Money market......................... 300,887 3.10 276,888 3.41
CD's less than $100,000.............. 81,371 4.72 75,874 5.03
CD's $100,000 and over............... 334,386 4.83 270,550 5.15
IRA's & QRP's........................ 17,988 4.80 18,597 5.25
----------- --------- ----------- ---------
Total interest-bearing
deposits...................... 1,218,464 4.07% 1,100,279 4.42%
========= =========
Noninterest-bearing deposits......... 487,900 444,961
----------- -----------
Total deposits.................. $ 1,706,364 $ 1,545,240
=========== ===========
</TABLE>
The following table sets forth the maturity of the Company's time deposits
that are $100,000 or greater as of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
3 months or less..................... $214,131 $ 209,776
Between 3 months and 6 months........ 51,201 51,729
Between 6 months and 1 year.......... 65,474 34,451
Over 1 year.......................... 13,673 14,995
------------------ -----------------
Total time deposits $100,000 and
over.......................... $344,479 $ 310,951
================== =================
</TABLE>
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:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $ 195,968 $182,254
Period-end...................... 204,504 181,696
Maximum month-end balance during
period........................ 204,504 240,670
Interest rate:
Average......................... 4.04% 4.77%
Period-end...................... 6.00% 5.16%
Other short-term borrowings:
Average......................... $ 109,334 $ 26,034
Period-end...................... 105,925 138,388
Maximum month-end balance during
period........................ 207,834 138,388
Interest rate:
Average......................... 5.16% 5.65%
Period-end...................... 5.19% 5.53%
</TABLE>
Securities sold under repurchase agreements are maintained in safekeeping
by correspondent banks.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. For the three months ended March 31, 1999, the
Company's liquidity needs have primarily been met by growth in core deposits.
Although access to purchased funds from correspondent banks is available and has
been utilized on occasion to take advantage of investment opportunities, the
Company does not generally rely on these external funding sources. The cash and
federal funds sold position, supplemented by amortizing securities and loan
portfolios, have generally created an adequate liquidity position.
The Company's risk-based capital ratios including Leverage Capital, Tier 1
Risk-Based Capital and the Total Risk-Based Capital Ratio were 7.28%, 9.27% and
10.11%, respectively, at March 31, 1999.
YEAR 2000 INFORMATION AND READINESS DISCLOSURE
The Company has undertaken a company-wide initiative to address the Year
2000 issue and has developed a comprehensive plan to prepare, as appropriate,
its computer system and facilities. The Company has completed a thorough
education and awareness initiative and an inventory and assessment of its
technology and application portfolio to understand the scope of the Year 2000
impact. The Company is presently renovating, in the way of upgrades, and testing
these technologies and applications in partnership with software development
organizations.
The Company has focused on developing appropriate policies or risk
mitigation actions to address Year 2000 related failures prior to the millennium
due to reliance on internal or external dependencies. The Company is working
with key external parties, including customers, counterparties, vendors,
exchanges, depositories, utilities, suppliers, agents, and regulatory agencies,
to eliminate the potential risks posed by the Year 2000 problem. Year 2000
compliance by the Company's borrowers is now an integral part of its
underwriting procedures. The Company is prepared to curtail credit availability
to customers identified as having material exposure to the Year 2000 issue.
However, its ability to exercise curtailment may be limited by various factors,
including existing legal agreements and potential concerns regarding lender
liability.
The Company has also completed an extensive review of its non-information
technology systems, such as elevators, escalators, bank vaults and security
systems. Most of these systems do not have date sensitive systems or imbedded
computer chips, and the Company has received written confirmation from
substantially all vendors of these systems that they are Year 2000 compliant.
The failure of external parties to resolve their own Year 2000 issues in a
timely manner could result in a material financial risk to the Company. For
potential failure scenarios where the risk to the Company is deemed significant
and where the risk is considered to have higher probability of occurrence, the
Company has developed business recovery/contingency plans. These plans define
the infrastructure that should be put in place for managing a failure after
January 1, 2000.
Costs to prepare the Company's systems for the Year 2000 are estimated at
approximately $3.5 million, for internal systems renovation and testing, testing
equipment and both internal and external resources working on the project.
Through March 31, 1999, the Company had incurred approximately $2.7 million of
these costs. Capital expenditures total approximately $584,000 and non-capital
expenditures total approximately $2.1 million.
OTHER MATTERS
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, was issued by the Financial Accounting Standard Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure
20
<PAGE>
of a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for the changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. The
standard is effective for all fiscal years beginning after June 15, 1999. This
pronouncement is not anticipated to have a material effect on the Company's
financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURERS ABOUT MARKET RISK.
Not Applicable.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
21
<PAGE>
ITEM 5. OTHER INFORMATION
Set forth below are certain unaudited financial results reflecting the
combined operating results of the Company and Fort Bend for the thirty days
ended April 30, 1999. These financial results are presented to satisfy the
requirements for publication of combined results of operations with respect to
affiliate trading restrictions as specified in pooling-of-interests accounting
treatment. This information is presented only to satisfy such requirements and
is not necessarily indicative of future operating results or financial
condition.
SOUTHWEST BANCORPORATION OF TEXAS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MONTH
ENDED APRIL 30,
1999
----------------
<S> <C>
Interest Income:
Loans.............................. $ 10,774
Securities......................... 3,570
Federal funds sold and other....... 238
----------------
Total interest income...... 14,582
Interest expense on deposits and
other borrowings................... 6,171
----------------
Net interest income........ 8,411
Provision for loan losses............ 500
----------------
Net interest income after
provision for loan
losses.................... 7,911
----------------
Other income:
Service charges.................... 934
Other operating income............. 1,417
----------------
Total other income......... 2,351
----------------
Other expenses:
Salaries and employee benefits..... 3,777
Occupancy expense.................. 943
Merger-related expenses and other
charges......................... 3,740
Other operating expenses........... 1,467
----------------
Total other expenses....... 9,927
Income before income
taxes..................... 335
Provision for income taxes........... 691
----------------
Net loss............................. $ (356)
================
Loss per common share
Basic...................... $ (0.01)
================
Diluted.................... $ (0.01)
================
</TABLE>
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 15.1 Awareness Letter of PricewaterhouseCoopers LLP
Exhibit 27. Financial Data Schedule
The required Financial Data Schedule has been included as Exhibit 27 of
the Form 10-Q filed electronically with the Securities and Exchange
Commission.
b) Reports on Form 8-K
None
23
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- ------------------------------------------ -------------
<C> <S> <C>
WALTER E. JOHNSON Chairman of the Board and Chief Executive May 12, 1999
WALTER E. JOHNSON Officer (Principal Executive Officer)
DAVID C. FARRIES Executive Vice President, May 12, 1999
DAVID C. FARRIES Treasurer and Secretary (Principal
Financial Officer)
R. JOHN McWHORTER Senior Vice President and Controller May 12, 1999
R. JOHN MCWHORTER (Principal Accounting Officer)
</TABLE>
24
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
May 12, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 205449
Re: Southwest Bancorporation of Texas, Inc.
Registration on Form S-8 and Form S-3
We are aware that our report dated April 12, 1999, on our review of interim
financial information of Southwest Bancorporation of Texas, Inc. and subsidiary
for the period ended March 31, 1999 and included in the Company's quarterly
report on Form 10-Q for the quarter then ended is incorporated by reference in
the Company's registration statements on Form S-3 (File No. 333-47995) and Form
S-8 (File Nos. 333-76369, 333-21619, 333-27891, 333-33533, and 333-55685).
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not
be considered a part of the reigstration statement prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 92,488
<INT-BEARING-DEPOSITS> 4,495
<FED-FUNDS-SOLD> 29,806
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 574,925
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,356,203
<ALLOWANCE> 14,459
<TOTAL-ASSETS> 2,205,521
<DEPOSITS> 1,716,303
<SHORT-TERM> 310,429
<LIABILITIES-OTHER> 19,346
<LONG-TERM> 0
0
0
<COMMON> 23,434
<OTHER-SE> 125,142
<TOTAL-LIABILITIES-AND-EQUITY> 2,194,654
<INTEREST-LOAN> 27,477
<INTEREST-INVEST> 9,775
<INTEREST-OTHER> 360
<INTEREST-TOTAL> 37,612
<INTEREST-DEPOSIT> 12,234
<INTEREST-EXPENSE> 15,612
<INTEREST-INCOME-NET> 22,000
<LOAN-LOSSES> 1,500
<SECURITIES-GAINS> 93
<EXPENSE-OTHER> 14,288
<INCOME-PRETAX> 6,305
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 6,305
<CHANGES> 0
<NET-INCOME> 6,305
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 4.48
<LOANS-NON> 999
<LOANS-PAST> 689
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15,800
<ALLOWANCE-OPEN> 13,281
<CHARGE-OFFS> 361
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 14,459
<ALLOWANCE-DOMESTIC> 14,459
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
