UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 000-22007
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SOUTHWEST BANCORPORATION OF TEXAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0519693
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 235-8800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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)
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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 [ ]
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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. [ ]
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There were 28,063,483 shares of the Registrant's Common Stock outstanding
as of the close of business on February 16, 2000. The aggregate market value of
the Registrant's Common Stock held by non-affiliates was approximately $484
million (based upon the closing price of $17.25 on February 16, 2000, as
reported on the NASDAQ National Market System).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the 2000 Annual
Meeting of Shareholders, which will be filed within 120 days after December 31,
1999, are incorporated by reference into Part III of this Report.
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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: (a) the effects of future economic conditions on the Company and its
customers; (b) governmental monetary and fiscal policies, as well as legislative
and regulatory changes; (c) 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; (d) 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 (e) the failure of
assumptions underlying the establishment of reserves for loan losses and
estimations of values of collateral and various financial assets and liabilities
and technological changes, including "Year 2000" data systems compliance
issues, are more difficult or expensive than anticipated. 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, 1999, 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 twenty-six 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
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appropriate approvals for credit extensions in excess of conservatively assigned
individuals' lending limits. 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 ten 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 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. The Bank also
originates and purchases residential and commercial mortgage loans to sell to
investors with servicing rights retained. The Bank also promotes residential and
commercial construction financing to builders and developers and acts as a
broker in the origination of multi-family and commercial real estate loans. In
addition, the Bank offers a broad array of fee income products including
merchant card services, letters of credit, accounts receivable finance,
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
and a full suite of internet products 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 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 computer, the Bank's
NetStar 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
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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 has a retail presence in 26 locations throughout the Houston
metropolitan area. Such locations are emerging as an important source of bank
funding and fee income. Retail products consist of both traditional deposit
accounts such as checking, savings, money market accounts and certificates of
deposit, and a wide array of consumer loan and electronic banking alternatives.
The Bank is putting a strong emphasis on the cultivation of retail market
opportunities and on its retail staff to help expand and deepen customer
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. In addition, the enactment of
the Gramm-Leach-Bliley Act (see discussion below) which breaks down many
barriers between the banking, securities and insurance industries, may
significantly affect the competitive environment in which the Company operates.
EMPLOYEES
As of December 31, 1999, the Company had 934 full-time employees, 323 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 690 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
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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 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. Section 23A of the Federal Reserve Act affects loans
or other credit extensions to, asset purchases from 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.
In addition, Section 23B of the Federal Reserve Act 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 26 week
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 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
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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 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 4.0% 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, 1999, the Bank met the capital requirements of an
"adequately-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,
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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 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 have in the past been limited to the business of banking
and activities closely related or incidental to banking. Under new banking
legislation (see discussion of Gramm-Leach-Bliley Act below), however, national
banks will have broadened authority, subject to limitations on investment, to
engage in activities that are financial in nature (other than insurance
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underwriting, merchant or insurance portfolio investment, real estate
development and real estate investment) through subsidiaries if the bank is well
capitalized, well managed and has at least a satisfactory rating under the
Community Reinvestment Act.
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,
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 average 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
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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.
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.
GRAMM-LEACH-BLILEY ACT
Traditionally, the activities of bank holding companies have been limited
to the business of banking and activities closely related or incidental to
banking. On November 12, 1999, however, the Gramm-Leach-Bliley Act was signed
into law which will, effective March 11, 2000, relax the previous limitations
and permit bank holding companies to engage in a broader range of financial
activities. Specifically, bank holding companies may elect to become financial
holding companies which may affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. Among the
activities that will be deemed "financial in nature" are, in addition to
traditional lending activities, securities underwriting, dealing in or making a
market in securities; sponsoring mutual funds and investment companies,
insurance underwriting and agency activities, merchant banking activities, and
activities which the Federal Reserve Board considers to be closely related to
banking. A bank holding company may become a financial holding company under the
new statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company that falls out of compliance with such requirement
may be required to cease engaging in certain activities. Any bank holding
company which does not elect to become a financial holding company remains
subject to the current restrictions of the Bank Holding Company Act.
Under the new legislation, the Federal Reserve Board serves as the primary
"umbrella" regulator of financial holding companies with supervisory authority
over each parent company and limited authority over its subsidiaries. The
primary regulator of each subsidiary of a financial holding company will depend
on the type of activity conducted by the subsidiary. For example, broker-dealer
subsidiaries will be regulated largely by securities regulators and insurance
subsidiaries will be regulated largely by insurance authorities.
Implementing regulations under the Gramm-Leach-Bliley Act have not yet been
promulgated and the Company cannot predict the full sweep of the new legislation
and has not yet determined whether it will ever elect to become a financial
holding company.
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.
8
<PAGE>
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, 1999, the Bank met the
requirements of an "adequately capitalized" institution and, therefore, these
requirements presently do not apply 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.
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 twenty-six locations, sixteen 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 28-story office tower in the Galleria area.
<TABLE>
<CAPTION>
BRANCH DEPOSITS
AT
BRANCH SQ. FT. LOCATION DECEMBER 31, 1999
- ---------------------------------------- --------- ------------------------------------ -----------------
<S> <C> <C> <C>
(IN THOUSANDS)
Galleria/Corporate...................... 149,294 4400 Post Oak Parkway $ 974,365
Downtown -- 1100 Louisiana.............. 10,124 1100 Louisiana 81,996
Northwest Crossing...................... 6,558 Hwy 290 at Tidwell 281,686
Memorial City........................... 3,554 899 Frostwood 20,588
12 Greenway Plaza....................... 2,669 12 Greenway Plaza 48,568
Medical Center.......................... 2,437 6602 Fannin 15,824
Downtown -- Two Houston Center.......... 2,219 909 Fannin 66,666
Hempstead............................... 17,000 12130 Hempstead Hwy 116,759
Tanglewood.............................. 5,625 5791 Woodway 72,544
Pasadena................................ 4,900 4207 Fairmont Parkway 25,901
Memorial West........................... 1,700 14803 Memorial 5,807
Spring.................................. 6,300 2000 Spring Cypress Road 34,358
Bell Tower.............................. 4,500 1330 Wirt Road 21,021
Kingwood................................ 5,500 29805 Loop 494 36,237
Porter.................................. 2,450 23741 Highway 59, Suite 2 9,329
North Port.............................. 5,000 9191 North Loop East 21,323
Sugar Land.............................. 4,000 14965 Southwest Freeway 22,790
Greenspoint............................. 3,797 Sam Houston at Ronan Road 14,041
3 Greenway Plaza........................ 2,549 3 Greenway Plaza, Suite C118 1,158
Rosenberg............................... 45,000 3400 Avenue H 145,077
East Bernard............................ 1,500 9212 Hwy 60 17,586
Needville............................... 2,500 3328 School Street 37,043
Bissonnet............................... 1,520 10881 Bissonnet 14,520
Katy.................................... 2,800 919 Avenue C 11,402
Missouri City........................... 8,446 5819 Hwy 6 23,540
The Woodlands.......................... 3,600 10077 Grogan's Mill Road, Suite 300 52,625
-----------------
$ 2,172,754
=================
</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 16, 2000, there were
approximately 1,162 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, 1999, approximately
$70.1 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 and low sale prices reported
on the NASDAQ during the year ended December 31, 1999.
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------ ----- ------ ----- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock sale price:
High............................... $20 $18 7/16 $18 5/8 $18 3/16 $18 1/2 $19 1/4 $21 19/32 $19 7/8
Low................................ 16 1/8 16 1/8 12 3/8 11 7/8 10 12 3/4 16 1/4 15
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
On June 21, 1999, the Company issued 307,323 shares of Common Stock to The
Woodlands Land Development Company, L.P. ("Woodlands") pursuant to the
exercise by Woodlands on June 17, 1999 of its right to exchange its 49% equity
interest in Mitchell Mortgage Company L.L.C. ("Mitchell") for shares of
Company Common Stock. As a result of the exchange, Mitchell became a
wholly-owned subsidiary of the Bank effective June 30, 1999. No underwriter was
involved, and the issuance of those shares of Company Common Stock was not
registered under the Securities Act of 1933 in reliance upon the exemption
provided by Section 4(2) thereof. The Company is entitled to rely upon Section
4(2) in connection with this transaction because it was a privately negotiated
transaction with a single accredited investor.
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, 1999 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 Fort Bend Holding Corp.
prior to April 1, 1999, the date on which it was merged into the Company in a
transaction accounted for as a pooling of interests.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income.................. $ 186,223 $ 161,747 $ 130,895 $ 97,189 $ 78,233
Interest expense................. 79,241 70,973 58,055 43,675 35,533
--------- --------- --------- --------- ---------
Net interest income.......... 106,982 90,774 72,840 53,514 42,700
Provision for loan losses........ 6,060 4,053 3,982 2,414 1,244
--------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses..................... 100,922 86,721 68,858 51,100 41,456
Noninterest income............... 27,011 22,482 16,769 10,123 6,526
Noninterest expenses............. 85,836 70,828 56,264 41,498 31,134
--------- --------- --------- --------- ---------
Income before income taxes... 42,097 38,375 29,363 19,725 16,848
Provision for income taxes....... 15,266 13,541 10,167 6,831 5,832
Minority interest................ (19) 373 373 58 --
--------- --------- --------- --------- ---------
Net income before preferred stock
dividend....................... 26,850 24,461 18,823 12,836 11,016
Preferred stock dividend......... -- -- 36 457 50
--------- --------- --------- --------- ---------
Net income available to common
shareholders................... $ 26,850 $ 24,461 $ 18,787 $ 12,379 $ 10,966
========= ========= ========= ========= =========
PER SHARE DATA:
Basic earnings per common
share(1)....................... $ 0.97 $ 0.95 $ 0.77 $ 0.58 $ 0.53
Diluted earnings per common
share(1)....................... $ 0.93 $ 0.88 $ 0.71 $ 0.53 $ 0.50
Cash dividends per common share
paid by Fort Bend.............. $ 0.10 $ 0.40 $ 0.285 $ 0.14 $ 0.14
Book value per share............. $ 6.96 $ 6.47 $ 5.48 $ 4.33 $ 3.71
Average common shares (in
thousands)..................... 27,744 25,795 24,333 21,168 20,521
Average common share equivalents
(in thousands)................. 1,200 2,947 3,080 3,304 1,962
PERFORMANCE RATIOS:
Return on average assets......... 1.03% 1.11% 1.06% 0.93% 1.05%
Return on average common
equity......................... 15.25% 16.10% 15.44% 14.75% 15.58%
Net interest margin.............. 4.48% 4.42% 4.44% 4.35% 4.36%
Efficiency ratio(3).............. 63.99% 62.79% 63.14% 65.03% 61.95%
BALANCE SHEET DATA(2):
Total assets..................... $2,852,196 $2,522,391 $2,124,210 $1,567,221 $1,251,785
Securities....................... 652,539 718,740 652,210 458,981 472,649
Loans............................ 1,913,857 1,528,999 1,160,724 874,244 626,904
Allowance for loan losses........ 19,716 14,980 11,927 9,101 7,374
Total deposits................... 2,172,754 1,999,462 1,781,332 1,291,665 1,044,088
Total shareholders' equity....... 194,997 177,336 136,239 91,843 75,876
CAPITAL RATIO:
Average equity to average
assets......................... 6.78% 6.88% 6.88% 6.28% 6.72%
ASSET QUALITY RATIOS(2):
Nonperforming assets(4) to loans
and other real estate.......... 0.24% 0.25% 0.42% 0.37% 0.66%
Net charge-offs to average
loans.......................... 0.08% 0.08% 0.12% 0.20% 0.15%
Allowance for loan losses to
total loans.................... 1.07% 0.99% 1.04% 1.04% 1.18%
Allowance for loan losses to
nonperforming loans(5)......... 650.91% 460.07% 285.13% 359.01% 187.68%
</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 adjusted for any
changes in income that would result from the assumed conversion of all
potential dilutive common shares, 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.
(2) At period end, except net charge-offs (recoveries) to average loans.
(3) Calculated by dividing total noninterest expenses by net interest income
plus noninterest income, excluding net security gains/losses.
(4) Nonperforming assets consist of nonperforming loans and other real estate
owned.
(5) Nonperforming loans consist of nonaccrual loans, troubled debt
restructurings 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, 1999, 1998 AND 1997
OVERVIEW
On April 1, 1999, Southwest Bancorporation of Texas, Inc. (the "Company")
and Fort Bend Holding Corp. ("Fort Bend") completed their merger, which was
accounted for as a pooling of interests. The merger agreement provided for the
exchange of 1.45 shares of the Company's Common Stock for each share of Fort
Bend Common Stock, resulting in the issuance of approximately 4.6 million shares
of Company Common Stock on a fully diluted basis. In connection with this
merger, the Company incurred approximately $4.5 million in pretax merger-related
expenses and other charges including investment banking fees, other professional
fees and severance expense (the "special charge"). The historical financial
data has been restated to include the accounts and operations of Fort Bend for
all periods presented.
Through the merger with Fort Bend, the Company acquired Fort Bend's 51%
ownership interest in Mitchell Mortgage Company L.L.C. ("Mitchell"), a
full-service mortgage banking affiliate of The Woodlands Operating Company L.P.
("Woodlands"). Following the merger, Woodlands had the right to convert its
49% ownership interest in Mitchell into shares of Company Common Stock at an
exchange rate of 119.3408 shares for each $1,000 of its ownership interest in
Mitchell. Prior to the merger Woodlands had the right to convert its ownership
interest into Fort Bend common stock. On June 17, 1999, Woodlands exercised its
conversion right, resulting in the issuance of 307,323 shares of Company Common
Stock to Woodlands in exchange for Woodlands' 49% ownership interest in Mitchell
and Mitchell becoming a wholly-owned subsidiary of the Bank, effective as of
June 30, 1999. As a result, 100% of the accounts and operations of Mitchell
after that date are included in the financial statements of the Company.
Total assets at December 31, 1999, 1998 and 1997 were $2.85 billion, $2.52
billion, and $2.12 billion, respectively. This growth was a result of a strong
local economy, the addition of new loan officers, aggressive marketing, and the
Company's overall growth strategy. Loans were $1.91 billion at December 31,
1999, an increase of $384.9 million or 25% from $1.53 billion at the end of
1998, marking the second consecutive year that loan growth exceeded $350
million. Loans were $1.16 billion at year end 1997. Deposits increased to $2.17
billion at year end 1999 from $2.00 billion at year end 1998 and $1.78 billion
at year end 1997.
Net income available for common shareholders was $26.9 million, $24.5
million, and $18.8 million and diluted earnings per common share was $0.93,
$0.88, and $0.71 for the years ended 1999, 1998 and 1997, respectively. This
increase in net income was primarily the result of strong loan growth,
maintaining strong asset quality and expense control and resulted in returns on
average assets ("ROA") of 1.03%, 1.11%, and 1.06% and returns on average
common equity ("ROE") of 15.25%, 16.10%, and 15.44% for the years ended 1999,
1998 and 1997, respectively.
Results for 1999 include the impact of the special charge taken in the
second quarter. On an operating basis, excluding this special charge, the
Company's net income was $30.5 million or $1.05 per diluted common share,
resulting in an ROA of 1.17%, ROE of 17.29, and an efficiency ratio of 60.66%.
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. In 1999, net interest income provided 79.8% of the Company's net
revenues, compared with 80.1% in 1998
13
<PAGE>
and 81.3% in 1997. Interest rate fluctuations, as well as changes in the amount
and type of earning assets and liabilities, combine to affect net interest
income.
1999 VERSUS 1998. Net interest margin increased six basis points in 1999
to 4.48%. The principal factor contributing to the increase was lower cost of
funds partially offset by lower yielding earning assets resulting in higher
interest rate spreads.
Total net interest income was $107.0 million in 1999 compared to $90.8
million in 1998, an increase of $16.2 million or 18%. Growth in average earning
assets was $332.4 million or 16% while yields decreased seven basis points to
7.80%. During the first six months of the year yields remained relatively flat
and then increased during the final six months of the year as the Bank's prime
lending rate increased. The yield on earning assets during the fourth quarter
was the highest for the year, resulting in increased yields on a weighted
average basis.
Net interest margin risk is typically related to a narrowing of the prime
rate and cost of funds. The Company reduced this risk with a modestly asset
sensitive balance sheet during 1999. On June 30, 1999 the Federal Reserve
increased the federal funds rate and discount rate by 25 basis points. This was
followed by two additional 25 basis point increases on August 25, 1999 and
November 17, 1999. Due to the Bank's asset sensitivity the net interest margin
gradually increased during the second half of the year. This resulted in net
interest margins of 4.48% and 4.42% and net interest spreads of 3.53% and 3.34%
for 1999 and 1998, respectively.
The increase in net interest income was due primarily to a $332.4 million
or 16% increase in average earning assets. Average loans grew $338.7 million or
26% during 1999 while average securities grew $82.6 million or 13% during the
same period. The yield earned on average loans outstanding decreased 37 basis
points to 8.51% in 1999. Overall, the yield earned on average earning assets
decreased seven basis points to 7.80% in 1999 compared to a 26 basis point
decrease in the rate paid on average interest-bearing liabilities.
1998 VERSUS 1997. Net interest income totaled $90.8 million in 1998
compared to $72.8 million in 1997, an increase of $17.9 million or 25%. This
resulted in net interest margins of 4.42% and 4.44% and net interest spreads of
3.34% and 3.32% for 1998 and 1997, respectively.
The increase in net interest income was due primarily to a $415.6 million
or 25% increase in average interest-earning assets. Average loans grew $302.6
million or 30% during 1998 while average securities grew $110.7 million or 22%
during the same period. The increase in net interest income caused by this
increase in average interest-earning assets was partially offset by an increase
in average interest-earning liabilities of $321.5 million or 26%. The yield
earned on average interest-earning assets decreased 11 basis points to 7.87% in
1998 compared to an overall decrease in the yield earned on average
interest-bearing liabilities of 13 basis points to 4.53% for the period.
14
<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. 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,
--------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- ----------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID
----------- -------- ------- ----------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans................................. $1,652,242 $140,598 8.51% $1,313,500 $116,586 8.88% $1,010,910 $ 92,307
Securities............................ 699,581 43,865 6.67 616,999 38,302 6.21 506,275 31,709
Federal funds sold and other.......... 36,010 1,760 4.89 124,897 6,859 5.49 122,591 6,879
----------- -------- ------- ----------- -------- ------- ----------- --------
Total interest-earning assets..... 2,387,833 186,223 7.80% 2,055,396 161,747 7.87% 1,639,776 130,895
-------- ------- -------- ------- --------
Less allowance for loan losses.......... (17,534) (13,321) (10,294)
----------- ----------- -----------
2,370,299 2,042,075 1,629,482
Nonearning assets....................... 227,332 167,580 138,584
----------- ----------- -----------
Total assets...................... $2,597,631 $2,209,655 $1,768,066
=========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits..... $ 870,033 31,277 3.59% $ 808,779 31,766 3.93% $ 618,924 24,517
Certificates of deposit............... 609,423 30,386 4.99 536,095 27,984 5.22 465,665 24,933
Repurchase agreements and borrowed
funds............................... 374,398 17,578 4.70 222,246 11,223 5.05 161,072 8,605
----------- -------- ------- ----------- -------- ------- ----------- --------
Total interest-bearing
liabilities..................... 1,853,854 79,241 4.27% 1,567,120 70,973 4.53% 1,245,661 58,055
-------- ------- -------- ------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 543,961 469,721 380,034
Other liabilities..................... 23,712 20,838 20,658
----------- ----------- -----------
Total liabilities................. 2,421,527 2,057,679 1,646,353
Shareholders' equity.................... 176,104 151,976 121,713
----------- ----------- -----------
Total liabilities and
shareholders' equity............ $2,597,631 $2,209,655 $1,768,066
=========== =========== ===========
Net interest income..................... $106,982 $ 90,774 $ 72,840
======== ======== ========
Net interest spread..................... 3.53% 3.34%
======= =======
Net interest margin..................... 4.48% 4.42%
======= =======
<CAPTION>
AVERAGE
YIELD/
RATE
-------
<S> <C>
ASSETS
Interest-earning assets:
Loans................................. 9.13%
Securities............................ 6.26
Federal funds sold and other.......... 5.61
-------
Total interest-earning assets..... 7.98%
-------
Less allowance for loan losses..........
Nonearning assets.......................
Total assets......................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits..... 3.96%
Certificates of deposit............... 5.35
Repurchase agreements and borrowed
funds............................... 5.34
-------
Total interest-bearing
liabilities..................... 4.66%
-------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...
Other liabilities.....................
Total liabilities.................
Shareholders' equity....................
Total liabilities and
shareholders' equity............
Net interest income.....................
Net interest spread..................... 3.32%
=======
Net interest margin..................... 4.44%
=======
</TABLE>
15
<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,
----------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $30,067 $ (6,055) $ 24,012 $27,630 $ (3,351) $ 24,279
Securities.............................. 5,127 436 5,563 6,935 (342) 6,593
Federal funds sold and other............ (4,881) (218) (5,099) 129 (149) (20)
------- --------- --------- ------- --------- ---------
Total increase (decrease) in
interest
income............................ 30,313 (5,837) 24,476 34,694 (3,842) 30,852
------- --------- --------- ------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits....... 2,406 (2,895) (489) 7,520 (271) 7,249
Certificates of deposits................ 3,827 (1,425) 2,402 3,771 (720) 3,051
Repurchase agreements and borrowed
funds................................. 7,684 (1,329) 6,355 3,268 (650) 2,618
------- --------- --------- ------- --------- ---------
Total increase (decrease) in
interest expense.................. 13,917 (5,649) 8,268 14,559 (1,641) 12,918
------- --------- --------- ------- --------- ---------
Increase (decrease) in net interest
income................................ $16,396 $ (188) $ 16,208 $20,135 $ (2,201) $ 17,934
======= ========= ========= ======= ========= =========
</TABLE>
PROVISION FOR LOAN LOSSES
The 1999 provision for loan losses was $6.1 million, an increase of $2.0
million or 50% from 1998. The provision for the year ended 1998 was $4.0 million
unchanged from the year ended December 31, 1997. Net charge-offs during 1999
equaled $1.3 million, which when subtracted from the provision for loan losses
of $6.1 million resulted in a net increase in the allowance for loan losses of
$4.8 million. This increase approximates a reserve of 1.23% provided for new
loans recorded. 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
Noninterest income grew to $27.0 million for the year ended December 31,
1999, an increase of $4.5 million or 20% from 1998. Noninterest income totaled
$22.5 million in 1998, an increase of $5.7 million or 33.9% from 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts..... $ 10,515 $ 8,552 $ 6,843
Investment services..................... 4,232 3,537 2,536
Factoring fee income.................... 3,169 1,775 --
Loan fee income......................... 2,445 2,804 2,730
Bank-owned life insurance income........ 1,379 390 --
Letters of credit fee income............ 829 627 423
Gain (loss) on sale of securities,
net................................... (139) 463 498
Other income............................ 4,581 4,334 3,739
--------- --------- ---------
$ 27,011 $ 22,482 $ 16,769
========= ========= =========
</TABLE>
16
<PAGE>
The largest component of noninterest income is service charges, which were
$10.5 million for the year ended December 31, 1999, compared to $8.6 million for
1998 and $6.8 for 1997. These were increases of 23% and 25%, respectively for
1999 and 1998. Several factors are attributable for this growth. First, during
this three-year period the Company introduced several new products to their
existing retail product line. Secondly, in August 1999, the Company initiated a
deposit campaign encompassing all of their existing market areas and redesigned
the consumer banking area which has experienced strong growth since its
inception. Additionally, the number of deposit accounts grew from 65,939 at
December 31, 1997 to 70,997 at December 31, 1998 and to 78,324 at December 31,
1999.
Additional areas of increased growth included investment services and
factoring fee income. Factoring fee income is derived from the acquisition of
First Republic Capital Corp. and City Financial Services, Inc. in February of
1998. This acquisition was accounted for as a pooling of interests, and due to
immateriallity, prior years financial statements were not restated. Investment
services income grew to $4.2 million, or 20% from the 1998 period. During the
past several years, the international department and the foreign exchange
division have experienced strong growth, including the addition of seven new
officers. This addition adds to the high quality of personal service and
responsiveness to customer needs. Secondly the Company introduced new services
such as confirmation of letters of credit for a variety of countries and banks.
The international department also has a registered broker for non-U.S. citizens
which allows the Company to offer investment products in that market as well.
NONINTEREST EXPENSES
For the year ended December 31, 1999, noninterest expenses totaled $85.8
million, an increase of $15.0 million, or 21%, from $70.8 million during 1998,
which had increased from $56.3 million during 1997. The increase in noninterest
expenses during these periods was due primarily to salaries and employee
benefits, occupancy expenses, FDIC insurance and merger-related expenses. The
efficiency ratio was 63.99%, 62.79% and 63.14% for the years ended December 31,
1999, 1998 and 1997 respectively. The increase in efficiency ratio during 1999
resulted primarily from expenses incurred in connection with the acquisition of
Fort Bend Holding Corp. Excluding the special charge incurred, the efficiency
ratio would have improved to 60.66%. Additionally, less than 75% of the
estimated cost savings projected from the merger were realized during 1999. Full
cost savings are expected to be achieved in 2000.
Salaries and employee benefits expense for the year ended December 31, 1999
was $48.9 million, an increase of $6.1 million or 14% from $42.8 million for the
year ended December 31, 1998. Salaries and employee benefits expense for the
year ended December 31, 1998 increased $10.7 million or 33% from the same period
in 1997. This increase was due primarily to hiring of additional personnel
required to accommodate the Company's growth. Total full-time equivalent
employees for the years ended December 31, 1999, 1998 and 1997 were 934, 850,
and 734, respectively.
Occupancy expense rose $2.3 million from the prior year in both 1999 and
1998. Major categories included within occupancy expense are building lease
expense, depreciation expense, and maintenance contract expense. Building lease
expense increased to $3.7 million in 1999 from $2.8 million in 1998, an increase
of $916,000 or 33%. The Company continues to increase the rentable square feet
of the Galleria location to accommodate the increases in personnel. Depreciation
expense increased $455,000 to $4.9 million for the year ended December 31, 1999.
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, 1999 was $1.4
million, an increase of $350,000 or 33% compared to $1.1 million in 1998 and
$789,000 in 1997. The Company has purchased maintenance contracts for major
operating systems throughout the organization.
FDIC insurance expense increased $488,000 to $832,000 during 1999. This
increase was the result of a three basis point increase in rates as a result of
the Bank's capital classification changing from well capitalized to adequately
capitalized and due to a $173.0 million increase in deposits from which the FDIC
assessment is calculated.
17
<PAGE>
During the second quarter of 1999, the Company expensed approximately $4.5
million (pretax) in merger-related expenses and other charges including
investment banking fees, other professional fees and severance expense
associated with the merger of Fort Bend Holding Corp.
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 1999 income
tax expense was $15.3 million, an increase of $1.7 million or 13% from the $13.5
million of income tax expense in 1998. In 1998 income tax expense was $13.5
million, an increase of $3.3 million or 33% from the $10.2 million of income tax
expense in 1997.
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.
FINANCIAL CONDITION
LOANS HELD FOR INVESTMENT
Loans were $1.84 billion at December 31, 1999, an increase of $323.1
million, or 21% from December 31, 1998. Loans were $1.51 billion at December 31,
1998, an increase of $365.9 million, or 32%, from $1.15 billion at December 31,
1997.
During the past 5 years loans have grown at an annualized rate of 30%. This
growth is consistent with the Bank's strategy of targeting corporate "middle
market" and private banking customers and providing innovative products with
superior customer service. This plan also includes establishing new branches in
areas that demographically complement existing or targeted customer base,
pursuing selected mergers / acquisitions which will add new markets, delivery
systems and talent to the Bank and leveraging new or existing technology to
improve the profitability of the Bank and its customers.
The following table summarizes the loan portfolio of the Company by major
category as of the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- ------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $ 721,229 39.27 % $ 639,027 42.22 % $ 453,082 39.47 % $332,129 38.11%
Real estate:
Construction & land development.... 494,755 26.94 296,004 19.56 177,911 15.50 119,316 13.69
1-4 family residential............. 268,349 14.61 255,619 16.89 242,106 21.09 204,579 23.47
Commercial owner occupied.......... 185,679 10.11 167,084 11.04 139,296 12.14 104,468 11.99
Farmland........................... 13,056 0.71 8,314 0.55 8,384 0.73 8,879 1.02
Other................................ 20,447 1.10 17,480 1.14 10,852 0.95 6,498 0.74
Consumer............................. 133,295 7.26 130,161 8.60 116,173 10.12 95,715 10.98
--------- ------- --------- ------- --------- ------- -------- -------
Loans held for investment........ $1,836,810 100.00 % $1,513,689 100.00 % $1,147,804 100.00 % $871,584 100.00%
========= ======= ========= ======= ========= ======= ======== =======
<CAPTION>
1995
------------------
AMOUNT PERCENT
-------- -------
<S> <C> <C>
Commercial and industrial............ $218,723 34.94 %
Real estate:
Construction & land development.... 67,831 10.84
1-4 family residential............. 157,167 25.11
Commercial owner occupied.......... 71,613 11.44
Farmland........................... 5,327 0.85
Other................................ 27,905 4.45
Consumer............................. 77,416 12.37
-------- -------
Loans held for investment........ $625,982 100.00 %
======== =======
</TABLE>
18
<PAGE>
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 cash flow. 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 five year period,
such loans often remain outstanding for significantly shorter periods than their
contractual terms.
The Bank is engaged in the mortgage banking business and originates and
purchases residential and commercial mortgage loans to sell to investors with
servicing rights retained. The Bank also provides residential and commercial
construction financing to builders and developers and acts as a broker in the
origination of multi-family and commercial real estate loans.
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, 1999
are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Commercial and industrial............ $ 452,276 $ 236,226 $ 32,727 $ 721,229
Real estate construction............. 310,088 154,403 30,264 494,755
---------- ---------- --------- ------------
Total......................... $ 762,364 $ 390,629 $ 62,991 $ 1,215,984
========== ========== ========= ============
Loans with a fixed interest rate..... $ 244,032 $ 110,414 $ 19,206 $ 373,652
Loans with a floating interest
rate............................... 518,332 280,215 43,785 842,332
---------- ---------- --------- ------------
Total......................... $ 762,364 $ 390,629 $ 62,991 $ 1,215,984
========== ========== ========= ============
</TABLE>
LOANS HELD FOR SALE
Loans held for sale of $77.0 million at December 31, 1999 increased from
$15.3 million at December 31, 1998. These loans are typically sold to investors
within one month of origination. The
19
<PAGE>
increase during 1999 is due to a reclassification from the loan portfolio. It is
expected that these loans will ultimately be sold after restrictions have
expired relating to pooling of interests merger.
LOAN REVIEW AND ALLOWANCE FOR LOAN LOSSES
The Company's loan review 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, the Houston metropolitan area 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. 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.
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 growth in the loan portfolio, 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. The allocated component of the allowance is supplemented by
an unallocated component. The unallocated portion of the allowance includes
management's judgmental determination of the amounts necessary for subjective
factors such as economic uncertainties and concentration risks. 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, 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 December 31,
1999.
20
<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,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning
balance............................ $ 14,980 $ 11,927 $ 9,101 $ 7,374 $ 6,641
Provision charged against
operations......................... 6,060 4,053 3,982 2,414 1,244
Charge-offs.......................... (1,536) (1,151) (1,283) (1,614) (870)
Recoveries........................... 212 133 127 192 31
Increase from acquisition............ -- -- -- 735 328
Adjustment to conform reporting
periods............................ -- 18 -- -- --
--------- --------- --------- ---------- ----------
Allowance for loan losses, ending
balance............................ $ 19,716 $ 14,980 $ 11,927 $ 9,101 $ 7,374
========= ========= ========= ========== ==========
Allowance to period-end loans........ 1.07% 0.99% 1.04% 1.04% 1.18%
Net charge-offs to average loans..... 0.08% 0.08% 0.12% 0.20% 0.15%
Allowance to period-end nonperforming
loans.............................. 650.91% 460.07% 285.13% 359.01% 187.68%
</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. Portions of the allowance for loan losses are allocated to
cover the estimated losses inherent in particular risk categories of loans. The
allocation of the allowance for loan losses is based upon the Company's loss
experience over a period of years and is adjusted for subjective factors such as
economic trends, performance trends, portfolio age and concentrations of credit.
Prior year allocations have been restated to conform to this methodology. 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,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses
applicable to:
Commercial and industrial........ $ 8,503 39.27% $ 7,023 42.22% $ 3,908 39.47%
Real estate:
Construction and land
development............... 2,942 26.94 2,123 19.56 1,054 15.50
1-4 family residential...... 1,409 14.61 1,802 16.89 1,355 21.09
Commercial owner occupied... 947 10.11 1,153 11.04 760 12.14
Farmland.................... 60 0.71 57 0.55 46 0.73
Other....................... 94 1.10 120 1.14 59 0.95
Consumer......................... 1,633 7.26 1,598 8.60 1,136 10.12
Unallocated...................... 4,128 n/a 1,104 n/a 3,609 n/a
--------- ----------- --------- ----------- --------- -----------
Total allowance for loan losses...... $ 19,716 100.00% $ 14,980 100.00% $ 11,927 100.00%
========= =========== ========= =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses
applicable to:
Commercial and industrial........ $ 2,802 38.11% $ 1,779 34.94%
Real estate:
Construction and land
development............... 874 13.69 538 10.84
1-4 family residential...... 1,366 23.47 1,174 25.11
Commercial owner occupied... 716 11.99 661 11.44
Farmland.................... 58 1.02 40 0.85
Other....................... 44 0.74 212 4.45
Consumer......................... 898 10.98 784 12.37
Unallocated...................... 2,343 n/a 2,186 n/a
--------- ----------- --------- -----------
Total allowance for loan losses...... $ 9,101 100.00% $ 7,374 100.00%
========= =========== ========= ===========
</TABLE>
21
<PAGE>
NONPERFORMING ASSETS AND IMPAIRED LOANS
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 $4.4 million at December 31, 1999, compared with
$3.8 million at December 31, 1998 and $4.8 million at December 31, 1997. This
resulted in a ratio of nonperforming assets to loans plus other real estate of
0.24%, 0.25%, and 0.42% for the years ended 1999, 1998, and 1997, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $ 2,388 $ 2,324 $ 3,253 $ 2,104 $ 1,598
Accruing loans 90 or more days past
due................................ 641 681 383 26 23
Restructured loans................... -- 251 547 405 2,308
Other real estate and foreclosed
property........................... 1,337 504 643 655 225
---------- --------- --------- --------- ---------
Total non-performing assets... $ 4,366 $ 3,760 $ 4,826 $ 3,190 $ 4,154
========== ========= ========= ========= =========
Nonperforming assets to total loans
and other real estate.............. 0.24% 0.25% 0.42% 0.37% 0.66%
</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 $13.7
million and $14.0 million at December 31, 1999 and 1998, respectively. The
largest component of impaired loans at December 31, 1999 and 1998 is a
commercial energy related loan of approximately $10.8 million and 10.6 million,
respectively. The average recorded investment in impaired loans during 1999 and
1998 was $13.9 million and $6.3 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 $1.5 million and $415,000 was
recognized for cash payments received in 1999 and 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 classified as held to maturity are stated at
cost, increased by accretion of discounts and reduced by amortization of
premiums, both computed by the interest method. 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 (loss) until realized. Gains and losses on sales of securities are
22
<PAGE>
determined using the specific-identification method. The Company has classified
all securities as available for sale at December 31, 1999. This allows the
Company to manage its investment portfolio more effectively and to enhance the
average yield on the portfolio.
The amortized cost of securities classified as available for sale and held
to maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Available for sale:
U.S. Government securities...... $ 78,527 $ 143,570 $ 163,730 $ 127,466 $ 136,794
Mortgage-backed securities...... 560,471 488,851 323,716 169,920 166,744
Federal Reserve Bank stock...... 2,408 1,869 1,791 950 946
Federal Home Loan Bank stock.... 14,886 7,672 39,451 41,319 39,808
Other securities................ 14,253 3,894 28,732 11,147 8,694
---------- ---------- ---------- ---------- ----------
Total securities available
for sale................ $ 670,545 $ 645,856 $ 557,420 $ 350,802 $ 352,986
========== ========== ========== ========== ==========
Held to maturity:
U.S. Government securities...... $ -- $ 6,248 $ 9,244 $ 11,235 $ 9,233
Mortgage-backed securities...... -- 60,869 82,815 97,084 110,490
---------- ---------- ---------- ---------- ----------
Total securities held to
maturity................ $ -- $ 67,117 $ 92,059 $ 108,319 $ 119,723
========== ========== ========== ========== ==========
</TABLE>
The following table presents the amortized cost of securities classified as
held to maturity and available for sale and their approximate fair values as of
the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------- -----------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS VALUE COST GAIN LOSS
--------- ---------- ---------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Available for sale:
U.S. Government securities.......... $ 78,527 $ 35 $ (1,567) $ 76,995 $143,570 $1,575 $--
Mortgage-backed securities.......... 560,471 356 (16,852) 543,975 488,851 4,549 (452)
Federal Reserve Bank stock.......... 2,408 -- -- 2,408 1,869 -- --
Federal Home Loan Bank stock........ 14,886 -- -- 14,886 7,672 -- --
Other securities.................... 14,253 22 -- 14,275 3,894 107 (12)
--------- ---------- ---------- -------- --------- ---------- ----------
Total securities available for
sale............................ $670,545 $ 413 $(18,419) $652,539 $645,856 $6,231 $ (464)
========= ========== ========== ======== ========= ========== ==========
Held to maturity:
U.S. Government securities.......... $ -- $-- $ -- $ -- $ 6,248 $ 14 $ (186)
Mortgage-backed securities.......... -- -- -- -- 60,869 689 (259)
--------- ---------- ---------- -------- --------- ---------- ----------
Total securities held to
maturity........................ $ -- $-- $ -- $ -- $ 67,117 $ 703 $ (445)
========= ========== ========== ======== ========= ========== ==========
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
GROSS GROSS
FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
VALUE COST GAIN LOSS VALUE
-------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government securities.......... $145,145 $163,730 $ 536 $ (5) $164,261
Mortgage-backed securities.......... 492,948 323,716 2,275 (151) 325,840
Federal Reserve Bank stock.......... 1,869 1,791 -- -- 1,791
Federal Home Loan Bank stock........ 7,672 39,451 -- -- 39,451
Other securities.................... 3,989 28,732 76 -- 28,808
-------- --------- ---------- ---------- --------
Total securities available for
sale............................ $651,623 $557,420 $2,887 $ (156) $560,151
======== ========= ========== ========== ========
Held to maturity:
U.S. Government securities.......... $ 6,076 $ 9,244 $ 21 $ (281) $ 8,984
Mortgage-backed securities.......... 61,299 82,815 923 (516) 83,222
-------- --------- ---------- ---------- --------
Total securities held to
maturity........................ $ 67,375 $ 92,059 $ 944 $ (797) $ 92,206
======== ========= ========== ========== ========
</TABLE>
In connection with the Fort Bend merger, the Company transferred all of
Fort Bend's held-to-maturity debt securities to the available for sale category.
The amortized cost of these securities at the time of transfer was $57.8 million
and the unrealized gain was $80,000 ($52,000 net of income taxes). The Company
does not intend to sell these securities in the near term.
Securities totaled $652.5 million at December 31, 1999, a decrease of $66.2
million from $718.7 million at December 31, 1998. During 1998, securities
increased $66.5 million from $652.2 million at December 31, 1997. The yield on
the securities portfolio for 1999 was 6.67% while the yield was 6.21% in 1998.
23
<PAGE>
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, 1999 were agency issued collateral mortgage obligations with a book
value of $272.0 million and a fair market value of $265.8 million.
At December 31, 1999, $502.1 million of the mortgage-backed securities held
by the Company had final maturities of more than 10 years. At December 31, 1999,
approximately $32.2 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 and
their weighted average yields at December 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 separate component of other
comprehensive income.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT WITHIN YEARS BUT 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.............. $ 4,002 5.89% $59,525 5.79% $15,000 6.45% $ -- -- % $ 78,527
Mortgage-backed securities.............. 4,198 5.93 18,561 6.48 35,659 6.35 502,053 6.41 560,471
Federal Reserve Bank stock.............. 2,408 6.00 -- -- -- -- -- -- 2,408
Federal Home Loan Bank stock............ 14,886 5.25 -- -- -- -- -- -- 14,886
Other securities........................ 2,819 5.14 182 8.01 619 6.94 10,633 7.51 14,253
Interest-bearing deposits............... 20,517 6.48 -- -- -- -- -- -- 20,517
------- ----- ------- ----- ------- ----- -------- ----- --------
Total investments................... $48,830 5.91% $78,268 5.96% $51,278 6.39% $512,686 6.43% $691,062
======= ===== ======= ===== ======= ===== ======== ===== ========
YIELD
-----
U.S. Government securities.............. 5.92 %
Mortgage-backed securities.............. 6.40
Federal Reserve Bank stock.............. 6.00
Federal Home Loan Bank stock............ 5.25
Other securities........................ 7.03
Interest-bearing deposits............... 6.48
-----
Total investments................... 6.34 %
=====
</TABLE>
OTHER ASSETS
Other assets were $86.8 million at December 31, 1999, an increase of $31.1
million from $55.7 million at December 31, 1998. This increase is primarily
attributable to the purchase of Bank-owned life insurance policies, increases in
factored receivables and increases in deferred tax assets. Cash value of
bank-owned life insurance policies was approximately $26.8 million at December
31, 1999 compared with a balance of $20.4 million at December 31, 1998. This
increase primarily resulted from insurance purchased for new officers, including
those from the merger with Fort Bend.
Factored receivables result from providing operating funds to businesses by
converting their accounts receivable to cash. During 1999 factored receivables
increased $9.6 million to $18.5 million. This increase was due to several
factors including new officers hired and aggressive marketing, both internally
and externally.
Temporary differences between the tax bases of assets and their financial
reporting amounts give rise to deferred income tax assets and liabilities. At
December 31, 1999 deferred tax assets totaled $12.3 million compared with $2.4
million for the same period in 1998. This increase was caused by a decline in
the market value of the securities portfolio and an increase in the allowance
for loan losses.
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, 1999, the Company had less than two
percent of its deposits classified as brokered funds and does not anticipate any
significant increase. Deposits provide the majority of 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.
24
<PAGE>
The Company's ratio of average demand deposits to average total deposits
for the years ended December 31, 1999, 1998, and 1997 was 26.88%, 25.89%, and
25.95%, respectively.
Average total deposits during 1999 increased to $2.02 billion from $1.81
billion in 1998, an increase of $208.8 million or 12%. Average
noninterest-bearing deposits increased to $544.0 million in 1999 from $469.7
million in 1998 due to the increase of approximately 7,000 deposit accounts.
Average deposits in 1998 rose to $1.81 billion from $1.46 billion in 1997, an
increase of $350.0 million or 24%.
The average daily balances and weighted average rates paid on deposits for
each of the years ended December 31, 1999, 1998, and 1997 are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ --------- ------------ --------- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
NOW accounts......................... $ 28,807 2.31% $ 47,482 1.67% $ 61,830 1.92%
Regular Savings...................... 36,201 2.44 35,122 2.35 33,901 2.44
Premium Yield........................ 472,501 4.24 426,034 4.69 278,448 4.91
Money market savings................. 332,525 2.92 300,141 3.39 244,745 3.61
CD's less than $100,000.............. 221,161 4.92 192,041 5.15 194,788 5.20
CD's $100,000 and over............... 345,060 4.97 289,357 5.17 217,463 5.40
IRA's, QRP's & Other................. 43,201 5.43 54,697 5.70 53,414 5.74
------------ --------- ------------ --------- ---------- ----
Total interest-bearing
deposits........................ 1,479,456 4.17% 1,344,874 4.44% 1,084,589 4.56%
========= ========= ====
Noninterest-bearing deposits......... 543,961 469,721 380,034
------------ ------------ ----------
Total deposits.................. $ 2,023,417 $ 1,814,595 $1,464,623
============ ============ ==========
</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>
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
3 months or less..................... $ 177,432 $ 213,705 $ 184,244
Between 3 months and 6 months........ 68,476 56,005 43,269
Between 6 months and 1 year.......... 67,388 43,019 45,130
Over 1 year.......................... 23,678 24,636 19,222
---------- ---------- ----------
Total time deposits $100,000 and
over.......................... $ 336,974 $ 337,365 $ 291,865
========== ========== ==========
</TABLE>
25
<PAGE>
BORROWINGS
Securities sold under repurchase agreements and other 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>
DECEMBER 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $ 184,815 $ 182,254
Period-end...................... 216,838 181,696
Maximum month-end balance during
period........................ 216,838 240,670
Interest Rate:
Average......................... 4.06% 4.77%
Period-end...................... 4.03% 5.16%
Other borrowings:
Average......................... $ 189,929 $ 26,034
Period-end...................... 248,346 138,347
Maximum month-end balance during
period........................ 265,440 138,347
Interest rate:
Average......................... 5.33% 5.65%
Period-end...................... 5.23% 5.53%
</TABLE>
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 adjusts
its interest sensitivity 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. The Company did not utilize derivative financial instruments
to manage interest rate risk during the years ended December 31, 1999 and 1998.
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 and three outside directors, 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.
To effectively measure and manage interest rate risk, the Company uses
simulation analysis to determine the impact on net interest income of changes in
interest rates under various interest rate scenarios, balance sheet trends, and
strategies. From these simulations, interest rate risk is quantified and
appropriate strategies are developed and implemented.
26
<PAGE>
The following table presents an analysis of the sensitivity inherent in the
Company's net interest income and market value of portfolio equity. The interest
rate scenarios presented in the table include interest rates at December 31,
1999 and 1998 and as adjusted by instantaneous rate changes upward and downward
of up to 200 basis points. Each rate scenario reflects unique prepayment and
repricing assumptions. Since there are limitations inherent in any methodology
used to estimate the exposure to changes in market interest rates, this analysis
is not intended to be a forecast of the actual effect of a change in market
interest rates on the Company. The market value sensitivity analysis presented
includes assumptions that (i) the composition of the Company's interest
sensitive assets and liabilities existing at year end will remain constant over
the twelve month measurement period; and (ii) that changes in market rates are
parallel and instantaneous across the yield curve regardless of duration or
repricing characteristics of specific assets or liabilities. Further, the
analysis does not contemplate any actions that the Company might undertake in
response to changes in market interest rates. Accordingly, this analysis is not
intended and does not provide a precise forecast of the effect actual changes in
market rates will have on the Company.
<TABLE>
<CAPTION>
CHANGES IN INTEREST RATES
-----------------------------------------------------
-200 -100 0 +100 +200
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Impact on net interest income:
December 31, 1999............... -8.30% -3.32% 0.00% 3.18% 6.25%
December 31, 1998............... -4.22% -2.10% 0.00% 1.52% 2.48%
Impact on market value of portfolio
equity:
December 31, 1999............... - 2.90% -0.05% 0.00% -0.85% -1.46%
December 31, 1998............... -15.28% -7.21% 0.00% 5.96% 10.93%
</TABLE>
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.
The Company's one-year cumulative GAP position at December 31, 1999 was
negative $444.8 million or 15.59% of assets. This is a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management,
shortcomings are inherent in GAP analysis since certain assets and liabilities
may not move proportionally as interest rates change. Consequently, in addition
to GAP analysis the Company uses a simulation model to test the interest rate
sensitivity of net interest income and the balance sheet. Based on the Company's
December 31, 1999 simulation analysis, the Company estimates that it's one-year
cumulative GAP position, adjusted for the calculated correlation between changes
in the prime rate and interest-earning assets and interest-bearing liabilities,
is a positive 2.74%. This results primarily from the behavior of demand, money
market and savings deposits. The Company has found that historically, interest
rates on these deposits change more slowly than changes in prime rate.
27
<PAGE>
The following table sets forth an interest rate sensitivity analysis for
the Company as of December 31, 1999:
<TABLE>
<CAPTION>
AFTER
0-30 DAYS 31-180 DAYS 181-360 DAYS ONE YEAR TOTAL
---------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Money market funds.............. $ 2,276 $ -- $ -- $ -- $ 2,276
Securities...................... 32,151 39,683 43,095 552,161 667,090
Loans........................... 1,119,312 164,802 73,579 554,283 1,911,976
Overdrafts...................... 3,735 -- -- -- 3,735
Federal funds sold.............. -- -- -- -- --
---------- ----------- ------------ ---------- ------------
Total interest-earning
assets..................... 1,157,474 204,485 116,674 1,106,444 2,585,077
---------- ----------- ------------ ---------- ------------
Interest-bearing liabilities:
Demand, money market and savings
deposits...................... 973,149 -- -- -- 973,149
Certificates of deposit and
other time deposits........... 100,986 253,202 131,399 108,022 593,609
Short-term borrowings........... 460,891 -- -- -- 460,891
Long-term borrowings............ -- 3,762 -- 530 4,292
---------- ----------- ------------ ---------- ------------
Total interest-bearing
liabilities................ 1,535,026 256,964 131,399 108,552 2,031,941
---------- ----------- ------------ ---------- ------------
Period GAP........................... $ (377,552) $ (52,479) $ (14,725) $ 997,892 $ 553,136
========== =========== ============ ========== ============
Cumulative GAP....................... $ (377,552) $ (430,031) $ (444,756) $ 553,136
========== =========== ============ ==========
Period GAP to total assets........... -13.24% -1.84% -0.52% 34.99%
Cumulative GAP to total assets....... -13.24% -15.08% -15.59% 19.39%
</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, 1999, the Company's
liquidity needs have primarily been met by growth in core deposits, and
increases in short-term borrowings, primarily from the Federal Home Loan Bank.
The cash and federal funds sold position, supplemented by amortizing securities
and loan portfolios, have generally created an adequate liquidity position.
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 $237.2 million at
December 31, 1999. 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, 1999 was approximately $85.0
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
Shareholders' equity increased to $195.0 million at December 31, 1999 from
$177.3 million at December 31, 1998, an increase of $17.7 million, or 10%.
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
28
<PAGE>
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. 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.
29
<PAGE>
The following table compares the Company's and the Bank's leverage and
risk-weighted capital ratios as of December 31, 1999 and 1998 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
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
As of December 31, 1999
Total Capital (to Risk
Weighted Assets):
The Company..................... $ 223,862 9.54% $ 187,770 8.00 % $ 234,712 10.00%
The Bank........................ 222,333 9.47% 187,756 8.00 % 234,695 10.00%
Tier I Capital (to Risk
Weighted Assets):
The Company..................... 204,146 8.70% 93,885 4.00 % 187,770 8.00%
The Bank........................ 202,617 8.63% 93,878 4.00 % 187,756 8.00%
Tier I Capital
(to Average Assets):
The Company..................... 204,146 7.48% 81,916 3.00 % 136,526 5.00%
The Bank........................ 202,617 7.40% 82,208 3.00 % 137,013 5.00%
As of December 31, 1998
Total Capital (to Risk
Weighted Assets):
The Company..................... 187,378 10.18% 147,261 8.00 % 184,077 10.00%
The Bank........................ 173,812 9.46% 146,969 8.00 % 183,711 10.00%
Tier I Capital (to Risk
Weighted Assets):
The Company..................... 172,538 9.37% 73,631 4.00 % 147,261 8.00%
The Bank........................ 158,970 8.65% 73,484 4.00 % 146,969 8.00%
Tier I Capital
(to Average Assets):
The Company..................... 172,538 7.27% 71,236 3.00 % 118,727 5.00%
The Bank........................ 158,970 6.72% 70,976 3.00 % 118,294 5.00%
</TABLE>
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 as "adequately capitalized" for purposes of prompt corrective
action. See "Supervision and Regulation."
YEAR 2000 INFORMATION AND READINESS DISCLOSURE
The Company has undertaken a company-wide initiative to address the Year
2000 and has developed a comprehensive plan to prepare, as appropriate, its
computer systems 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.
30
<PAGE>
The contingency plan developed for the Year 2000 detailed the course of
action to follow at various stages of readiness. There were no problems
encountered that warranted implementation of the contingency plan. Operations
for the Company continued with no noticeable disruptions of service.
Costs to prepare the Company's systems for the Year 2000, including costs
for internal systems renovation and testing, equipment testing, and internal and
external project personnel, are estimated at approximately $3.8 million. Through
December 31, 1999, the Company had incurred approximately $3.6 million of these
costs. Capital expenditures total approximately $592,000 and non-capital
expenditures total approximately $3.0 million.
OTHER MATTERS
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, 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, 2000. The Company is evaluating the effect of this pronouncement
on the Company's consolidated financial position, results of operations and cash
flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management uses derivative contracts to manage its exposure to commitments
to originate mortgage loans. All of the derivatives utilized by the Company are
for purposes other than trading. The derivatives utilized consist of purchased
options on FNMA or FHLMC guaranteed mortgage-backed securities. These financial
instruments are used to reduce the Company's exposure to the effects of
fluctuations in interest rates on the Company's lending and secondary marketing
activities. The notional amount and fair value of such derivatives was
immaterial at December 31, 1999 and 1998.
In addition, 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.
31
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for each of the quarters in
fiscal 1999 and 1998 (in thousands, except earnings per share).
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -------------------------------------
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...................... $50,620 $47,513 $45,024 $43,066 $42,567 $42,137 $39,614 $37,429
Interest expense..................... 21,374 20,180 19,340 18,347 18,229 18,312 17,208 17,224
------- ------- ------- ------- ------- ------- ------- -------
Net interest income.............. 29,246 27,333 25,684 24,719 24,338 23,825 22,406 20,205
Provision for loan losses............ 1,500 1,500 1,515 1,545 1,245 1,245 945 618
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses...... 27,746 25,833 24,169 23,174 23,093 22,580 21,461 19,587
Noninterest income................... 7,144 6,963 6,351 6,553 5,923 5,837 5,496 5,226
Noninterest expenses................. 22,012 20,683 23,812 19,329 19,110 18,273 17,420 16,025
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes and
minority interest.............. 12,878 12,113 6,708 10,398 9,906 10,144 9,537 8,788
Provision for income taxes........... 4,412 4,305 2,813 3,736 3,509 3,567 3,355 3,110
Minority interest.................... -- -- 34 (53) 49 165 123 36
------- ------- ------- ------- ------- ------- ------- -------
Net income available to common
shareholders....................... $ 8,466 $ 7,808 $ 3,861 $ 6,715 $ 6,348 $ 6,412 $ 6,059 $ 5,642
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per common share...... $ 0.30 $ 0.28 $ 0.14 $ 0.25 $ 0.24 $ 0.25 $ 0.24 $ 0.22
Diluted earnings per common share.... $ 0.29 $ 0.27 $ 0.13 $ 0.24 $ 0.22 $ 0.23 $ 0.22 $ 0.21
Weighted average common shares
outstanding (in 000's)............. 29,082 29,010 28,929 28,751 28,811 28,427 28,569 28,499
</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, 1999.
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 2000 Annual Meeting of Shareholders
to be filed with the Commission pursuant to Regulation 14A under the Securities
and Exchange Act of 1934 (the "2000 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, 1999 to its executive officers, reference is made to the
information presented in the Company's 2000 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 2000
Proxy Statement. Such information is incorporated herein by reference.
32
<PAGE>
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 Company's 2000 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 report on Form 8-K was filed by the Company during the three months
ended December 31, 1999.
(c) *Exhibits:
<TABLE>
<C> <S>
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 January 24, 2000
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. Argue, David C. Farries, James R.
Massey, Steve D. Stephens and Randall E. Meyer
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).
**10.11 -- Form of Employment Contract between the Company and Walter Lane Ward, Jr.
**21.1 -- List of subsidiaries of the Company
**23.1 -- Consent of PricewaterhouseCoopers LLP
**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.
33
<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
Date: March 1, 2000
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 March 1, 2000
WALTER E. JOHNSON
/s/PAUL B. MURPHY, JR. Director, President and Chief March 1, 2000
PAUL B. MURPHY, JR. Executive Officer (Principal
Executive Officer)
/s/DAVID C. FARRIES Executive Vice President, Treasurer March 1, 2000
DAVID C. FARRIES and Secretary (Principal Financial
Officer)
/s/R. JOHN McWHORTER Senior Vice President and Controller March 1, 2000
R. JOHN MCWHORTER (Principal Accounting Officer)
/s/JOHN W. JOHNSON Director and Chairman of the March 1, 2000
JOHN W. JOHNSON Executive Committee of the Board
/s/JOHN B. BROCK III Director March 1, 2000
JOHN B. BROCK III
/s/ERNEST H. COCKRELL Director March 1, 2000
ERNEST H. COCKRELL
/s/J. DAVID HEANEY Director March 1, 2000
J. DAVID HEANEY
/s/WILHELMINA R. MORIAN Director March 1, 2000
WILHELMINA R. MORIAN
/s/ANDRES PALANDJOGLOU Director March 1, 2000
ANDRES PALANDJOGLOU
/s/ADOLPH A. PFEFFER, JR. Director March 1, 2000
ADOLPH A. PFEFFER, JR.
/s/STANLEY D. STEARNS, JR. Director March 1, 2000
STANLEY D. STEARNS, JR.
/s/WALTER LANE WARD, JR. Director March 1, 2000
WALTER LANE WARD, JR.
/s/MICHAEL T. WILLIS Director March 1, 2000
MICHAEL T. WILLIS
</TABLE>
34
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements
Report of Independent
Accountants.................... F-2
Consolidated Balance Sheet as of
December 31, 1999 and 1998..... F-3
Consolidated Statement of Income
for the Years Ended December
31, 1999, 1998 and 1997........ F-4
Consolidated Statement of
Changes in Shareholders' Equity
for the Years Ended
December 31, 1999, 1998 and
1997........................... F-5
Consolidated Statement of Cash
Flows for the Years Ended
December 31, 1999, 1998 and
1997........................... F-6
Notes to Consolidated Financial
Statements..................... F-7
Financial Statement Schedule
Report of Independent
Accountants on Financial
Statement Schedule............. F-26
Schedule I -- Parent Company
Condensed Financial
Statements..................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Southwest Bancorporation of Texas, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity, and of
cash flows present fairly, in all material respects, the consolidated financial
position of Southwest Bancorporation of Texas, Inc. and Subsidiaries (the
"Company") at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
February 11, 2000
F-2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks.............. $ 148,710 $ 129,922
Federal funds sold and other cash
equivalents........................ 20,517 57,571
------------ ------------
Total cash and cash
equivalents............. 169,227 187,493
Securities -- available for sale..... 652,539 651,623
Securities -- held to maturity....... -- 67,117
Loans held for sale.................. 77,047 15,310
Loans held for investment, net....... 1,817,094 1,498,709
Premises and equipment, net.......... 31,912 30,944
Accrued interest receivable.......... 17,546 15,459
Other assets......................... 86,831 55,736
------------ ------------
Total assets............... $ 2,852,196 $ 2,522,391
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Deposits:
Demand -- noninterest-bearing... $ 605,997 $ 561,420
Demand -- interest-bearing...... 30,483 94,683
Money market accounts........... 906,762 735,000
Savings......................... 35,904 35,915
Time, $100 and over............. 336,974 337,365
Other time...................... 256,634 235,079
------------ ------------
Total deposits............. 2,172,754 1,999,462
Securities sold under repurchase
agreements......................... 216,838 181,696
Other borrowings..................... 248,346 142,750
Accrued interest payable............. 3,034 1,499
Other liabilities.................... 16,227 16,926
------------ ------------
Total liabilities.......... 2,657,199 2,342,333
------------ ------------
Minority interest in consolidated
subsidiary......................... -- 2,722
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value,
50,000,000 shares authorized;
28,018,783 issued and
outstanding at December 31,
1999 and
27,649,710 issued and 27,394,005 outstanding at December
31, 1998.. 28,019 27,650
Additional paid-in capital...... 63,182 58,549
Retained earnings............... 115,417 88,844
Accumulated other comprehensive
income (loss).................. (11,621) 3,749
Treasury stock, at
cost -- 255,705 shares......... -- (1,456)
------------ ------------
Total shareholders'
equity.................. 194,997 177,336
------------ ------------
Total liabilities and
shareholders' equity.... $ 2,852,196 $ 2,522,391
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans........................... $ 140,598 $ 116,586 $ 92,307
Securities...................... 43,865 38,302 31,709
Federal funds sold and other.... 1,760 6,859 6,879
---------- ---------- ----------
Total interest income...... 186,223 161,747 130,895
Interest expense on deposits and
other borrowings................... 79,241 70,973 58,055
---------- ---------- ----------
Net interest income........ 106,982 90,774 72,840
Provision for loan losses............ 6,060 4,053 3,982
---------- ---------- ----------
Net interest income after
provision for loan
losses.................. 100,922 86,721 68,858
---------- ---------- ----------
Other income:
Service charges on deposit
accounts...................... 10,515 8,552 6,843
Investment services............. 4,232 3,537 2,536
Other fee income................ 6,443 5,206 3,153
Other operating income.......... 5,960 4,724 3,739
Gain (loss) on sale of
securities, net............... (139) 463 498
---------- ---------- ----------
Total other income......... 27,011 22,482 16,769
---------- ---------- ----------
Other expenses:
Salaries and employee
benefits...................... 48,884 42,828 32,170
Occupancy expense............... 12,870 10,606 8,351
Merger-related expenses and
other charges................. 4,474 67 2,011
Other operating expenses........ 19,608 17,327 13,732
---------- ---------- ----------
Total other expenses....... 85,836 70,828 56,264
---------- ---------- ----------
Income before income taxes
and minority interest... 42,097 38,375 29,363
Provision for income taxes........... 15,266 13,541 10,167
---------- ---------- ----------
Income before minority
interest................ 26,831 24,834 19,196
Minority interest............... (19) 373 373
---------- ---------- ----------
Net income before bank
preferred stock
dividend................ 26,850 24,461 18,823
Bank preferred stock dividend........ -- -- 36
---------- ---------- ----------
Net income available for
common shareholders..... $ 26,850 $ 24,461 $ 18,787
========== ========== ==========
Earnings per common share:
Basic...................... $ 0.97 $ 0.95 $ 0.77
========== ========== ==========
Diluted.................... $ 0.93 $ 0.88 $ 0.71
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS INCOME/(LOSS) STOCK EQUITY
---------- ------- ---------- -------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........... 21,191,837 $21,447 $ 24,816 $ 47,130 $ (94) $ (1,456) $ 91,843
Issuance of common stock to
benefit plan................... 5,040 5 30 35
Issuance of common stock to the
recognition and retention
plan........................... 7,540 8 (8)
Exercise of stock options........ 929,301 929 2,134 3,063
Proceeds of public offering...... 2,645,000 2,645 17,165 19,810
Conversion of subordinated
debentures..................... 90,602 91 549 640
Deferred compensation
amortization................... 218 218
Stock compensation............... 450 450
Cash dividends on preferred stock
($.05 per share)............... (36) (36)
Cash dividends paid by Fort
Bend........................... (476) (476)
Comprehensive income:............
Net income for the year ended
December 31, 1997............ 18,823 18,823
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of ($1,007)... 1,869 1,869
-------------
Total comprehensive income..... 20,692
---------- ------- ---------- -------- -------------- -------- -------------
BALANCE, DECEMBER 31, 1997........... 24,869,320 25,125 45,354 65,441 1,775 (1,456) 136,239
Common stock issued in
acquisition.................... 280,000 280 304 584
Issuance of common stock to the
recognition and retention
plan........................... 4,707 5 (5)
Exercise of stock options........ 713,457 713 3,061 3,774
Conversion of subordinated
debentures..................... 1,606,631 1,607 9,736 11,343
Deferred compensation
amortization................... 187 187
Stock compensation............... 358 358
Cash dividends paid by Fort
Bend........................... (723) (723)
Comprehensive income:
Net income for the year ended
December 31, 1998............ 24,461 24,461
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of ($1,063)... 1,974 1,974
-------------
Total comprehensive income..... 26,435
-------------
Adjustment to conform reporting
periods...................... (80,110) (80) (446) (335) (861)
---------- ------- ---------- -------- -------------- -------- -------------
BALANCE, DECEMBER 31, 1998........... 27,394,005 27,650 58,549 88,844 3,749 (1,456) 177,336
Issuance of common stock to
401(k) plan.................... 4,431 4 73 77
Exercise of stock options........ 313,024 313 2,150 2,463
Purchase of minority interest in
Mitchell Mortgage.............. 307,323 307 3,303 3,610
Deferred compensation
amortization................... 108 108
Cancellation of treasury stock... (255) (1,201) 1,456
Cash dividends paid by Fort
Bend........................... (277) (277)
Stock compensation............... 200 200
Comprehensive income:
Net income for the year ended
December 31, 1999............ 26,850 26,850
Net change in unrealized
depreciation on securities
available for sale, net of
deferred taxes of $8,277..... (15,370) (15,370)
-------------
Total comprehensive income..... 11,480
---------- ------- ---------- -------- -------------- -------- -------------
BALANCE, DECEMBER 31, 1999........... 28,018,783 $28,019 $63,182 $115,417 $ (11,621) $ -- $ 194,997
========== ======= ========== ======== ============== ======== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 26,850 $ 24,461 $ 18,823
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses........ 6,060 4,053 3,982
Depreciation..................... 6,833 5,386 4,289
Realized loss (gain) on
securities available for sale,
net............................. 139 (463) (498)
Amortization..................... 3,145 3,399 2,888
Minority interest in net (loss)
income of consolidated
subsidiary...................... (19) 373 373
Gain on sale of loans, net....... (570) (1,329) (870)
Dividends on Federal Home Loan
Bank stock...................... (617) (936) (2,949)
Origination of loans held for
sale and mortgage servicing
rights.......................... (91,303) (120,526) (82,249)
Proceeds from sales of loans..... 74,935 115,725 71,991
Increase in accrued interest
receivable and other assets..... (19,166) (14,597) (4,571)
Increase in accrued interest
payable and other liabilities... 1,804 2,568 4,824
Other, net....................... 1,439 (1,933) 1,696
Adjustment to conform reporting
periods......................... -- 2,650 --
---------- ---------- ----------
Net cash provided by
operating activities...... 9,530 18,831 17,729
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from maturity of
securities available for sale.... 60,672 284,996 42,080
Proceeds from maturity of
securities held to maturity...... -- 4,000 4,000
Principal paydowns of
mortgage-backed securities
available for sale............... 114,424 111,986 47,378
Principal paydowns of
mortgage-backed securities held
to maturity...................... -- 25,939 14,223
Proceeds from sale of securities
available for sale............... 239,995 123,185 93,109
Purchase of securities available
for sale......................... (373,360) (608,737) (388,025)
Purchase of securities held to
maturity......................... -- -- (1,992)
Net increase in loans receivable... (371,714) (381,183) (277,169)
Purchase of bank-owned life
insurance policies............... (5,000) (20,000) --
Purchase of premises and
equipment........................ (9,694) (10,163) (9,499)
Other, net......................... 2,034 197 (54)
Adjustment to conform reporting
periods.......................... -- 9,654 --
---------- ---------- ----------
Net cash used in investing
activities................ (342,643) (460,126) (475,949)
---------- ---------- ----------
Cash flows from financing activities:
Net increase in noninterest-bearing
demand deposits.................. 44,577 55,315 129,070
Net increase in time deposits...... 21,164 35,634 146,064
Net increase in other
interest-bearing deposits........ 107,551 140,446 214,533
Net increase in securities sold
under repurchase agreements...... 35,142 25,864 19,713
Net increase in other borrowings... 105,596 121,587 7,164
Net proceeds from public offering
of common stock.................. -- -- 19,810
Net proceeds from exercise of stock
options.......................... 1,146 1,734 821
Retirement of Bank preferred
stock............................ -- -- (7,500)
Payment of dividends on Bank
preferred stock.................. -- -- (152)
Other, net......................... (329) (2,497) (933)
Adjustment to conform reporting
periods.......................... -- (13,318) --
---------- ---------- ----------
Net cash provided by
financing activities...... 314,847 364,765 528,590
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents................... (18,266) (76,530) 70,370
Cash and cash equivalents at
beginning of period................ 187,493 264,023 193,653
---------- ---------- ----------
Cash and cash equivalents at end of
period............................. $ 169,227 $ 187,493 $ 264,023
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND 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 direct and indirect
wholly-owned subsidiaries, Southwest Holding Delaware Inc. (the "Delaware
Company"), Southwest Bank of Texas, National Association (the "Bank"), and
Mitchell Mortgage Company, LLC ("Mitchell"). All material intercompany
accounts and transactions have been eliminated.
Substantially all of the Company's revenue and income is derived from the
operations 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.
In connection with the Company's merger with Fort Bend Holding Corp.
("Fort Bend") (as more fully discussed in note 2) the historical financial
data has been restated to include the accounts and operations of Fort Bend for
all periods presented. This restatement was accomplished by combining Fort
Bend's March 31, 1998 fiscal year financial information with the Company's
December 31, 1997 calendar year financial information. In 1998, Fort Bend's
fiscal year was conformed to the Company's calendar year. As a result of
conforming fiscal periods, the Company's consolidated statement of income for
the fourth quarter of 1997 and the first quarter of 1998 include Fort Bend's net
income for the three months ended March 31, 1998 of $504. An adjustment to
shareholders' equity removes the effect of including Fort Bend's financial
results in both periods.
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 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 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
$6,090 and $7,985 for the years ended December 31, 1999 and 1998, 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 amortization of
premiums, both computed by the interest method.
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 separate component of other comprehensive income until realized.
The amortized cost of securities
F-7
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 consolidated
statement of income as they occur. The Company held no trading securities at
December 31, 1999 and 1998.
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 held for investment are reported at the principal amount outstanding,
net of unearned discounts, 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. 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 the provision for loan losses.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
Loans held for sale are carried at the lower of cost or market, which is
computed by the aggregate method (unrealized losses are offset by unrealized
gains). The carrying amount of loans held for sale in the near-term is adjusted
by gains and losses generated from corresponding hedging transactions entered
into to protect loss of value from increases in interest rates. Hedge positions
are also used to protect the pipeline of loan applications in process from
increases in interest rates. Gains and losses resulting from changes in the
market value of the inventory and open hedge positions are netted.
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
F-8
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 is based on evaluations of the collectibility and
prior loss experience of loans. In making its evaluation, management considers
growth in the loan portfolio, 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.
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 stated at cost less accumulated depreciation and
amortization. Depreciation expense is computed using the straight-line method
and is charged to operating expense over the estimated useful lives of the
assets. Depreciation expense has been computed principally using estimated lives
of twenty years for premises, three to five years for hardware and software, and
five to ten years for furniture and equipment. Leasehold improvements are
amortized using the straight-line method over the shorter of the initial term of
the respective lease or the estimated useful life of the improvement. Costs of
major additions and improvements are capitalized. Expenditures for maintenance
and repairs are charged to operations as incurred. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in income for the
period.
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.
MORTGAGE SERVICING
Mortgage servicing rights represent the right to receive future mortgage
servicing fees. The Company recognizes as separate assets the right to service
mortgage loans for others, whether the servicing rights are acquired through a
separate purchase or through loan origination by allocating total costs incurred
between the loan and the servicing rights retained based on their relative fair
values. Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income. The Company periodically evaluates
the carrying value of the mortgage servicing rights in relation to the present
value of the estimated future net servicing revenue based on management's best
estimate of remaining loan lives.
Mortgage servicing rights are reported as a component of other assets in
the accompanying consolidated balance sheet. Fair values are based on quoted
market prices in active markets for loans and loan servicing rights. For
purchased mortgage servicing rights, the cost of acquiring loan servicing
contracts is
F-9
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized to the extent such costs do not exceed the amount by which the
present value of estimated future servicing revenue exceeds the present value of
expected future servicing costs.
Mortgage loans serviced for others are not included in the consolidated
balance sheet. The unpaid principal balance of mortgage loans serviced for
others was approximately $844,000 and $884,000 at December 31, 1999 and 1998,
respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $21,000 and
$9,000 at December 31, 1999 and 1998, respectively.
EARNINGS PER COMMON SHARE
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, adjusted for any changes in
income that would result from the assumed conversion of all potential dilutive
common shares, by the sum of the weighted average number of common shares
outstanding and the effect of all potential dilutive common shares outstanding
for the period.
INCOME TAX
Deferred income taxes are provided utilizing the liability method whereby
deferred income tax assets or liabilities 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.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments to sell mortgage loans, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, 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, 2000. The Company is evaluating the effect of this pronouncement
on the Company's consolidated financial position, results of operations and cash
flows.
2. MERGERS:
On April 1, 1999, the Company consummated its merger with Fort Bend Holding
Corp. ("Fort Bend"). Fort Bend was the parent company of Fort Bend Federal
Savings and Loan Association of
F-10
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rosenberg (which also was merged into the Bank on April 1, 1999) and the
majority owner of Mitchell. 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, resulting in the issuance of approximately 4.6
million shares of Company Common Stock on a fully diluted basis. At March 31,
1999, Fort Bend had total assets of approximately $316,000 and total deposits of
approximately $269,000. The transaction has been accounted for as a pooling of
interests; therefore the Company's consolidated financial statements have been
restated to include the accounts and operations of Fort Bend for all periods
presented.
Separate interest income and net income amounts of the merged entities are
presented in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Periods prior to consummation:
Southwest Bancorporation... $ 37,612 $ 139,144 $ 108,932
Fort Bend.................. 5,454 22,603 21,963
Periods subsequent to
consummation.................. 143,157 -- --
---------- ---------- ----------
Total interest
income............. $ 186,223 $ 161,747 $ 130,895
========== ========== ==========
Net income:
Periods prior to consummation:
Southwest Bancorporation... $ 6,305 $ 22,470 $ 16,769
Fort Bend.................. 410 1,991 2,018
Periods subsequent to
consummation.................. 20,135 -- --
---------- ---------- ----------
Total net income...... $ 26,850 $ 24,461 $ 18,787
========== ========== ==========
</TABLE>
Through the merger with Fort Bend, the Company acquired Fort Bend's 51
percent ownership interest in Mitchell, a full-service mortgage banking
affiliate of The Woodlands Operating Company, L.P. ("Woodlands"). Following
the merger, Woodlands had the right to convert its 49% ownership interest in
Mitchell into shares of Company Common Stock at an exchange rate of 119.3408
shares for each $1,000 of its ownership interest in Mitchell. Prior to the
merger, Woodlands had the right to convert its ownership interest into Fort Bend
common stock. On June 17, 1999, Woodlands exercised its conversion right,
resulting in the issuance of 307,323 shares of Company Common Stock to Woodlands
in exchange for Woodlands' 49% ownership interest in Mitchell and Mitchell
becoming a wholly-owned subsidiary of the Bank effective as of June 30, 1999.
The acquisition of additional ownership interest in Mitchell has been accounted
for as a purchase.
3. SECURITIES:
The amortized cost and fair value of securities classified as available for
sale and held to maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAINS LOSSES VALUE
--------- ------ -------- ----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government securities......... $ 78,527 $ 35 $ (1,567) $ 76,995
Mortgage-backed securities......... 560,471 356 (16,852) 543,975
Federal Reserve Bank stock......... 2,408 -- -- 2,408
Federal Home Loan Bank stock....... 14,886 -- -- 14,886
Other securities................... 14,253 22 -- 14,275
--------- ------ -------- ----------
Total securities available for
sale.......................... $ 670,545 $ 413 $(18,419) $ 652,539
========= ====== ======== ==========
</TABLE>
F-11
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
--------- ------ ------ ----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government securities......... $ 143,570 $1,575 $ -- $ 145,145
Mortgage-backed securities......... 488,851 4,549 (452) 492,948
Federal Reserve Bank stock......... 1,869 -- -- 1,869
Federal Home Loan Bank stock....... 7,672 -- -- 7,672
Other securities................... 3,894 107 (12) 3,989
--------- ------ ------ ----------
Total securities available for
sale.......................... $ 645,856 $6,231 $ (464) $ 651,623
========= ====== ====== ==========
Held to maturity:
U.S. Government securities......... $ 6,248 $ 14 $ (186) $ 6,076
Mortgage-backed securities......... 60,869 689 (259) 61,299
--------- ------ ------ ----------
Total securities held to
maturity...................... $ 67,117 $ 703 $ (445) $ 67,375
========= ====== ====== ==========
</TABLE>
The scheduled maturities of securities classified as available for sale and
held to maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available for sale:
Due in one year or less............ $ 4,002 $ 4,006 $ 49,061 $ 49,335
Due from one year to five years.... 59,525 58,520 64,509 65,650
Due after 5 years.................. 15,000 14,469 30,000 30,160
---------- ---------- ---------- ----------
78,527 76,995 143,570 145,145
Mortgage-backed securities......... 560,471 543,975 488,851 492,948
Federal Reserve Bank stock......... 2,408 2,408 1,869 1,869
Federal Home Loan Bank stock....... 14,886 14,886 7,672 7,672
Other securities................... 14,253 14,275 3,894 3,989
---------- ---------- ---------- ----------
Total securities available for
sale.......................... $ 670,545 $ 652,539 $ 645,856 $ 651,623
========== ========== ========== ==========
Held to maturity:
Due in one year or less............ $ -- $ -- $ 3,249 $ 3,246
Due from one year to five years.... -- -- 2,999 2,830
Due after five years............... -- -- -- --
---------- ---------- ---------- ----------
-- -- 6,248 6,076
Mortgage-backed securities......... -- -- 60,869 61,299
---------- ---------- ---------- ----------
Total securities available for
sale.......................... $ -- $ -- $ 67,117 $ 67,375
========== ========== ========== ==========
</TABLE>
Securities with a carrying value of $507,200 and $508,810 at December 31,
1999 and 1998, respectively, have been pledged to collateralize repurchase
agreements, public deposits, Federal Home Loan Bank borrowings and other items.
In connection with the Fort Bend merger, the Company transferred all of
Fort Bend's held-to-maturity debt securities to the available for sale category.
The amortized cost of these securities at the time of transfer was $57,800 and
the unrealized gain was $80 ($52 net of income taxes). The Company does not
intend to sell these securities in the near term.
F-12
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gross gains of $281, $526 and $535 and gross losses of $420, $63 and $37
were recognized on sales of investment securities for the years ended December
31, 1999, 1998 and 1997, respectively.
4. LOANS:
A summary of loans outstanding follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Commercial and industrial............ $ 721,996 $ 639,630
Real estate:
Construction and land
development................... 496,439 297,895
1-4 family residential.......... 268,411 253,130
Other........................... 219,463 196,750
Consumer............................. 133,353 130,266
Less:
Unearned income and fees, net of
related costs................. (2,852) (3,982)
Allowance for loan losses....... (19,716) (14,980)
------------ ------------
Loans held for investment, net....... 1,817,094 1,498,709
Loans held for sale.................. 77,047 15,310
------------ ------------
Total loans, net........... $ 1,894,141 $ 1,514,019
============ ============
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year........... $ 14,980 $ 11,927 $ 9,101
Provision charged against
operations......................... 6,060 4,053 3,982
Charge-offs.......................... (1,536) (1,151) (1,283)
Recoveries........................... 212 133 127
Adjustment to conform reporting
periods............................ -- 18 --
--------- --------- ---------
Balance, end of year................. $ 19,716 $ 14,980 $ 11,927
========= ========= =========
</TABLE>
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 $13,700
and $14,000 at December 31, 1999 and 1998 respectively. The largest component of
impaired loans is a commercial energy related loan of approximately $10,840 and
$10,600, at December 31, 1999 and 1998 respectively. The average recorded
investment in impaired loans during 1999 and 1998 was $13,900 and $6,300,
respectively. The total required allowance for loan losses related to these
loans was $0 at December 31, 1999 and 1998. Interest income on impaired loans of
$1,500 and $415 was recognized for cash payments received in 1999 and 1998,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
F-13
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of business. At December 31,
1999, the aggregate amount of loans and unfunded lines of credit to such related
parties was $51,755. Following is an analysis of activity with respect to these
amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Balance, beginning of year........... $ 66,809
New loans and unfunded lines of
credit............................... 10,305
Repayments........................... (25,359)
------------
Balance, end of year................. $ 51,755
============
</TABLE>
5. PREMISES AND EQUIPMENT:
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Land.................................... $ 7,024 $ 6,749
Premises and leasehold improvements..... 16,801 15,755
Furniture and equipment................. 32,516 27,991
--------- ---------
56,341 50,495
Less accumulated depreciation and
amortization............................ (24,429) (19,551)
--------- ---------
$ 31,912 $ 30,944
========= =========
</TABLE>
6. OTHER ASSETS:
Other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Foreclosed real estate.................. $ 1,337 $ 500
Deferred income taxes................... 12,323 2,376
Goodwill................................ 2,471 2,696
Banker's acceptances.................... 4,152 1,936
Investment in unconsolidated investee... 5,374 3,500
Cash value of bank-owned life
insurance............................. 26,769 20,390
Factored receivables.................... 18,542 8,948
Mortgage servicing rights............... 6,681 7,044
Other................................... 9,182 8,346
--------- ---------
$ 86,831 $ 55,736
========= =========
</TABLE>
F-14
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEPOSITS:
At December 31, 1999, scheduled maturities of time deposits are summarized
as follows:
<TABLE>
<S> <C>
2000.................................... $ 499,772
2001.................................... 60,705
2002.................................... 16,171
2003.................................... 5,828
2004.................................... 9,757
Thereafter.............................. 1,375
----------
$ 593,608
==========
</TABLE>
At December 31, 1999 and 1998, the aggregate amount of deposits from
related parties was $37,855 and $49,798, respectively.
8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER BORROWINGS:
Securities sold under repurchase agreements and other 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>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Securities sold under repurchase
agreements:
<S> <C> <C>
Average......................... $184,815 $182,254
Year-end........................ 216,838 181,696
Maximum month-end balance during
year.......................... 216,838 240,670
Interest rate:
Average......................... 4.06% 4.77%
Year-end........................ 4.03% 5.16%
Other borrowings:
Average......................... $189,929 $ 26,034
Year-end........................ 248,346 138,347
Maximum month-end balance during
year.......................... 265,440 138,347
Interest rate:
Average......................... 5.33% 5.65%
Year-end........................ 5.23% 5.60%
</TABLE>
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.
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 were approximately $237,200 and $34,323 at
December 31, 1999 and 1998, respectively. 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, 1999 was
approximately $85,000.
F-15
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES:
The income tax provision (benefit) for the years ended December 31, 1999,
1998 and 1997 is composed of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current.............................. $ 16,326 $ 16,041 $ 10,041
Deferred............................. (1,060) (2,500) 126
--------- --------- ---------
$ 15,266 $ 13,541 $ 10,167
========= ========= =========
</TABLE>
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, 1999 DECEMBER 31, 1998
----------------------- -----------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCES EFFECT DIFFERENCES EFFECT
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Future deductible differences:
Unrealized loss on securities
available for sale................. $ 15,545 $ 5,441 $ -- $ --
Allowance for loan losses............ 19,175 6,711 14,194 4,953
Mortgage servicing rights............ 1,455 509 -- --
Other................................ 1,321 462 1,197 415
------------ ------- ------------ -------
Deferred income tax asset....... $ 37,496 13,123 $ 15,391 5,368
============ ============
------- -------
Future taxable differences:
Unrealized gain on securities
available for sale................. $ -- -- $ 5,767 2,019
Market discount on securities........ 577 202 360 126
Federal Home Loan Bank stock
dividend........................... 1,708 598 1,493 520
Mortgage servicing rights............ -- -- 686 233
Other................................ -- -- 285 94
------------ ------- ------------ -------
Deferred income tax liability... $ 2,285 800 $ 8,591 2,992
============ ============
------- -------
Net deferred income tax asset........ $12,323 $ 2,376
======= =======
</TABLE>
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate....... 35.0% 35.0% 35.0%
Permanent differences................... 0.1 0.6 1.6
Other................................... 1.1 -- (1.5)
---- ---- ----
Effective income tax rate............... 36.2% 35.6% 35.1%
==== ==== ====
</TABLE>
10. 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.
F-16
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies the intrinsic value method 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 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 1996 Stock Option Plan, the Company is authorized to issue up to
2,000,000 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 353,893, 640,552 and 344,777 stock options in 1999,
1998 and 1997, respectively. These stock options were granted with an exercise
price, as determined in each individual grant agreement. The majority of the
options granted 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) with the remaining
options vesting over a period not to exceed five years.
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 $108, $172 and $218 of compensation expense in connection with these
grants in 1999, 1998 and 1997, respectively.
F-17
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1999, 1998, and 1997 and the change during the years is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
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............................... 2,903,907 $ 7.08 3,007,141 $ 4.89 3,633,113 $ 3.43
Granted at a discount........... -- n/a 19,715 $ 5.05 30,000 $ 5.94
Granted at-the-money............ 353,893 $14.35 620,837 $ 8.16 314,777 $ 9.73
Granted at a premium............ -- n/a -- n/a -- n/a
---------- -------- ---------- -------- ---------- --------
Total granted........................ 353,893 $14.35 640,552 $ 8.06 344,777 $ 9.43
Exercised............................ (313,024) $ 3.32 (713,457) $ 1.26 (929,301) $ 1.12
Forfeited............................ (121,605) 12.71 (34,595) $ 6.10 (41,448) $ 2.43
Expired.............................. -- n/a -- n/a -- n/a
Adjustment to conform reporting
periods............................ -- n/a 4,266 $ 5.86 -- n/a
---------- -------- ---------- -------- ---------- --------
Outstanding at end of year........... 2,823,171 $ 8.97 2,903,907 $ 7.08 3,007,141 $ 4.89
========== ========== ==========
Exercisable at end of year........... 1,425,698 $ 6.06 986,807 $ 6.32 1,071,602 $ 3.09
========== ========== ==========
</TABLE>
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 1999, 1998 and 1997: dividend yield
of 0.00%: risk-free interest rates are different for each grant and range from
5.18% to 6.48%; the expected lives of options range from 5 to 6 years; and a
volatility of 28.59%, 26.77% and 25.36% respectively. The weighted average fair
value of options granted during the year is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted-average fair value of
options granted at a discount...... n/a $ 4.71 $ 7.06
Weighted-average fair value of
options granted at-the-money....... $ 5.08 $ 2.96 $ 3.24
Weighted-average fair value of
options granted at a premium....... n/a n/a n/a
Weighted-average fair value of all
options granted during the year.... $ 5.08 $ 3.43 $ 3.57
</TABLE>
F-18
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<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> <C>
$.20 to $5.20........................ 923,511 * $3.05 786,011 $3.02
$5.35 to $11.16...................... 1,000,398 6.64 8.54 540,203 8.53
$11.72 to $15.35..................... 231,070 9.29 12.74 484 11.72
$15.38 to $20.19..................... 668,192 9.60 16.51 99,000 16.69
----------- =========== -------- ----------- --------
$.20 to $20.19....................... 2,823,171 * $8.97 1,425,698 $6.06
=========== ===========
</TABLE>
- ------------
* All options, with an exercise price between $.20 to $5.20, are exercisable
while the employee remains an employee at the Company and cease to be
exercisable three months after termination of employment.
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income available for common
shareholders
As reported..................... $ 26,850 $ 24,461 $ 18,787
Pro forma....................... $ 25,582 $ 23,320 $ 17,943
Basic earnings per common share......
As reported..................... $ 0.97 $ 0.95 $ 0.77
Pro forma....................... $ 0.92 $ 0.91 $ 0.68
Diluted earnings per common share
As reported..................... $ 0.93 $ 0.88 $ 0.71
Pro forma....................... $ 0.89 $ 0.84 $ 0.68
</TABLE>
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.
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 100% of the employee
contributions not to exceed 5.0% of the employee's annual compensation. Total
plan expense charged to the Company's operations for the years ended December
31, 1999, 1998 and 1997 was $1,374, $972 and $385, respectively.
The 401-K Plan allows for the Company to contribute up to 500,000 shares of
common stock of the Company (valued at the approximate fair market value on the
date of contribution) instead of cash. A total of 4,431, 0, and 5,040 shares at
prices ranging from $16.58, $0, and $7.00 were issued to the 401-K Plan during
the years ended December 31, 1999, 1998 and 1997, respectively.
F-19
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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 the option of the Bank at the
redemption price if a change of control occurs prior to December 31, 1997. 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.
12. EARNINGS PER COMMON SHARE:
Earnings per common share is computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income available for common
shareholders....................... $ 26,850 $ 24,461 $ 18,787
Interest on 8% convertible
debentures, net of tax............. -- 516 683
Minority interest in net income of
Mitchell, net of tax............... -- 246 (a)
--------- --------- ---------
Net income, adjusted................. $ 26,850 $ 25,223 $ 19,470
========= ========= =========
Divided by average common shares and
common share equivalents:
Average common shares........... 27,744 25,795 24,333
Average common shares issuable
under the stock option plan... 1,200 1,300 1,474
Average common shares issuable
with the conversion of the 8%
convertible debentures........ -- 1,351 1,606
Average common shares issuable
with the conversion of the
minority interest of
Mitchell...................... -- 296 (a)
--------- --------- ---------
Total average common shares and
common share equivalents........... 28,944 28,742 27,413
========= ========= =========
Basic earnings per common share...... $ 0.97 $ 0.95 $ 0.77
========= ========= =========
Diluted earnings per common share.... $ 0.93 $ 0.88 $ 0.71
========= ========= =========
</TABLE>
- ------------
(a) The assumed conversion of the minority ownership interest in Mitchell into
shares of common stock has an antidilutive effect on earnings per share for
the year ended December 31, 1997. Thus, it is excluded from the calculation
of diluted earnings per share.
F-20
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. 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, 1999, the Company has certain noncancelable operating
leases which cover the Company's premises with approximate future minimum annual
rental payments as follows:
2000................................. $ 3,883
2001................................. 3,372
2002................................. 3,130
2003................................. 2,909
2004................................. 2,844
Thereafter........................... 5,371
-------
$21,509
=======
Rent expense was $3,673, $2,830 and $2,378 for the years ended December 31,
1999, 1998 and 1997, respectively.
14. 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, 1999, the Company's and Bank's Tier 1 capital
consists of their respective shareholders' equity adjusted for minority interest
in equity accounts of consolidated subsidiaries, goodwill, and various other
intangibles and Tier 2 consists of the allowance for loan losses subject to
certain limitations. The guidelines require total capital of 8% of risk-weighted
assets.
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 average 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, 1999, the most recent notification from the regulators
categorized the Bank and the Company as "adequately 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 Bank's capital levels do not allow the Bank to accept brokered deposits
without prior approval from the FDIC. Brokered deposits were $30,056 and $71,578
at December 31, 1999 and 1998, respectively.
F-21
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table compares the Company's and the Bank's leverage and
risk-weighted capital ratios as of December 31, 1999 and 1998 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
---------- --------- ---------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to Risk
Weighted Assets):
The Company..................... $ 223,862 9.54% $ 187,770 8.00 % $ 234,712 10.00%
The Bank ....................... 222,333 9.47% 187,756 8.00 % 234,695 10.00%
Tier I Capital (to Risk
Weighted Assets):
The Company..................... 204,146 8.70% 93,885 4.00 % 187,770 8.00%
The Bank ....................... 202,617 8.63% 93,878 4.00 % 187,757 8.00%
Tier I Capital
(to Average Assets):
The Company..................... 204,146 7.48% 81,916 3.00 % 136,526 5.00%
The Bank ....................... 202,617 7.40% 82,208 3.00 % 137,013 5.00%
As of December 31, 1998
Total Capital (to Risk
Weighted Assets):
The Company..................... 187,378 10.18% 147,261 8.00 % 184,077 10.00%
The Bank ....................... 173,812 9.46% 146,969 8.00 % 183,711 10.00%
Tier I Capital (to Risk
Weighted Assets):
The Company..................... 172,538 9.37% 73,631 4.00 % 147,261 8.00%
The Bank ....................... 158,970 8.65% 73,484 4.00 % 146,969 8.00%
Tier I Capital
(to Average Assets):
The Company..................... 172,538 7.27% 71,236 3.00 % 118,727 5.00%
The Bank ....................... 158,970 6.72% 70,976 3.00 % 118,294 5.00%
</TABLE>
The Company and the Bank are also subject to certain restrictions on the
amount of dividends that they may declare without prior regulatory approval.
15. 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, which are for purposes other than
trading, include loan commitments, letters of credit, commitments to sell
mortgage loans to permanent investors, purchased option contracts and financial
guarantees on GNMA mortgage-backed securities administered. These financial
instruments 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. In order to control the credit risk associated
with entering into commitments, the Company subjects such activity to the same
credit quality and monitoring controls as its lending activities. For
commitments to sell mortgage loans to permanent investors, the contract amounts
do not represent exposure to credit loss. For purchased put options, the
Company's exposure is limited to the option premium paid, not the notional
amount of the option. For GNMA mortgage-backed securities administered, the
contract amount administered exceeds the Company's exposure to credit loss.
F-22
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The approximate amounts of financial instruments with off-balance sheet
risk are as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
CONTRACT CONTRACT
AMOUNT AMOUNT
------------ ------------
Loan commitments including unfunded
lines of credit.................... $997,593 $776,709
Standby letters of credit............ 71,970 63,037
Commercial letters of credit......... 2,357 5,010
Commitments to sell mortgage loans... 1,671 6,056
Option contracts..................... 1,000 3,000
Guarantees on GNMA securities
administered....................... 101,596 111,738
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.
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.
Commitments to sell mortgage loans to permanent investors are contracts in
which the Company agrees to deliver mortgage loans at specific future dates at
specified prices or yields. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
interest rates.
The Company purchases option contracts on FNMA or FHLMC guaranteed
mortgage-backed securities to reduce the Company's exposure to the effects of
fluctuations in interest rates on the Company's lending and secondary marketing
activities. The time value portion of option premiums paid is recorded in other
assets and is amortized to expense over the term of the option. Changes in the
intrinsic value of options are deferred and recognized as the related mortgage
loans are sold.
The Company administers GNMA mortgage-backed securities on which it
guarantees payment of monthly principal and interest to the security holders.
The underlying loans are supported by FHA and VA mortgage insurance and are
collateralized by real estate. In the event of mortgagor default, losses may
arise from principal, interest or other costs which may exceed reimbursement
limitations established by FHA or VA.
The Company originates real estate, commercial, construction 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.
16. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The fair value of financial instruments provided below represents 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
F-23
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 for cash and cash
equivalents approximate their fair values.
SECURITIES: Fair values for investment securities are based on quoted
market prices. The fair value of stock in the Federal Home Loan Bank of Dallas
and the Federal Reserve Bank Stock 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 transactions in the stock are executed at the stated par
value.
LOANS HELD FOR SALE: Fair values of loans held for sale are estimated
based on outstanding commitments from investors or current market prices for
similar loans.
LOANS 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 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.
Fair values for impaired loans are estimated using discounted cash flow analyses
or underlying collateral values, where applicable. The carrying amount of
accrued interest approximates its fair value.
OFF-BALANCE-SHEET INSTRUMENTS: The fair values of the Company's lending
commitments, letters of credit, commitments to sell loans and guarantees 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. The fair value of the Company's option contracts are based on the
estimated amounts the Company would receive from terminating the contracts at
the reporting date.
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.
BORROWINGS: The carrying amounts of federal funds purchased, securities
sold under repurchase agreements, and other borrowings approximate their fair
values.
F-24
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999 DECEMBER 31, 1998
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks......... $ 148,710 $ 148,710 $ 129,922 $ 129,922
Fed funds sold and other cash
equivalents................... 20,517 20,517 57,571 57,571
Securities available for sale... 652,539 652,539 651,623 651,623
Securities held to maturity..... -- -- 67,117 67,375
Loans held for sale............. 77,047 77,047 15,310 15,310
Loans held for investment,
net........................... 1,817,094 1,753,956 1,498,709 1,507,426
Accrued interest receivable..... 17,546 17,546 15,459 15,459
Liabilities
Deposits........................ 2,172,754 2,172,859 1,999,462 2,006,624
Securities sold under repurchase
agreements.................... 216,838 216,838 181,696 181,696
Other borrowings................ 248,346 248,346 142,750 142,750
Accrued interest payable........ 3,034 3,034 1,499 1,499
</TABLE>
The fair value of the Company's off-balance sheet instruments was
immaterial at December 31, 1999 and 1998.
17. SUPPLEMENTAL CASH FLOW INFORMATION:
The supplemental cash flow information for the years ended December 31,
1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash paid for interest............... $ 77,705 $ 71,141 $ 57,961
Cash paid for income taxes........... 16,235 12,450 8,649
Non-cash investing and financing
activities:
Tax benefit related to the
exercise of certain stock
options....................... 967 1,800 1,400
Subordinated debentures
converted to common stock..... -- 10,857 640
Loans transferred to foreclosed
real estate................... 1,326 61 86
Loans to facilitate sale of
foreclosed real estate........ -- -- 240
Issuance of common stock to Fort
Bend Retirement Retention
Plan.......................... -- 58 62
Reduction of debt in prior Fort
Bend Employee Stock Option
Plan.......................... -- 79 189
Issuance of common stock in
exchange for 49% ownership
interest in Mitchell.......... 2,575 -- --
</TABLE>
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
Southwest Bancorporation of Texas, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 11, 2000 of Southwest Bancorporation of Texas, Inc. and
Subsidiaries included on page F-2 of this Form 10-K also included an audit of
the financial statement schedule listed in the index on page F-1 of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Houston, Texas
February 11, 2000
F-26
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
SCHEDULE I -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............ $ 104 $ 12,520
Securities -- available for sale..... 406 --
Investment in subsidiaries........... 194,236 164,007
Other assets......................... 251 935
---------- ----------
Total assets............... $ 194,997 $ 177,462
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Other liablities................ $ -- $ 14
---------- ----------
Total liabilities.......... -- 14
---------- ----------
Shareholders' equity:
Common stock -- $1 par value,
50,000,000 shares authorized;
28,018,783 issued and
outstanding at December 31,
1999 and 27,649,710 issued and
27,394,005 outstanding at
December 31, 1998.............. 28,019 27,650
Additional paid-in capital...... 63,182 58,661
Retained earnings............... 115,417 88,844
Accumulated other comprehensive
income......................... (11,621) 3,749
Treasury stock, at
cost -- 255,705 shares......... -- (1,456)
---------- ----------
Total shareholders'
equity....................... 194,997 177,448
---------- ----------
Total liabilities and
shareholders' equity......... $ 194,997 $ 177,462
========== ==========
</TABLE>
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiaries included herein.
F-27
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
SCHEDULE I -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---------- --------- ---------
Equity in undistributed income of
subsidiaries....................... $ 26,987 $ 25,221 $ 17,761
<S> <C> <C> <C>
Interest income:
Loans........................... -- 76 64
Securities...................... 63 26 26
---------- --------- ---------
Total interest income...... 63 102 90
Interest expense on borrowings....... 120 717 1,035
---------- --------- ---------
Net interest income........ (57) (615) (945)
Other income:
Dividends received from
subsidiaries............ -- -- 2,000
Other operating income..... -- 5 5
---------- --------- ---------
Total other income......... -- 5 2,005
Operating expenses................... 155 552 540
---------- --------- ---------
Income before income
taxes................... 26,775 24,059 18,281
Income tax benefit......... (75) (402) (506)
---------- --------- ---------
Net income........................... 26,850 24,461 18,787
Other comprehensive income, net of
tax:
Net unrealized
(depreciation)
appreciation on
securities available for
sale.................... (15,370) 1,974 1,869
---------- --------- ---------
Comprehensive income....... $ 11,480 $ 26,435 $ 20,656
========== ========= =========
</TABLE>
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiaries included herein.
F-28
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
SCHEDULE I -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................... $ 26,850 $ 24,461 $ 18,787
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed
income of
subsidiaries............ (26,987) (25,221) (17,761)
Decrease in accrued
interest receivable,
prepaid expenses and
other assets............ 684 364 4,014
Decrease in accrued
interest payable and
other liabilities....... (14) (262) (151)
Other, net...................... 57 -- --
Adjustment to conform reporting
periods....................... -- 100 --
---------- ---------- ----------
Net cash provided by
(used in) operating
activities......... 590 (558) 4,889
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from maturity of
securities available for
sale.......................... -- 500 --
Purchase of securities available
for sale...................... (24,567) -- --
Sales of securities available
for sale...................... 24,161 -- --
Investments in subsidiaries..... (39,000) -- (20,000)
Return of capital from
subsidiaries.................. 25,500 -- --
---------- ---------- ----------
Net cash (used in)
provided by
investing
activities......... (13,906) 500 (20,000)
---------- ---------- ----------
Cash flows from financing activities:
Payments of dividends on common
stock by Fort Bend Holding
Corp. ........................ (277) (723) (476)
Net proceeds from issuance of
common stock.................. 1,236 2,370 20,733
Other, net...................... (59) --
Adjustment to conform reporting
periods....................... -- 143 --
---------- ---------- ----------
Net cash provided by
finacing
activities......... 900 1,790 20,257
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents................... (12,416) 1,732 5,146
Cash and cash equivalents at
beginning of period................ 12,520 10,788 5,642
---------- ---------- ----------
Cash and cash equivalents at end of
period............................. $ 104 $ 12,520 $ 10,788
========== ========== ==========
</TABLE>
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiaries included herein.
F-29
EXHIBIT 10.4
SOUTHWEST BANCORPORATION OF TEXAS, INC.
1996 STOCK OPTION PLAN
(AMENDED AND RESTATED AS OF JANUARY 24, 2000)
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 500,000 (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, 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
-1-
<PAGE>
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.
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
-2-
<PAGE>
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 3,000,000 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.
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.
-3-
<PAGE>
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 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
-4-
<PAGE>
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.
(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
-5-
<PAGE>
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.
-6-
EXHIBIT 10.11
SOUTHWEST BANCORPORATION OF TEXAS, INC.
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
October 20, 1998
Mr. Lane Ward
President
Fort Bend Holding Corp.
1011 Millie Street
Rosenberg, Texas 77471-3808
Re: Employment Agreement
Dear Mr. Ward:
On this date, Fort Bend Holding Corp., a Delaware corporation ("FBHC"),
and Southwest Bancorporation of Texas, Inc., a Texas corporation ("Southwest")
have entered into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which FBHC would merge with and into Southwest and Fort Bend Federal
Savings and Loan Association of Rosenberg (the "Association") would merge with
and into Southwest Bank of Texas National Association ("SW Bank") (the
"Mergers"), and the stockholders of FBHC would receive 1.45 shares of Southwest
Common Stock in exchange for each of their shares of FBHC Common Stock.
Upon consummation of the Mergers, SW Bank hereby assumes all liabilities
and obligations of the Association under the Employment Agreement dated as of
June 30, 1993, between the Association and you, as extended on March 19, 1998,
providing for a new term expiration date as of March 31, 2001 (the "Employment
Agreement"). In connection with SW Bank's assumption of the Employment
Agreement, SW Bank agrees to perform the Employment Agreement in the same manner
and to the same extent that the Association would be required to perform it,
except that Southwest, SW Bank and you hereby agree that the Employment
Agreement will be amended to effectuate the following changes:
1. Instead of being employed as President of the Association and FBHC, you
will be elected as a Director and will hold the office of Vice Chairman of the
Board of SW Bank, with responsibility for all mortgage banking and mortgage
servicing operations of SW Bank. You will also be responsible for (i)
coordinating all business development activities in all branch offices of SW
Bank located in Fort Bend County, Wharton County and Montgomery County, and (ii)
assisting line of business managers in the implementation of their strategic
business objectives in those offices. In addition, all loan approval procedures
in those offices will conform to the standard credit underwriting procedures of
SW Bank as they currently exist and as they may be amended from time to time. SW
Bank has reviewed FBHC's credit underwriting procedures and has determined that
no material differences exist between the current credit policies of the two
companies.
-1-
<PAGE>
2. The date of expiration of the Employment Agreement will be extended to
December 31, 2001. Your annual salary will be increased to $150,000 (I.E.,
$12,500 per month), effective as of the consummation of the Mergers, and you
will have the opportunity to earn a bonus for the 1999 calendar year of up to
$60,000, the amount of which bonus shall be determined and paid in accordance
with SW Bank's current incentive plan for its executive officers. SW Bank will
also (i) pay to you a car allowance of $500 per month, and (ii) maintain your
existing country club membership. SW Bank will also permit you to continue your
position as a trustee of the George Foundation. In addition, Management of
Southwest shall recommend to Southwest's Compensation Committee that you be
granted an incentive option to purchase 12,000 shares of Southwest Common Stock
under Southwest's 1996 Stock Option Plan effective as of the date of
consummation of the Mergers at an exercise price per share equal to the fair
market value per share of Southwest Common Stock on such date of grant. The
terms of such option, including vesting, will be consistent with those granted
by the Compensation Committee to other executive officers of SW Bank.
3. At the first Board of Directors Meeting of Southwest following
consummation of the Mergers you will be elected a Director of Southwest.
4. The above changes in your job title, description and responsibilities
shall not be deemed to constitute an "involuntary termination" under the
Employment Agreement.
You hereby agree and acknowledge that the agreement by SW Bank hereunder
regarding assumption of the Association's obligations under the Employment
Agreement fully satisfies the requirements of Section 11 of the Employment
Agreement.
If FBHC and Southwest decide not to proceed with the consummation of the
Mergers, the agreement set forth in this Letter shall become null and void and
no party hereunder shall have any further responsibility or liability to any
other party hereunder with respect to the Employment Agreement.
If the foregoing correctly states our agreements and understanding, please
execute and return a copy of this Letter acknowledging your acceptance and
agreement to the terms hereof.
SOUTHWEST BANCORPORATION OF TEXAS, INC.
By:_________________________________________
Paul B. Murphy, Jr.
President and Chief Operating Officer
SOUTHWEST BANK OF TEXAS
NATIONAL ASSOCIATION
By:_________________________________________
Paul B. Murphy, Jr.
President and Chief Operating Officer
Lane Ward
<PAGE>
[LETTERHEAD]
EMPLOYMENT AGREEMENT AMENDMENT
On March 19, 1998, the Board of Directors approved the extension of this
Employment Agreement for a period of one year giving a new term expiration date
of March 31, 2001, at a pay rate of $11,663.08 monthly.
FORT BEND FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ROSENBERG
By: /s/ WILLIAM A. LITTLE
William A. Little
EMPLOYEE
/s/ LANE WARD
Lane Ward
3/19/98
Date
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 30th day of June, 1993, by and between FORT BEND FEDERAL SAVINGS AND LOAN
ASSOCIATION OF ROSENBERG, a federally chartered savings and loan association
whose address is 1011 Millie Street, Rosenberg, Texas 77471-3808, (which,
together with any successor thereto which executes and delivers the assumption
agreement provided for in Section 11(a) hereof or which otherwise becomes bound
by the terms and provisions of this Agreement by operation of law, is
hereinafter referred to as the "Association"), and LANE WARD whose residence
address is 1117 Lindsey, Rosenberg, Texas (the "Employee").
WHEREAS, the Employee is currently serving as President of the Association
and Fort Bend Holding Corp., (the "Holding Company"); and
WHEREAS, the Association adopted a plan of conversion whereby the
Association converted to capital stock savings and loan association form as the
subsidiary of the Holding Company, which plan was approved by the Association's
members and the Office of Thrift Supervision (the "Conversion"); and
WHEREAS, the Board of Directors of the Association recognizes that, as is
the case with publicly held corporations generally, the possibility of a change
in control of the Holding Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Association, the Holding Company and its stockholders; and
<PAGE>
WHEREAS, the Board of Directors of the Association believes it is in the
best interests of the Association to enter into this Agreement with the Employee
in order to assure continuity of management of the Association and to reinforce
and encourage the continued attention and dedication of the Employee to his
assigned duties without distraction in the face of potentially disruptive
circumstances arising from the possibility of a change in control of the Holding
Company, although no such change is now contemplated; and
WHEREAS, the Board of Directors of the Association has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 4 hereof:
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. EMPLOYMENT. The Employee will be employed as President of the
Association, or in such other more senior capacity as the Board of Directors may
subsequently determine. As President, Employee shall render administrative and
management services as are customarily performed by persons situated in similar
executive capacities, and shall have other powers and duties as may from time to
time be prescribed by the Board, provided that such duties are consistent with
the Employee's position. The Employee shall continue to devote his best efforts
and substantially all his business time and attention to the business and
affairs of the Association and its subsidiaries and affiliated companies.
2
<PAGE>
2. COMPENSATION.
(a) SALARY. The Association agrees to pay the Employee during the term
of this Agreement a salary established by the Board of Directors. The salary
hereunder as of the Commencement Date (as defined in Section 4 hereof) shall be
equal to the Employee's salary as in effect immediately prior to such date. The
salary provided for herein shall be payable in cash not less frequently than
bi-monthly in accordance with the practices of the Association; PROVIDED,
HOWEVER, that no such salary is required to be paid by the terms of this
Agreement in respect of any month or portion thereof subsequent to the
termination of this Agreement, and PROVIDED FURTHER, that the amount of such
salary shall be reviewed by the Association not less often than annually and may
be increased (but not decreased) from time to time in such amounts as the Board
of Directors in its discretion may decide, subject to the customary withholding
tax and other employee taxes as required with respect to compensation paid by a
corporation to an employee.
(b) DISCRETIONARY BONUSES. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Association in discretionary bonuses as authorized and declared by the Board of
Directors of the Association to its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the Employee's
right to participate in such bonuses when and as declared by the Board of
Directors.
(c) EXPENSES. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in
3
<PAGE>
accordance with policies and procedures at least as favorable to the Employee as
those presently applicable to the senior executive officers of the Association)
in performing services hereunder, provided that the Employee properly accounts
therefor in accordance with Association policy.
3. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. The
Employee shall be entitled while employed hereunder to participate equitably in,
and receive benefits under, all plans relating to stock options, stock
purchases, pension, thrift, profit-sharing, group life insurance, medical
coverage, education, cash or stock bonuses, and other retirement or employee
benefits or combinations thereof, that are now or hereafter maintained for the
benefit of the Association's executive employee or for its employees generally.
(b) FRINGE BENEFITS. The Employee shall be eligible while employed
hereunder to participate in, and receive benefits under, any other fringe
benefits which are or may become applicable to the Association's executive
employees or to its employees generally, including a reasonable expense account.
4. TERM. The term of employment under this Agreement shall be a period of
36 months commencing on the date of completion of the Conversion (the
"Commencement Date"), subject to earlier termination as provided herein.
Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of employment under this Agreement shall be
extended, subject to the next sentence of this paragraph, for a period of one
year unless either the Association or the Employee gives contrary
4
<PAGE>
written notice to the other not less than 90 days in advance of the date on
which the term of employment under this Agreement would otherwise be extended.
This Agreement will not be automatically extended unless such extension is
approved by the Board of Directors of the Association following the Board's
review of a formal performance evaluation of the Employee performed by the
disinterested members of the Board of Directors of the Association and reflected
in the minutes of the Board of Directors. Reference herein to the term of
employment under this Agreement shall refer to both such initial term and such
extended terms.
5. VACATIONS. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) During the term of employment under this Agreement, the Employee
shall be entitled to an annual paid vacation of four weeks, or, if more
favorable to Employee, in accordance with the most favorable plans, policies,
programs or practices of the Association and its affiliated companies as in
effect for the Employer at any time during the six month period immediately
preceding the Commencement Date, or as in effect generally at any time
thereafter with respect to other senior executives of the Association and its
affiliated companies;
(b) The timing of vacations shall be scheduled in a reasonable manner
by the Employee;
(c) The Board of Directors shall, solely at the Employee's request, be
entitled to grant to the Employee a leave or leaves of absence with or without
pay at such time or times and
5
<PAGE>
upon such terms and conditions as the Board of Directors, in its discretion, may
determine; and
(d) The Board of Directors shall, in its sole discretion, have the
right to pay the Employee for any unused vacation time, such payment to be
calculated on a pro rata basis, based upon the Employee's then current salary.
6. TERMINATION OF EMPLOYMENT; DEATH.
(a) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Association's Board of Directors, other
than termination for cause, shall not prejudice the Employee's right to
compensation or other benefits under the Agreement. If the employment of the
Employee is involuntarily terminated, other than (i) for "cause" as provided in
this Section 6(a) or (ii) by reason of death or disability as provided in
Sections 6(c) or 7, or if there occurs a voluntary or involuntary termination of
the Employee's employment as defined in Section 8 in connection with or within
12 months after a change in control which occurs at any time during the term of
this Agreement as provided in Section 8, the Employee shall be entitled to
receive, (i) his then applicable salary for the remaining term of the Agreement
as calculated in accordance with Section 4 hereof, payable in such manner and at
the times as such the salary would have been payable to the Employee under
Section 2 had he remained in the employ of the Association, (ii) his then
applicable health insurance benefits for the remaining term of the Agreement as
calculated in accordance with Section 4 hereof, of termination and (iii) his
bonus determined on an annualized basis for the period commencing on the first
day of the fiscal year in which such
6
<PAGE>
termination occurs and ending as of the month and closest to date of termination
in such fiscal year, which bonus shall be payable at such time as it would have
been payable under Section 2(b) had he remained in the employ of the
Association.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent. In addition, a material diminution of or interference with the
Employee's duties, responsibilities and benefits, including, but not limited to,
those events constituting a loss of status as defined in Section 8(a), shall be
deemed and shall constitute an involuntary termination of employment to the same
extend as express notice of such involuntary termination.
In case of termination of the Employee's employment for cause, the
Association shall pay the Employee his salary through the date of termination,
and the Association shall have no further obligation to the Employee under this
Agreement. The Employee shall have no right to receive compensation or other
benefits for any period after termination for cause. For purposes of this
Agreement, termination for "cause" shall include termination because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any material law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have
7
<PAGE>
been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Board of Directors of the Association at a meeting of the Board called and held
for such purpose (after reasonable notice to the Employee and an opportunity for
the Employee, together with the Employee's counsel, to be heard before the
Board), stating that in the good faith opinion of the Board the Employee was
guilty of conduct constituting "cause" as set forth above and specifying the
particulars thereof.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Association or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Association. In the event of such voluntary termination, except
as provided in Section 8 below, the Association shall be obligated to continue
to pay the Employee his salary only through the date of termination together
with any accrued unpaid vacation pay as of said date, at the time such payments
are due, and the Association shall have no further obligation to the Employee
under this Agreement.
(c) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntarily terminate his employment under this Agreement
by written notice to the Association upon the occurrence, or within thirty (30)
days thereafter, of any change in control if the Employee suffers a loss of
status, as defined in Section 8(a) hereof. Upon such termination Employee shall
be entitled to receive his salary, and such group medical insurance coverage or
reimbursement benefits
8
<PAGE>
provided for (and on the same terms as set forth) in Section 3(a) hereof, during
the unexpired portion of the term of this Agreement (i.e., excluding any
automatic extensions of the term hereof that would otherwise occur pursuant to
Section 4 hereof subsequent to such termination), with such salary to be payable
in such manner and at such times as such salary would have been payable to
Employee under Section 4 had he remained in the employ of the Association.
Except as set forth in the preceding sentence, Employee shall have no right to
receive any other payments or benefits under this Agreement for any periods
after the date of such termination.
(d) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Association the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred together with Employee's unused vacation and sick leave, and the
term of employment under this Agreement shall end on such last day of the month.
(e) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Association's affairs by a
notice served under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance
Act ("FDIA"), 12 U.S.C. ss 1818(e)(4); (g)(1), the Association's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the
9
<PAGE>
Employee all or part of the compensation withheld while its obligations under
this Agreement were suspended and (ii) reinstate in whole or in part any of the
obligations which were suspended.
(f) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Association's affairs by an
order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss
1818(e)(4); (g)(1), all obligations of the Association under this Agreement
shall terminate, as of the effective date of the order, but vested rights of the
parties shall not be affected.
(g) If the Association becomes in default (as defined in Section
3(x)(1) of the FDIA, 12 U.S.C. ss 1813(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(h) All obligations under this Agreement shall be terminated, except
to the extent determined that continuation of this Agreement is necessary for
the continued operation of the Association: (i) by the Director of the OTS or
his or her designee at the time the Federal Deposit Insurance Corporation
("FDIC") or the Resolution Trust Corporation ("RTC") enters into an agreement to
provide assistance to or on behalf of the Association under the authority
contained in Section 13(c) of the FDIA, 12 U.S.C. ss 1823(c); or (ii) by the
Director of the OTS or his or her designee at the time the Director of the OTS
or his or her designee approves a supervisory merger to resolve problems related
to operation of the Association or when the Association is determined by the
Director of the OTS to be in an unsafe or unsound condition.
10
<PAGE>
Any rights of the parties that have already vested, however, shall not be
affected by any such action.
(i) In the event the Association purports to terminate the Employee
for cause, but it is determined by a court of competent jurisdiction that cause
did not exist for such termination, or if in any event it is determined by any
such court that the Association has failed to make timely payment of any amounts
owed to the Employee under this Agreement, the Employee shall be entitled to
reimbursement for all reasonable costs, including attorneys' fees, incurred in
challenging such termination or collecting such amounts. Such reimbursement
shall be in addition to all rights to which the Employee is otherwise entitled
under this Agreement.
7. DISABILITY. If during the term of employment hereunder Employee shall
become disabled or incapacitated to the extent that he is unable to perform the
duties of President, he shall be entitled to receive disability benefits of the
type provided for other executive employees of the Association. In such event,
the rights of the Employee to receive the salary stated in Section 2 hereof
shall be suspended after a period of six months until such time as the Employee
is able to resume his duties.
8. CHANGE IN CONTROL.
(a) INVOLUNTARY TERMINATION. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
6(c) through 6(g) or Section 7 of this Agreement) in connection with or within
12 months after a change in control which occurs at any time during the term of
employment under this Agreement, the Association shall pay to the Employee in
11
<PAGE>
a lump sum in cash within 25 business days after the Date of Termination (as
hereinafter defined) of employment an amount equal to 100 percent of the
Employee's then current annual compensation.
An involuntary termination shall include a loss of status in
connection with the change in control. A loss of status shall include, but not
be limited to: (1) a change in the principal workplace of the Employee to a
location outside of Rosenberg, Texas; (2) a material reduction in the
secretarial or other administrative support of the Employee other than as part
of a Association or Holding Company-wide reduction in staff; (3) a reduction or
adverse change in the Employee's title or decision-making responsibilities; (4)
a reduction in the number or seniority of other Association personnel reporting
to the Employee, other than as part of an Association or Holding Company-wide
reorganization or reduction in staff, or a reduction in the frequency with
which, or in the nature of the matters with respect to which, such personnel are
to report to the Employee; (5) an increase in the number of, or a decrease in
the seniority of, the persons (other than the Board of Directors) to whom the
Employee must report, other than is normal and customary for a President, or
such other, more senior, capacity as the Employee may be subsequently employed
by the Association, of a similarly situated financial institution or financial
institution holding company; or an increase in the frequency of, or in the
nature of matters with respect to which, such reports by the Employee shall be
required; (6) a reduction or adverse change in the salary, perquisites,
benefits, contingent benefits or vacation time which had theretofore been
provided to the Employee, other than as part of an
12
<PAGE>
overall program applied uniformly and with equitable effect to all members of
the senior management of the Association or Holding Company; and (7) a material
increase in the required hours of work, or the workload of the Employee.
(b) DEFINITIONS. For purposes of Sections 8, 9 and 11 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Association gives notice to the Employee of the Termination of his
employment with the Association or (ii) the date upon which the Employee ceases
to serve as an Employee of the Association, and "change in control" is defined
solely as any acquisition of control (other than pursuant to the Conversion or
by a trustee or other fiduciary holding securities under an employee benefit
plan of the Holding Company or a subsidiary of the Holding Company), as defined
in 12 C.F.R. ss 574.4, or any successor regulation, of the Association or
Holding Company which would require the filing of an application for acquisition
of control or notice of change in control in a manner as set forth in 12 C.F.R.
ss 574.3, or any successor regulation.
(c) COMPLIANCE WITH CAPITAL REQUIREMENTS. Notwithstanding anything in
this Agreement to the contrary, no payments may be made pursuant to Section 8
hereof without the prior approval of the OTS if following such payment the
Association would not be in compliance with its fully phased-in capital
requirements as defined in OTS regulations.
9. CERTAIN REDUCTION OF PAYMENTS BY THE ASSOCIATION. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Association to or for the benefit of the
Employee (whether paid
13
<PAGE>
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part)
by the Association for Federal income tax purposes because of Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate
present value of amounts payable or distributable to or for the benefit of the
employee pursuant to this Agreement (such amounts payable or distributable
pursuant to this Agreement are hereinafter referred to as "Agreement Payments")
shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount,
not less than zero, expressed in present value which maximizes the aggregate
present value of Agreement Payments without causing any Payment to be
nondeductible by the Association because of Section 280G of the Code. For
purposes of this Section 9, present value shall be determined in accordance with
Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 9 shall
be made by the Association's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Association, provide to both the Association
and the Employee an opinion (and detailed supporting calculations) that the
Association has substantial authority to deduct for federal income tax purposes
the full amount of the Agreement Payments and that the Employee has substantial
authority not to report on his federal income tax return any excise
14
<PAGE>
tax imposed by Section 4999 of the Code with respect to the Agreement Payments.
Any such determination and opinion by the Advisory Firm shall be binding upon
the Association and the Employee. The Employee shall determine which and how
much, if any, of the Agreement Payments shall be eliminated or reduced
consistent with the requirements of this Section 9, provided that, if the
Employee does not make such determination within ten business days of the
receipt of the calculations made by the Advisory Firm, the Association shall
elect which and how much, if any, of the Agreement Payments shall be eliminated
or reduced consistent with the requirements of this Section 9 and shall notify
the Employee promptly of such election. Within five business days of the earlier
of (i) the Association's receipt of the Employee's determination pursuant to the
immediately preceding sentence of this Agreement or (ii) the Association's
election in lieu of such determination, the Association shall pay to or
distribute to or for the benefit of the Employee such amounts as are then due
the Employee under this Agreement. The Association and the Employee shall
cooperate fully with the Advisory Firm, including without limitation providing
to the Advisory Firm all information and materials reasonably requested by it,
in connection with the making of the determinations required under this Section
9.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Association which
should not have been made ("Overpayment") or that additional Agreement Payments
will not have been made by the Association which should have been made
("Underpayment"), in each case, consistent with the calculations required to be
made
15
<PAGE>
hereunder. In the event that the Advisory Firm, based upon the assertion by the
Internal Revenue Service against the Employee of a deficiency which the Advisory
Firm believes has a high probability of success determines that an Overpayment
has been made, any such Overpayment paid or distributed by the Association to or
for the benefit of Employee shall be treated for all purposes as a loan ab
initio which the Employee shall repay to the Association together with interest
at the applicable federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no such loan shall be deemed to have been made and no
amount shall be payable by the Employee to the Association if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Advisory Firm, based upon
controlling preceding or other substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Association to or for the benefit of the Employee together with interest at the
applicable federal rate provided for in Section 7872(F)(2) of the Code.
(d) PAYMENTS NOT TO EXCEED THREE TIMES ANNUALIZED SALARY.
Notwithstanding anything in this Agreement to the contrary, in no event shall
the sum of any payment to the Employee under Section 8 of this Agreement and any
payments of salary and bonus under Section 6 of this Agreement exceed an amount
that is three times the Employee's salary (annualized) as of the date of
termination of employment. For this purpose, the amount of
16
<PAGE>
payments of salary and bonus to be made in the future under Section 6 shall be
determined on a present value basis, and present value shall be determined as
provided for in Section 9 of this Agreement.
10. NO MITIGATION. The amount of any salary or other payment or benefit
provided for in this Agreement shall not be reduced by any compensation earned
by the Employee as the result of employment by another employer, by retirement
benefits after the date of termination, or otherwise.
11. NO ASSIGNMENTS. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Association will require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Association, by an assumption agreement in form and substance satisfactory to
the Employee, to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Association would be required to
perform it if no such succession or assignment had taken place. Failure of the
Association to obtain such an assumption agreement prior to the effectiveness of
any such succession or assignment shall be a breach of this Agreement and shall
entitle the Employee to compensation from the Association in the same amount and
on the same terms as the compensation pursuant to Section 8(a) hereof. For
purposes of implementing the provisions of this Section 11(a), the date on which
any such succession becomes effective shall be deemed the Date of Termination.
17
<PAGE>
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Association shall be directed to the attention of the Board of
Directors of the Association with a copy to the Secretary of the Association),
or to such other address as either party may have furnished to the other in
writing in accordance herewith.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
18
<PAGE>
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Texas.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
FORT BEND FEDERAL SAVINGS AND LOAN
ASSOCIATION OF ROSENBERG
By: /s/ R. W. LINDSEY
EMPLOYEE
/s/ LANE WARD
Lane Ward
19
EXHIBIT 21.1
SUBSIDIARIES OF SOUTHWEST BANCORPORATION OF TEXAS, INC.
JURISDICTION OF
NAME ORGANIZATION
- --------------------------------------------------------------------------------
1. Southwest Holding Delaware, Inc. Delaware
2. Southwest Bank of Texas National Association United States
3. Mitchell Mortgage Company L.L.C.* Texas
4. Southwest/Catalyst Capital, Ltd. Texas
5. Fairview, Inc.* Texas
*Subsidiary of Southwest Bank of Texas National Association
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements of Southwest Bancorporation of Texas, Inc. and Subsidiaries on Form
S-8 (File Nos. 333-21619, 333-27891, 333-33533, 333-55685 and 333-76269) of our
reports, dated February 11, 2000, relating to the consolidated financial
statements and financial statement schedule, which appear in this Form 10-K.
We hereby consent to the incorporation by reference in the registration
statements of Southwest Bancorporation of Texas, Inc. and Subsidiaries on Form
S-3 (File Nos. 333-47995 and 333-80603) of our reports dated February 11, 2000,
relating to the consolidated financial statements and financial statement
schedule, which appear in this Form 10-K. We also consent to the reference to
our firm under the caption "Experts".
PricewaterhouseCoopers LLP
Houston, Texas
March 2, 2000
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 148,710
<INT-BEARING-DEPOSITS> 17,695
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 652,539
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<ALLOWANCE> 19,716
<TOTAL-ASSETS> 2,852,197
<DEPOSITS> 2,172,754
<SHORT-TERM> 460,891
<LIABILITIES-OTHER> 19,262
<LONG-TERM> 4,292
0
0
<COMMON> 28,019
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<SECURITIES-GAINS> (139)
<EXPENSE-OTHER> 58,686
<INCOME-PRETAX> 42,097
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<EXTRAORDINARY> 0
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<NET-INCOME> 26,850
<EPS-BASIC> 0.97
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<LOANS-NON> 2,388
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