<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 1997.
Commission File No. 0-19968
SOUTHWEST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3811042
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4062 SOUTHWEST HIGHWAY
HOMETOWN, ILLINOIS 60456
(Address of principal executive offices) (Zip Code)
(708) 636-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the
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.
(1) Yes X No
---------- ----------
(2) Yes X No
---------- ----------
As of May 5, 1997, the Registrant had 2,640,492 shares of Common Stock
outstanding.
<PAGE> 2
SOUTHWEST BANCSHARES, INC.
Form 10-Q
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of
March 31, 1997 and December 31, 1996 3
Consolidated Income Statement
for the three months ended
March 31, 1997 and March 31, 1996 4
Consolidated Statement of Cash
Flows for the three months ended
March 31, 1997 and March 31, 1996 5
Notes to Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-15
PART II. OTHER INFORMATION 16
Signatures 17
-2-
<PAGE> 3
<TABLE>
<CAPTION>
SOUTHWEST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands)
March 31, December 31,
1997 1996
--------------- --------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS:
Cash and amounts due from depository institutions ............. $ 7,249 6,300
Interest-bearing deposits ..................................... 404 5,380
U.S. Government and agency obligations, available for sale .... 44,169 46,591
Mortgage-backed securities, available for sale ................ 30,195 32,840
Loans receivable, net ......................................... 267,370 262,431
Foreclosed real estate ........................................ 0 117
Stock in Federal Home Loan Bank of Chicago .................... 3,108 3,108
Other investments, available for sale ......................... 805 7,428
Investment in joint ventures .................................. 7,124 7,072
Accrued interest receivable ................................... 2,366 2,274
Office property and equipment, net ............................ 2,991 3,080
Prepaid expenses and other assets ............................. 5,782 5,740
------------- ------------
Total assets .......................................... 371,563 382,361
============= ============
LIABILITIES:
Deposits ...................................................... 278,093 280,434
Borrowed Money ................................................ 47,450 55,158
Advance payments by borrowers for taxes and insurance ......... 1,237 2,335
Other liabilities ............................................. 4,702 4,575
------------- ------------
Total liabilities ..................................... 331,482 342,502
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
1,000,000 shares; none outstanding ............................ 0 0
Common stock, $.01 par value; authorized
5,000,000 shares; issued 4,439,475 shares
and outstanding 2,638,812 shares at March 31, 1997
and 2,637,461 shares at December 31, 1996 ..................... 44 44
Additional paid-in capital .................................... 29,159 29,140
Retained earnings, substantially restricted ................... 40,751 40,257
Unrealized loss on available for sale securities .............. (1,061) (637)
Treasury stock, at cost (1,800,663 shares at March 31, 1997
and 1,800,259 shares at December 31, 1996) .................... (28,191) (28,183)
Common stock acquired by Employee Stock
Ownership Plan ................................................ (560) (640)
Common stock awarded by Management Recognition
Plan .......................................................... (61) (122)
------------- -----------
Total stockholders' equity............................. 40,081 39,859
------------- -----------
Total liabilities and stockholders' equity ............ $ 371,563 382,361
============= ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 4
<TABLE>
<CAPTION>
SOUTHWEST BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENT
(In Thousands)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Interest Income:
Interest on loans ........................................ $ 5,650 5,298
Interest on mortgage-backed securities ................... 535 514
Interest on investment securities ........................ 725 666
Interest on other financial assets ....................... 93 129
Dividends on FHLB stock .................................. 52 52
------------ -------------
Total interest income ............................. 7,055 6,659
------------ -------------
Interest Expense:
Interest on deposits ..................................... 3,198 2,814
Interest on borrowings ................................... 814 826
------------ --------------
Total interest expense ............................ 4,012 3,640
------------ --------------
Net interest income before provision for loan losses.............. 3,043 3,019
Provision for loan losses ........................................ 6 6
------------ --------------
Net interest income after provision for loan losses............... 3,037 3,013
------------ --------------
Non-interest Income:
Fees and service charges ................................. 52 17
Insurance commissions .................................... 40 36
Income from joint ventures ............................... 102 113
Gain on sale of securities available for sale ............ 15 0
Gain (loss) on sale of real estate owned (net) ........... (4) 0
Miscellaneous income ..................................... 77 102
------------ --------------
Total non-interest income ......................... 282 268
------------ --------------
Non-interest Expense:
Compensation, employee benefits and related expenses ..... 1,087 1,084
Advertising and promotion ................................ 26 31
Occupancy and equipment expense........................... 303 312
Data processing .......................................... 77 71
Insurance premiums ....................................... 108 224
Legal, audit and examination services .................... 55 48
Other operating expenses ................................. 146 192
------------ --------------
Total non-interest expense .......................... 1,802 1,962
------------ --------------
Income before income taxes .................................... 1,517 1,319
Provision for federal and state income taxes .................. 521 444
------------ --------------
Net income ..................................................... $ 996 875
============ ==============
Net income per share (primary) ................................ $ 0.36 0.29
Net income per share (fully diluted) .......................... $ 0.36 0.29
Dividends declared per common share ........................... $ 0.19 0.18
</TABLE>
See notes to consolidated financial statements. -4-
<PAGE> 5
<TABLE>
<CAPTION>
SOUTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three Months Ended March 31,
----------------------------------------
1997 1996
----------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 996 875
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation .......................................... 99 105
Amortization of cost of stock benefit plans ........... 141 141
Net loss on sale of mortgage-backed securities,
available for sale ................................. 32 0
Net gain on sale of investment securities, available
for sale ........................................... (47) 0
Net loss on sale of foreclosed real estate ............ 4 0
Provision for loan losses-net ......................... 6 6
Decrease in prepaid and deferred federal
and state income taxes .............................. 517 449
Increase in accrued interest receivable ............... (92) (18)
Increase in accrued interest payable .................. 23 27
Increase in other assets .............................. (257) (390)
Increase in other liabilities ......................... 104 241
---------- ----------
Net cash provided by operating activities ....................... 1,526 1,436
---------- ----------
Cash flows from investing activities:
Purchase of investment securities, available for sale ...... (1,000) (6,104)
Proceeds from sales of mortgage backed securities,
available for sale ...................................... 1,473 0
Proceeds from maturities of mortgage-backed securities,
available for sale ...................................... 777 603
Proceeds from sales of investment securities, available
for sale ................................................ 6,736 0
Proceeds from maturities of investment securities,
available for sale ...................................... 3,000 9,000
Proceeds from sale of stock in Federal Home Loan Bank ...... 0 687
Participation loans purchased .............................. (1,345) (100)
Participation loans sold ................................... 2,078 0
Proceeds from sale of foreclosed real estate ............... 113 0
Loan disbursements ......................................... (13,484) (10,077)
Loan repayments ............................................ 7,806 9,922
Property and equipment expenditures ........................ (10) (490)
Investments in joint ventures .............................. (52) (87)
---------- ----------
Net cash provided by investing activities ....................... 6,092 3,354
---------- ----------
Cash flows from financing activities:
Deposit receipts ........................................... 90,162 74,617
Deposit withdrawals ........................................ (95,363) (79,247)
Interest credited to deposit accounts ...................... 2,860 2,502
Proceeds of borrowed money ................................. 2,000 0
Repayment of borrowed funds ................................ (9,708) (3,000)
Decrease in advance payments by borrowers for
taxes and insurance ...................................... (1,098) (1,211)
Proceeds from exercise of stock options .................... 12 388
Purchase of treasury stock ................................. (8) (4,359)
Dividends paid on common stock ............................. (502) (514)
---------- ----------
Net cash provided for financing activities ...................... (11,645) (10,824)
---------- ----------
Decrease in Cash and cash equivalents ........................... (4,027) (6,034)
Cash and cash equivalents at beginning of period ................ 11,680 15,868
---------- ----------
Cash and cash equivalents at end of period ...................... $ 7,653 9,834
========== ==========
Cash paid during the period for:
Interest ................................................... $ 3,989 3,613
Income taxes ............................................... 4 22
Non-cash investing activities:
Transfer of loans to foreclosed real estate ................ 0 68
========== ==========
</TABLE>
See notes to consolidated financial statements. -5-
<PAGE> 6
SOUTHWEST BANCSHARES, INC.
Notes to Consolidated Financial Statements
- ------------------------------------------
1. Statement of Information Furnished
- --------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and in the opinion of management contain all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position as of March 31, 1997, the results of operations for the three months
ended March 31, 1997 and 1996 and the cash flows for the three months ended
March 31, 1997 and 1996. These results have been determined on the basis of
generally accepted accounting principles. 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 disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The attached consolidated statements are those of Southwest
Bancshares, Inc. and its consolidated subsidiaries Southwest Federal Savings and
Loan Association of Chicago and Southwest Bancshares Development Corporation.
The results of operations for the three month period ended March 31, 1997 are
not necessarily indicative of the results to be expected for the full year.
These consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto, included in the Company's
Annual Report to Stockholders for the year ended December 31, 1996.
2. Earnings Per Share
- -----------------------
Southwest Bancshares, Inc. presents earnings per share on a primary and a
fully diluted basis. Earnings per share were computed by dividing net income by
the average number of common equivalent shares outstanding during the period.
Common equivalent shares include shares issuable under the stock option plans.
3. Impact of New Accounting Standards
- ---------------------------------------
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement, among other things,
applies a "financial-components approach" that focuses on control, whereby an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The Company has adopted SFAS No.
125 effective January 1, 1997, resulting in no material impact on its
consolidated financial condition or results of operations.
-6-
<PAGE> 7
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 ("SFAS No. 127"), "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125". The statement delays for one year the
implementation of SFAS No. 125, as it relates to (1) secured borrowings and
collateral, and (2) for the transfers of financial assets that are part of
repurchase agreement, dollar-roll, securities lending and similar transactions.
The Company has adopted portions of SFAS No. 125 (those not deferred by SFAS No.
127) effective January 1, 1997. Adoption of these portions did not have a
significant effect on the Company's financial condition or results of
operations. Based on its review of SFAS No. 125, management does not believe
that adoption of the portions of SFAS No. 125 which have been deferred by SFAS
No. 127 will have a material effect on the Company.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share". The statement is
effective for periods ending after December 15, 1997, and will require
restatement of all prior-period earnings per share ("EPS") data presented. The
statement establishes standards for computing and presenting EPS, and requires
dual presentation of basic and diluted EPS on the face of the income statement.
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Based on its review of the statement, management believes the adoption of SFAS
No. 128 will have no material effect on diluted earnings per share of the
Company.
-7-
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Southwest Bancshares, Inc. (the "Company") is the holding company for Southwest
Federal Savings and Loan Association of Chicago (the "Association") and
Southwest Bancshares Development Corporation, a company engaged in real estate
development through joint venture partnerships. The Association operates a
wholly-owned subsidiary, Southwest Service Corporation, which also engages in
real estate development activities as well as operates a full service insurance
agency.
The Company's results of operations depend primarily on its level of net
interest income, which is the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
and related securities and investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits. The Company's
earnings also are affected by the level of its other income, including fee
revenue, joint venture income and gain on sale of investments and loans, as well
as its level of non-interest expenses, including employee compensation and
benefits, occupancy and equipment costs, federal deposit insurance premiums and
other general and administrative expenses. The Company's results of operations
are also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are the Association's deposits and
proceeds from principal and interest payments on loans and mortgage-backed
securities, advances from the FHLB-Chicago and proceeds from the maturity of
investments. While maturities and scheduled amortization of loans and
mortgage-backed securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. As of March 31, 1997 the Association had outstanding
loan commitments of $12.6 million, with an average interest rate of 8.41%, of
which the majority were fixed-rate loans. Management anticipates that it will
have sufficient funds available to meet its current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
March 31, 1997 totalled $147.9 million. Based upon the Association's experience,
management believes that a significant portion of such deposits will remain with
the Association.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows from operating activities were $1.5 million for the three months
ended March 31, 1997 as compared to $1.4 million for the three months ended
March 31, 1996. Net cash provided from investing activities was $6.1 million for
the three months ended March 31, 1997 as compared to $3.4 million provided for
investing activities in the comparable period of 1996. Net cash provided for
financing activities was $11.6 million and $10.8 million for the three month
periods ended March 31, 1997 and 1996, respectively.
-8-
<PAGE> 9
The primary investment activity of the Company is the origination of mortgage
loans and the purchase of mortgage-backed and mortgage-related securities. The
Company disbursed $13.5 million in mortgage loans for the three month period
ended March 31, 1997 as compared to $10.1 million for the same three month
period of 1996. The Company also purchased $1.3 million in participation loans
for the three month period ended March 31, 1997 as compared to $100,000 in the
comparable period of 1996 and sold $2.1 million in participation loans during
the three month period ended March 31, 1997 while having no participation loan
sales during this same period of 1996. The Company purchased $1.0 million of
investment securities during the three months ended March 31, 1997 as compared
to $6.1 million in the same period of 1996. Proceeds from sales of
mortgage-backed securities and from sales of investment securities during the
three month period ended March 31, 1997 of $1.5 million and $6.7 million,
respectively, compared to no sales during the same period of 1996. Proceeds from
maturities of mortgage-backed securities of $777,000 during the three month
period ended March 31, 1997 compares to $603,000 for the same period of 1996 and
proceeds from maturities of investment securities of $3.0 million during the
three month period ended March 31, 1997 compares to $9.0 million in the same
period of 1996.
The Association is required to maintain minimum levels of liquid assets as
defined by the Office of Thrift Supervision (OTS) regulations. This requirement,
which may be varied at the direction of the OTS depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The required ratio is currently 5%. The Association's
liquidity ratio was 15.45% at March 31, 1997.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The levels of these assets
are dependent on the Company's operating, financing, lending and investing
activities during any given period. At March 31, 1997, cash and cash equivalents
totalled $7.7 million.
The OTS capital regulations require savings institutions to meet three capital
standards: a 1.5% tangible capital standard; a 3% leverage (core capital) ratio;
and an 8% risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in equity accounts of
consolidated subsidiaries less intangibles other than certain qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The core
capital requirement was effectively increased to 4% since OTS regulations
stipulate that an institution with less than 4% core capital will be deemed to
be "undercapitalized". As of March 31, 1997, the Association's actual capital
percentages for tangible capital of 8.05%, core capital of 8.05%, and current
risk-based capital of 16.62% significantly exceed the regulatory requirement for
each category. In addition, under the OTS's prompt corrective action
regulations, the Association is considered a "well capitalized" institution.
Mortgage-Backed Securities - As part of its asset and liability management
strategy and to complement its mortgage lending and investment activities, the
Company invests in mortgage-backed and mortgage-related securities. The Company
has designated its entire portfolio of mortgage-backed and mortgage-related
securities as "available for sale" and are accounted for at fair market value,
and unrealized gains or losses are reported net of taxes as a separate component
of stockholders' equity.
-9-
<PAGE> 10
As of March 31, 1997, all of the mortgage-backed and mortgage-related securities
owned by the Company are issued, insured or guaranteed either directly or
indirectly by a federal agency and are typically rated in one of the two highest
rated categories by a nationally recognized rating agency.
Consistent with its asset and liability management strategy, $18.1 million or
59.83% of the Company's mortgage-backed and mortgage-related securities have
adjustable interest rates, thereby reducing the impact of changing interest
rates on these securities. However, because these securities are subject to
prepayments, the Company's yield on this portfolio could be adversely affected
if significant prepayments occur.
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs") purchased by the Company are not classified as "high risk"
under regulatory guidelines and are subject to normal effects of changes in
interest rates. To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of CMO and REMIC securities. This policy, which has been adopted
by the OTS, requires the Company to annually test its CMOs and REMICs to
determine whether they are high risk or non-high risk securities. All CMOs and
REMICs are subjected to this stress test quarterly and at March 31, 1997, all
were considered to be low risk securities.
Non-Performing Assets - The following table sets forth information regarding
loans which are 90 days or more delinquent. The Association continues accruing
interest on delinquent loans 90 days or more past due, but reserves 100% of the
interest due on such loans, thus effecting a non-accrual status. At March 31,
1997 there were no other known problem assets except as included in the table
below.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
(Dollars in Thousands)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
March 31 Dec. 31 Sept. 30 June 30 March 31
1997 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent
mortgage loans...................................... $671 $811 $781 $430 $752
Total real estate owned,
net of related allowance
for loan losses..................................... 0 117 47 47 115
--------------------------------------------------------------
Total non-performing
assets.............................................. 671 928 $828 $477 $867
==============================================================
Allowance for loan
losses.............................................. $757 $751 $772 $766 $760
Total non-performing
assets to total assets.............................. 0.18% 0.24% 0.22% 0.13% 0.25%
Total non-performing
loans to gross loans................................ 0.24% 0.30% 0.29% 0.16% 0.30%
Allowance for loan losses
to total non-performing
loans............................................... 112.82% 92.60% 98.85% 178.14% 101.06%
</TABLE>
-10-
<PAGE> 11
Interest Rate Sensitivity
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1997 which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each of
the future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability. The Association has assumed that
its passbook savings, NOW and money market accounts, which totalled $105.9
million at March 31, 1997, are withdrawn at the annual percentage rates of 6%,
38% and 15%, respectively. These withdrawal rates, as well as loan prepayment
assumptions, are based on the Association's historical experience regarding loan
prepayments and deposit withdrawals.
<TABLE>
<CAPTION>
At March 31, 1997
----------------------------------------------------------------------------------------
More More Than More Than
More Than Than Three Five 10 Years
0-3 4-12 One Year to Years to Years to to More Than
Months Months Three Years Five Years 10 Years 20 Years 20 Years Total
---------- --------- ----------- ----------- ----------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1) .................... 22,603 22,886 52,236 40,569 65,611 51,635 7,459 262,999
Other loans (1) ....................... 7,544 --- 102 --- --- --- --- 7,646
Interest-bearing deposits ............. 304 100 --- --- --- --- --- 404
Mortgage-backed securities ............ 18,804 1,041 2,376 1,902 3,224 3,154 755 31,256
Investment securities ................. 6,491 14,850 12,000 5,630 10,000 --- --- 48,971
----------- ----------- ----------- --------- ---------- ---------- ---------- --------
Total interest-earning
assets ......................... 55,746 38,877 66,714 48,101 78,835 54,789 8,214 351,276
Less:
Unearned discount and
deferred fees ....................... (288) (292) (666) (517) (836) (657) (95) (3,351)
----------- ----------- ----------- ---------- ---------- ---------- ---------- --------
Net interest-earning
assets ......................... 55,458 38,585 66,048 47,584 77,999 54,132 8,119 347,925
=========== =========== =========== ========== ========== ========== ========== ========
Interest-bearing liabilities:
Passbook accounts ..................... 735 2,161 2,780 2,607 2,444 2,292 34,434 47,453
NOW accounts .......................... 2,142 5,308 6,566 1,754 2,354 1,290 243 19,657
Money market accounts ................. 1,458 4,160 5,006 4,268 3,639 3,102 17,153 38,786
Certificate accounts .................. 38,632 109,269 24,296 --- --- --- --- 172,197
Borrowed funds ........................ 9,600 4,000 30,200 3,650 --- --- --- 47,450
----------- ----------- ----------- ---------- ---------- ---------- ---------- --------
Total interest-bearing
liabilities .................... 52,567 124,898 68,848 12,279 8,437 6,684 51,830 325,543
=========== =========== =========== ========== ========== ========== ========== ========
Interest sensitivity gap .............. 2,891 (86,313) (2,800) 35,305 69,562 47,448 (43,711) 22,382
Cumulative interest sensitivity gap ... 2,891 (83,422) (86,222) (50,917) 18,645 66,093 22,382
Cumulative interest sensitivity gap
as a percentage of total assets ..... 0.78 % (22.45)% (23.21)% (13.70)% 5.02 % 17.79 % 6.02 %
Cumulative net interest-earning
assets as a percentage of interest-
sensitive liabilities ............... 105.50 % 52.99 % 64.99 % 80.31 % 106.98 % 124.15 % 106.88 %
- ------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced for non-performing loans and undisbursed loan proceeds
but are not reduced by the allowance for loan losses. At March 31, 1997, non-performing loans and undisbursed loan proceeds
totalled $671,000 and $9.3 million, respectively.
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table.
In this current environment of narrowing interest margins, management intends
to decrease the interest rate sensitivity by extending liability maturities and
shortening the investment portfolio.
-11-
<PAGE> 12
Average Balance Sheet
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition for the periods indicated and
reflects the average yield on assets and average cost of liabilities. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Average
balances are derived from average monthly balances. Management does not believe
that the use of month-end balances instead of average daily balances has caused
any material differences in the information presented. The yields and costs
include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------ At March 31,
1997 1996 1997
------------------------------ ----------------------------- --------------------
Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Yield/Cost
--------- -------- ---------- --------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net ........................... $258,060 $5,493 8.51 % $242,739 $5,263 8.67 % $259,724 8.11 %
Other loans ................................... 7,357 157 8.54 1,727 35 8.11 7,646 8.92
Mortgage-backed securities .................... 32,198 535 6.65 31,107 514 6.61 31,094 6.71
Interest-bearing deposits ..................... 6,095 93 6.10 7,749 129 6.66 404 5.51
Investment securities ......................... 52,401 777 5.93 51,497 718 5.58 48,971 5.81
--------- -------- ------ ---------- ------- ------ ---------- -----
Total interest-earning assets ............. 356,111 7,055 7.92 334,819 6,659 7.96 347,839 7.68
Non-interest earning assets ........................ 23,135 20,031 23,724
--------- ---------- ----------
Total assets .......................... $379,246 $354,850 $371,563
========= ========== ==========
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposits:
Passbook ................................. 47,277 355 3.00 46,848 356 3.04 47,453 3.01
Certificate .............................. 172,640 2,377 5.51 145,662 1,984 5.45 172,197 5.63
NOW and money market accounts ............ 59,473 466 3.13 60,595 474 3.13 58,443 3.15
Borrowed funds:
FHLB advances and other .................. 51,379 814 6.34 50,408 826 6.55 47,450 6.51
--------- -------- ------ ---------- ------- ------ ---------- ------
Total interest-bearing liabilities..... 330,769 4,012 4.85 303,513 3,640 4.80 325,543 4.93
Other liabilities .................................. 8,507 5,682 5,939
--------- ---------- ----------
Total liabilities ..................... 339,276 309,195 331,482
Stockholders' equity ............................... 39,970 45,655 40,081
--------- ---------- ----------
Total liabilities and stockholders'
equity ......................... $379,246 $354,850 $371,563
========= ========== ==========
Net interest income/interest rate spread (1) ....... 3,043 3.07 3,019 3.16 2.75
Net earning assets/net interest margin (2) ......... $ 25,342 3.42 % $31,306 3.61 % 3.06 %
========= ====== ========== ====== ======
Ratio of interest-earning assets to interest-bearing
liabilities ...................................... 1.08 x 1.10 x 1.07 x
========= ========== ==========
(1) Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of
interest-bearing liabilities.
(2) Net interest margin represents net interest income before the provision for loan losses divided by average interest-earning
assets.
</TABLE>
<PAGE> 13
FINANCIAL CONDITION
- -------------------
The assets of the Company decreased $10.8 million, or 2.82%, to $371.6 million
for the three month period ended March 31, 1997 from $382.4 million at December
31, 1996. This decrease primarily resulted from a $4.0 million decrease in cash
and interest-bearing deposits, a $2.4 million decrease in U.S. Government and
agency obligations, available for sale, a $2.6 million decrease in
mortgage-backed securities, available for sale, and a $6.6 million decrease in
other investments, available for sale, all partially offset by the $4.9 million
increase in net loans receivable.
During the three month period ended March 31, 1997, cash and interest-bearing
deposits decreased by $4.0 million, or 34.48%, to $7.7 million at March 31, 1997
from $11.7 million at December 31, 1996. U.S. Government and agency obligations,
available for sale, decreased $2.4 million, or 5.20%, to $44.2 million at March
31, 1997 from $46.6 million at December 31, 1996, primarily as a result of
maturities of government securities and market value adjustments.
Mortgage-backed securities, available for sale decreased $2.6 million, or 8.05%,
to $30.2 million at March 31, 1997 from $32.8 million at December 31, 1996, as a
result of sales of $1.5 million along with principal repayments and market value
adjustments.
Loans receivable increased $4.9 million, or 1.88%, to $267.4 million for the
three months ended March 31, 1997 from $262.4 million at December 31, 1996. This
resulted primarily from funding $14.8 million in new loans and participation
loan purchases which were offset by loan repayments and participation loans sold
of $9.9 million.
The Association has no foreclosed real estate at the three month period ended
March 31, 1997 as compared to $117,000 at December 31, 1996.
Other investments, available for sale decreased $6.6 million, or 89.16%, to
$805,000 at March 31, 1997 as compared to $7.4 million at December 31, 1996,
primarily as a result of the sale of an ARM loan mutual fund.
Savings deposits for the three month period ended March 31, 1997 decreased by
$2.3 million, or 0.83%, as withdrawal activity of $95.4 million exceeded deposit
receipts of $90.2 million and interest credited to deposit accounts of $2.9
million.
Borrowed money decreased $7.7 million, or 13.97%, in the three month period
ended March 31, 1997, to $47.5 million from $55.2 million at December 31, 1996,
as borrowings were repaid.
Stockholders' equity increased $222,000, or 0.56%, for the three month period
ended March 31, 1997, to $40.1 million at March 31, 1997 from $39.9 million at
December 31, 1996, as a result of net income of $996,000 which was partially
offset by the dividend payment of $502,000 and the $424,000 increase in the
unrealized loss on available for sale securities.
-13-
<PAGE> 14
ANALYSIS OF OPERATIONS
- ----------------------
Net income of $996,000 for the three months ended March 31, 1997 increased by
$121,000, or 13.83%, from $875,000 for the three month period ended March 31,
1996. The increase is primarily attributable to the reduction in non-interest
expenses of $160,000, increases in net interest income after provision for loan
losses of $24,000 and the increase in non-interest income of $14,000, which were
offset by the increased income tax provision of $77,000.
Interest income increased to $7.1 million for the three month period ended March
31, 1997 from $6.7 million for the three month period ended March 31, 1996, an
increase of $396,000, or 5.95%, primarily as a result of an increase in the
amount of loans receivable.
Interest expense of $4.0 million for the three month period ended March 31, 1997
increased by $372,000, or 10.22%, from $3.6 million for the three month period
ended March 31, 1996. The increase is primarily related to the increase in the
amount of certificates of deposit.
The Association calculates any allowance for loan losses based upon its ongoing
evaluation of pertinent factors underlying the types and quality of its loans,
including the risk inherent in its loan portfolio, and other factors such as the
current regulatory and economic environment. As a result of this review, loan
loss provisions are recorded. A provision of $6,000 was established for the
three months ended March 31, 1997, which is the same as the $6,000 provision
established for the three months ended March 31, 1996. The ratio of
non-performing loans to total loans was .24% as of March 31, 1997 as compared to
.30% at December 31, 1996. The allowance for loan losses to non-performing loans
was 112.82% as of March 31, 1997 as compared to 92.60% as of December 31, 1996.
Management believes its provision for loan losses is adequate, given the risks
inherent in its loan portfolio and the current regulatory and economic
environment. Although the Association believes its allowance for losses is at a
level which it considers to be adequate to provide for potential losses, there
can be no assurance that such losses will not exceed the estimated amounts.
Activity in the allowance for loan losses for all periods presented in the
consolidated income statement is included in the following table.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
Three Months Ended
March 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Balance at beginning of period.......... $751 $754
Provision for loan losses............... 6 6
Write downs charged to allowance........ 0 0
Recoveries of amounts previously
charged off.......................... 0 0
---- ----
Balance at end of period................ $757 $760
==== ====
</TABLE>
-14-
<PAGE> 15
Non-interest income increased $14,000, or 5.22%, to $282,000 for the quarter
ended March 31, 1997 from $268,000 for the three month period ended March 31,
1996. This increase is primarily the result of increases in fees and service
charges of $35,000, gain on sale of securities available for sale of $15,000 and
insurance commissions of $4,000, which were partially offset by the $25,000
reduction in miscellaneous income, joint venture income reduction of $11,000 and
the $4,000 net loss on the sale of real estate owned.
Non-interest expense for the three months ended March 31, 1997 decreased
$160,000, or 8.15%, to $1.8 million from $2.0 million at March 31, 1996. This
decrease was primarily the result of the $116,000 decrease in insurance premium
expense as a result of the reduced quarterly SAIF insurance expense. The $46,000
reduction in other operating expenses along with modest decreases in advertising
and promotion and occupancy and equipment expenses were also contributing
factors which were all partially offset by modest increases in compensation,
data processing and legal and audit expenses.
The provision for federal and state income taxes increased $77,000, or 17.34%,
as a result of the increase in pre-tax income of $198,000, or 15.01%. The
provision was increased to $521,000 for the three month period ended March 31,
1997 from $444,000 for the three month period ended March 31, 1996.
RECENT DEVELOPMENTS
- -------------------
On February 12, 1997 the Company announced a quarterly cash dividend of 19
cents per share which was paid on March 12, 1997 to shareholders of record on
February 26, 1997.
On July 16, 1996 the Company announced its intention to repurchase up to 100,000
shares, or approximately 5% of its outstanding shares at that time. With the
3-for-2 stock split announced in the fourth quarter of 1996 the amount of shares
authorized to repurchase increased to 150,000. This repurchase program continues
and is to be accomplished by purchasing shares in open market transactions, from
time to time, subject to availability. As of May 5, 1997, 49,321 shares have
been purchased.
Thrift Rechartering Legislation. The proposed legislation regarding elimination
of the federal thrift charter and related issues remains pending before
Congress. The Company is unable to predict whether such legislation would be
enacted, the extent to which the legislation would restrict or disrupt its
operations or whether the BIF and SAIF funds will eventually merge. See Form
10-K for the fiscal year ended December 31, 1996 for a discussion of the
proposed legislation.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor its subsidiaries are involved in any
pending legal proceedings, other than routine legal matters
occurring in the ordinary course of business, which in the
aggregate involve amounts which are believed by management to be
immaterial to the consolidated financial condition or results of
operations of the Company.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1 Amended Certificate of Incorporation of Southwest
Bancshares, Inc.*
3.2 Bylaws of Southwest Bancshares, Inc.*
11.0 Statement regarding Computation of Earnings Per Share
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1997
------------------
<S> <C>
Net Income $ 996,000
==========
Weighted average shares outstanding 2,638,422
Common stock equivalents due to
dilutive effect on stock options 116,996
----------
Total weighted average common shares
and equivalents outstanding 2,755,418
==========
Primary earnings per share $ 0.36
==========
Total weighted average common shares
and equivalents outstanding 2,755,418
Additional dilutive shares using the end
of period market value versus the average
market value when applying the treasury
stock method -0- **
----------
Total weighted average common shares
and equivalents outstanding for
fully diluted computation 2,755,418
==========
Fully diluted earnings per share $ 0.36
==========
** Note: If average share price is greater than ending price, the average price
is used for both primary and fully diluted calculation.
</TABLE>
27.0 Financial Data Schedule (filed herewith)
b. Report on Form 8-K
None
- ----------------------
* Incorporated herein by reference into this document from the Exhibits to Form
S-1, Registration Statement, and Pre-Effective Amendment No. 1, filed on
March 13, 1992 and April 24, 1992, respectively, Registration No. 33-46409.
-16-
<PAGE> 17
SIGNATURES
Pursuant to the requirements 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 Bancshares, Inc.
Dated: May 9, 1997 By: /s/ Richard E. Webber
----------- -------------------------------------
Richard E. Webber
President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains sumary financial information extracted from the Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000885942
<NAME> SOUTHWEST BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,249
<INT-BEARING-DEPOSITS> 404
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,277
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 268,127
<ALLOWANCE> 757
<TOTAL-ASSETS> 371,563
<DEPOSITS> 278,093
<SHORT-TERM> 47,450
<LIABILITIES-OTHER> 5,939
<LONG-TERM> 0
0
0
<COMMON> 44
<OTHER-SE> 40,037
<TOTAL-LIABILITIES-AND-EQUITY> 371,563
<INTEREST-LOAN> 5,650
<INTEREST-INVEST> 1,405
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,055
<INTEREST-DEPOSIT> 3,198
<INTEREST-EXPENSE> 4,012
<INTEREST-INCOME-NET> 3,043
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 1,802
<INCOME-PRETAX> 1,517
<INCOME-PRE-EXTRAORDINARY> 996
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 996
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 7.92
<LOANS-NON> 671
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 751
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 757
<ALLOWANCE-DOMESTIC> 757
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
