EXHIBIT 99.2
UNAUDITED INTERIM FINANCIAL STATEMENTS OF AMEGY BANCORPORATION, INC.
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
September 30, | December 31, | |||||||||
2005 | 2004 | |||||||||
(Dollars in thousands, | ||||||||||
except per share amounts) | ||||||||||
ASSETS | ||||||||||
| Cash and due from banks | $ | 345,926 | $ | 327,558 | ||||||
| Federal funds sold and other cash equivalents | 48,135 | 14,417 | ||||||||
| Total cash and cash equivalents | 394,061 | 341,975 | ||||||||
| Securities available for sale (including $383,701 and $319,599 pledged to creditors) | 1,845,884 | 1,927,204 | ||||||||
| Securities held to maturity (fair value of $46,835 and $58,569) | 47,005 | 58,033 | ||||||||
| Loans held for sale | 103,423 | 107,404 | ||||||||
| Loans held for investment, net of allowance for loan losses of $49,189 and $49,408 | 4,857,108 | 4,490,170 | ||||||||
| Premises and equipment, net | 166,843 | 164,443 | ||||||||
| Accrued interest receivable | 36,949 | 30,200 | ||||||||
| Goodwill | 150,426 | 149,846 | ||||||||
| Core deposit intangibles | 20,785 | 27,246 | ||||||||
| Other assets | 271,887 | 209,082 | ||||||||
| Total assets | $ | 7,894,371 | $ | 7,505,603 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
| Deposits: | ||||||||||
| Demand — noninterest-bearing | $ | 1,984,716 | $ | 1,871,228 | ||||||
| Demand — interest-bearing | 123,866 | 135,003 | ||||||||
| Money market accounts | 2,167,935 | 2,091,624 | ||||||||
| Savings | 202,557 | 205,593 | ||||||||
| Time, $100 and over | 1,493,457 | 944,283 | ||||||||
| Other time | 396,988 | 372,312 | ||||||||
| Total deposits | 6,369,519 | 5,620,043 | ||||||||
| Federal funds purchased and securities sold under repurchase agreements | 441,181 | 482,968 | ||||||||
| Other borrowings | 208,048 | 560,410 | ||||||||
| Senior subordinated debenture | 75,000 | 75,000 | ||||||||
| Junior subordinated deferrable interest debentures | 149,486 | 149,486 | ||||||||
| Accrued interest payable | 3,676 | 2,902 | ||||||||
| Other liabilities | 30,415 | 34,380 | ||||||||
| Total liabilities | 7,277,325 | 6,925,189 | ||||||||
| Commitments and contingencies | ||||||||||
| Shareholders’ equity: | ||||||||||
| Preferred stock — $0.01 par value, 1,000,000 shares authorized; 0 issued and outstanding at September 30, 2005 and December 31, 2004 | — | — | ||||||||
| Common stock — $1 par value, 300,000,000 shares authorized; 70,880,202 issued and 70,767,938 outstanding at September 30, 2005; 70,198,456 issued and 70,095,949 outstanding at December 31, 2004 | 70,880 | 70,198 | ||||||||
| Additional paid-in capital | 101,926 | 92,330 | ||||||||
| Retained earnings | 473,866 | 428,311 | ||||||||
| Deferred compensation | (6,943 | ) | (5,469 | ) | ||||||
| Accumulated other comprehensive loss | (20,870 | ) | (3,221 | ) | ||||||
| Treasury stock, at cost — 112,264 shares and 102,507 shares, respectively | (1,813 | ) | (1,735 | ) | ||||||
| Total shareholders’ equity | 617,046 | 580,414 | ||||||||
| Total liabilities and shareholders’ equity | $ | 7,894,371 | $ | 7,505,603 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||
| Interest income: | ||||||||||||||||||||
| Loans | $ | 80,060 | $ | 55,282 | $ | 220,144 | $ | 154,632 | ||||||||||||
| Securities: | ||||||||||||||||||||
| Taxable | 17,341 | 13,558 | 52,177 | 38,724 | ||||||||||||||||
| Tax-exempt | 2,737 | 2,585 | 8,042 | 6,646 | ||||||||||||||||
| Federal funds sold and other | 555 | 192 | 1,176 | 500 | ||||||||||||||||
| Total interest income | 100,693 | 71,617 | 281,539 | 200,502 | ||||||||||||||||
| Interest expense: | ||||||||||||||||||||
| Deposits | 25,740 | 10,028 | 61,722 | 26,506 | ||||||||||||||||
| Interest on subordinated debentures | 3,108 | 698 | 8,463 | 1,793 | ||||||||||||||||
| Interest on other borrowings | 8,098 | 3,892 | 23,025 | 8,389 | ||||||||||||||||
| Total interest expense | 36,946 | 14,618 | 93,210 | 36,688 | ||||||||||||||||
| Net interest income | 63,747 | 56,999 | 188,329 | 163,814 | ||||||||||||||||
| Provision for loan losses | 1,900 | 2,878 | 6,500 | 7,710 | ||||||||||||||||
| Net interest income after provision for loan losses | 61,847 | 54,121 | 181,829 | 156,104 | ||||||||||||||||
| Noninterest income: | ||||||||||||||||||||
| Service charges on deposit accounts | 10,959 | 11,184 | 32,968 | 33,414 | ||||||||||||||||
| Investment services | 4,291 | 3,164 | 12,538 | 9,019 | ||||||||||||||||
| Other fee income | 8,960 | 5,907 | 24,315 | 15,780 | ||||||||||||||||
| Bank-owned life insurance income | 2,567 | 2,154 | 6,149 | 5,551 | ||||||||||||||||
| Other operating income | 2,698 | 2,594 | 12,728 | 5,189 | ||||||||||||||||
| Gain on sale of loans, net | 18 | 368 | 1,147 | 818 | ||||||||||||||||
| Gain (loss) on sale of securities, net | 1,170 | (46 | ) | 1,156 | (45 | ) | ||||||||||||||
| Total noninterest income | 30,663 | 25,325 | 91,001 | 69,726 | ||||||||||||||||
| Noninterest expenses: | ||||||||||||||||||||
| Salaries and employee benefits | 34,902 | 28,829 | 104,370 | 85,267 | ||||||||||||||||
| Occupancy expense | 10,747 | 9,395 | 32,132 | 26,540 | ||||||||||||||||
| Marketing and advertising | 885 | 1,052 | 4,925 | 3,146 | ||||||||||||||||
| Professional services | 3,482 | 3,174 | 10,516 | 8,274 | ||||||||||||||||
| Core deposit intangible amortization expense | 2,042 | 799 | 6,461 | 2,710 | ||||||||||||||||
| Other operating expenses | 10,455 | 9,035 | 34,569 | 26,676 | ||||||||||||||||
| Total noninterest expenses | 62,513 | 52,284 | 192,973 | 152,613 | ||||||||||||||||
| Income before income taxes | 29,997 | 27,162 | 79,857 | 73,217 | ||||||||||||||||
| Provision for income taxes | 8,549 | 7,496 | 22,308 | 22,043 | ||||||||||||||||
| Net income | $ | 21,448 | $ | 19,666 | $ | 57,549 | $ | 51,174 | ||||||||||||
| Earnings per common share: | ||||||||||||||||||||
| Basic | $ | 0.30 | $ | 0.28 | $ | 0.82 | $ | 0.74 | ||||||||||||
| Diluted | $ | 0.30 | $ | 0.28 | $ | 0.80 | $ | 0.73 | ||||||||||||
| Dividends per common share | $ | 0.11 | $ | 0.03 | $ | 0.17 | $ | 0.09 | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
Preferred | Accumulated | ||||||||||||||||||||||||||||||||||||||||
Stock | Common Stock | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||
Paid-In | Retained | Deferred | Comprehensive | Treasury | Shareholders’ | ||||||||||||||||||||||||||||||||||||
Shares | Dollars | Shares | Dollars | Capital | Earnings | Compensation | Loss | Stock | Equity | ||||||||||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2004 | — | $ | — | 70,198,456 | $ | 70,198 | $ | 92,330 | $ | 428,311 | $ | (5,469 | ) | $ | (3,221 | ) | $ | (1,735 | ) | $ | 580,414 | ||||||||||||||||||||
| Exercise of stock options | 491,715 | 492 | 6,465 | 6,957 | |||||||||||||||||||||||||||||||||||||
| Issuance of restricted common stock, net of shares forfeited into Treasury | 186,384 | 186 | 3,062 | (3,243 | ) | (5 | ) | — | |||||||||||||||||||||||||||||||||
| Issuance of non-employee director stock | 3,647 | 4 | 69 | 73 | |||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (73 | ) | (73 | ) | |||||||||||||||||||||||||||||||||||||
| Deferred compensation amortization | 1,769 | 1,769 | |||||||||||||||||||||||||||||||||||||||
| Cash dividends, $0.17 per common share | (11,994 | ) | (11,994 | ) | |||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||
| Net income for the nine months ended September 30, 2005 | 57,549 | 57,549 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (17,649 | ) | (17,649 | ) | |||||||||||||||||||||||||||||||||||||
| Total comprehensive income | 39,900 | ||||||||||||||||||||||||||||||||||||||||
| BALANCE, SEPTEMBER 30, 2005 | — | $ | — | 70,880,202 | $ | 70,880 | $ | 101,926 | $ | 473,866 | $ | (6,943 | ) | $ | (20,870 | ) | $ | (1,813 | ) | $ | 617,046 | ||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2005 | 2004 | |||||||||||
(Dollars in thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 57,549 | $ | 51,174 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Provision for loan losses | 6,500 | 7,710 | ||||||||||
| Deferred tax benefit | (3,638 | ) | (1,487 | ) | ||||||||
| Depreciation | 13,061 | 10,707 | ||||||||||
| Realized (gain) loss on securities available for sale, net | (1,156 | ) | 45 | |||||||||
| Gain on sale of premises and equipment, net | (661 | ) | (2 | ) | ||||||||
| Amortization and accretion of securities’ premiums and discounts, net | 2,432 | 4,346 | ||||||||||
| Amortization of mortgage servicing rights | 1,273 | 1,677 | ||||||||||
| Amortization of computer software | 5,767 | 4,873 | ||||||||||
| Amortization of core deposit intangibles | 6,461 | 2,710 | ||||||||||
| Other amortization | 1,769 | 1,248 | ||||||||||
| Income tax benefit from exercise of stock options | 1,278 | 2,135 | ||||||||||
| Net change in: | ||||||||||||
| Loans held for sale | 3,981 | 877 | ||||||||||
| Other assets and liabilities, net | (5,499 | ) | 4,871 | |||||||||
| Net cash provided by operating activities | 89,117 | 90,884 | ||||||||||
| Cash flows from investing activities: | ||||||||||||
| Proceeds from maturity and call of securities available for sale | 18,454 | 36,615 | ||||||||||
| Proceeds from sale of securities available for sale | 369,599 | 794,031 | ||||||||||
| Principal paydowns of mortgage-backed securities available for sale | 191,714 | 228,351 | ||||||||||
| Principal paydowns of mortgage-backed securities held to maturity | 11,002 | — | ||||||||||
| Purchase of securities available for sale | (520,625 | ) | (1,176,021 | ) | ||||||||
| Purchase of Federal Reserve Bank stock | (6,729 | ) | (3,444 | ) | ||||||||
| Purchase of Federal Home Loan Bank stock | (40,264 | ) | (24,512 | ) | ||||||||
| Proceeds from redemption of Federal Home Loan Bank stock | 40,779 | 15,102 | ||||||||||
| Net increase in loans held for investment | (374,550 | ) | (492,923 | ) | ||||||||
| Proceeds from sale of premises and equipment | 2,565 | 733 | ||||||||||
| Purchase of premises and equipment | (23,132 | ) | (36,809 | ) | ||||||||
| Purchase of mortgage servicing rights | (287 | ) | — | |||||||||
| Purchase of Bank-owned life insurance policies | (50,000 | ) | — | |||||||||
| Purchase of Reunion Bancshares, Inc., net of cash acquired of $30,596 | — | (20,004 | ) | |||||||||
| Investment in unconsolidated equity investees | (4,496 | ) | (2,431 | ) | ||||||||
| Net cash used in investing activities | (385,970 | ) | (681,312 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Net increase in noninterest-bearing demand deposits | 113,488 | 22,327 | ||||||||||
| Net increase in time deposits | 573,850 | 104,986 | ||||||||||
| Net increase in other interest-bearing deposits | 62,138 | 66,845 | ||||||||||
| Issuance of junior subordinated deferrable interest debentures, net of cost | — | 36,083 | ||||||||||
| Issuance of senior subordinated debentures | — | 75,000 | ||||||||||
| Net increase (decrease) in short-term borrowings | (391,787 | ) | 321,361 | |||||||||
| Proceeds from long-term borrowings | — | 2,200 | ||||||||||
| Payments on long-term borrowings | (2,362 | ) | (200,332 | ) | ||||||||
| Payments of cash dividends | (11,994 | ) | (6,195 | ) | ||||||||
| Net proceeds from exercise of stock options | 5,679 | 5,132 | ||||||||||
| Purchase of treasury stock | (73 | ) | (927 | ) | ||||||||
| Net cash provided by financing activities | 348,939 | 426,480 | ||||||||||
| Net increase (decrease) in cash and cash equivalents | 52,086 | (163,948 | ) | |||||||||
| Cash and cash equivalents at beginning of period | 341,975 | 485,798 | ||||||||||
| Cash and cash equivalents at end of period | $ | 394,061 | $ | 321,850 | ||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | Basis of Presentation |
The unaudited condensed consolidated financial statements include the accounts of Amegy Bancorporation, Inc. (“the Bancorporation”) and all other entities in which the Bancorporation has a controlling financial interest (collectively referred to as the “Company”). All material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position at September 30, 2005 and December 31, 2004, consolidated net income for the three and nine months ended September 30, 2005 and 2004, consolidated cash flows for the three and nine months ended September 30, 2005 and 2004, and consolidated changes in shareholders’ equity for the nine months ended September 30, 2005. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The accounting and financial reporting policies the Company follows conform, in all material respects, to accounting principles generally accepted in the United States of America and to general practices within the financial services industry.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly owned subsidiaries, Statutory Trust I, Statutory Trust II, and Statutory Trust III (“the Trusts”), are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not consolidated in the Company’s financial statements.
On March 7, 2005, Southwest Bank of Texas National Association changed its name to Amegy Bank National Association (“the Bank”). The Bank’s subsidiary, Mitchell Mortgage Company, L.L.C., changed its name to Amegy Mortgage Company, L.L.C. (“Amegy Mortgage”) on the same date. On May 5, 2005, the name of the Bancorporation changed to Amegy Bancorporation, Inc.
Substantially all of the Company’s revenue and income is derived from the operations of the Bank and Amegy Mortgage. The Bank provides a full range of commercial and private banking services to small and middle market businesses and individuals primarily in the Houston metropolitan area. Amegy Mortgage originates, sells, and services single family residential mortgages, residential and commercial construction loans, and commercial mortgages.
On January 31, 2004, the Company completed its merger with Reunion Bancshares, Inc. (“Reunion”), whereby Reunion was merged into the Company. On October 1, 2004, the Company completed its merger with Klein Bancshares, Inc. (“Klein”), whereby Klein was merged into the Company. The results of operations of Reunion and Klein have been included in the consolidated financial statements since their respective acquisition dates. See “Note 2 — Merger Related Activity” for further discussion of the mergers.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements and the notes thereto should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2004.
5
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Reclassifications |
Certain previously reported amounts have been reclassified to conform to the 2005 financial statement presentation. These reclassifications had no effect on net income, total assets, or shareholders’ equity.
| Stock-Based Compensation |
The Company applies the intrinsic value method in accounting for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25 (“APB No. 25”). Because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized on options granted.
In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 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 No. 123 is optional and the Company decided not to elect these provisions of SFAS No. 123. However, pro forma disclosures as if the Company adopted the expense recognition provisions of SFAS No. 123 are required by SFAS No. 123 and are presented below.
If the fair value based method of accounting under SFAS No. 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):
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(Dollars in thousands, except per share amounts) | |||||||||||||||||
| Net income | |||||||||||||||||
| As reported | $ | 21,448 | $ | 19,666 | $ | 57,549 | $ | 51,174 | |||||||||
| Pro forma | $ | 20,548 | $ | 18,910 | $ | 55,183 | $ | 49,263 | |||||||||
| Stock-based compensation cost, net of income taxes | |||||||||||||||||
| As reported | $ | 463 | $ | 338 | $ | 1,150 | $ | 811 | |||||||||
| Pro forma | $ | 1,363 | $ | 1,094 | $ | 3,516 | $ | 2,723 | |||||||||
| Basic earnings per common share | |||||||||||||||||
| As reported | $ | 0.30 | $ | 0.28 | $ | 0.82 | $ | 0.74 | |||||||||
| Pro forma | $ | 0.29 | $ | 0.27 | $ | 0.78 | $ | 0.72 | |||||||||
| Diluted earnings per common share | |||||||||||||||||
| As reported | $ | 0.30 | $ | 0.28 | $ | 0.80 | $ | 0.73 | |||||||||
| Pro forma | $ | 0.28 | $ | 0.27 | $ | 0.77 | $ | 0.70 | |||||||||
The effect of applying SFAS No. 123 in the above pro forma disclosure is not indicative of future amounts. The Company anticipates making awards in the future under its stock-based compensation plans.
The Company expects to adopt the provisions of Statement of Financial Accounting Standards No. 123, Share-Based Payment (“SFAS No. 123R”), on January 1, 2006. See “Note 1 — New Accounting Pronouncements” for additional information.
6
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| New Accounting Pronouncements |
On December 16, 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”). SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from the purchaser’s initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual, or valuation allowance at the time of purchase; (2) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (3) requires that subsequent decreases in expected cash flows be recognized as impairments. In addition, SOP 03-3 prohibits the creation or carrying over of a valuation allowance in the initial accounting of all loans within its scope that are acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The requirements of SOP 03-3 did not have a material impact on the Company’s financial condition or results of operations.
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation using APB No. 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. The provisions of this statement become effective for all equity awards granted after January 1, 2006, as well as equity awards that are unvested on that date. Although the Company has not yet completed an analysis to quantify the exact impact the new standard will have on its future financial performance, the Stock-Based Compensation disclosures in “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” provide detail as to the Company’s financial performance as if the Company had applied the fair value based method and recognition provision of SFAS No. 123 to stock-based compensation in the current reporting periods.
On September 4, 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF Issue 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. Certain disclosure requirements of EITF Issue 03-01 were adopted in 2003. At its meeting on July 11, 2005, the FASB decided to nullify the guidance in paragraphs 10 through 18 of EITF Issue 03-1, which provided guidance on how to determine whether an investment is other-than-temporarily impaired. The remaining guidance in EITF Issue 03-1 regarding measurement, disclosure, and subsequent accounting for debt securities, as well as the evaluation of whether a cost method investment is impaired, is still applicable. The Company continues to follow the requirements of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities.
On July 14, 2005, the FASB issued an exposure draft of a proposed Interpretation, Accounting for Uncertain Tax Positions — an Interpretation of FASB Statement No. 109. The proposed interpretation would require companies to recognize the best estimate of an uncertain tax position only if it is probable of being sustained on audit by the taxation authorities. Subsequently, the tax benefit would be derecognized (by either recording a tax liability or decreasing a tax asset) when the probable threshold is no longer met and it is more likely than not that the tax position will not be sustained. The proposed Interpretation would be effective for years ending after December 15, 2005 and treated as a change in accounting policy. It would require companies to assess all uncertain tax positions and only those meeting the probable threshold at the transition date would continue to be recognized. The difference between the amount previously recognized and the amount recognized after applying the proposed Interpretation would be recorded as the cumulative-effect adjustment in the 2005 statement of earnings (restatement is not permitted). The comment period ended September 12, 2005.
7
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 2. | Merger Related Activity |
The mergers described below were accounted for as purchase transactions. The purchase prices have been allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the date of the mergers. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill, none of which is expected to be deductible for tax purposes. Goodwill is evaluated annually for possible impairment under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets.
On January 31, 2004, the Company completed its merger with Reunion, whereby Reunion’s subsidiary, Lone Star Bank (“Lone Star”), was merged with and into the Bank. The addition of the five Lone Star branches expands the Company’s branch network to include the Dallas market and represents an attractive growth opportunity for the Company. The merger was a cash transaction with $43.5 million paid at closing and an additional $6.5 million deposited into an escrow account. The release of this account is contingent upon the performance of the loan portfolio and other potential liabilities over a three-year period. In addition, the Bank paid $600,000 to Reunion’s financial advisor in connection with this transaction. The purchase price was funded through the proceeds of $51.5 million of junior subordinated deferrable interest debentures issued in October 2003.
On October 1, 2004, the Company completed its merger with Klein, whereby Klein’s subsidiary, Klein Bank & Trust, was merged with and into the Bank. The addition of the 27 Klein branches expands the Company’s branch network in the northwest quadrant of the Houston metropolitan area. The merger was a cash and common stock transaction with $149.2 million of the $165.0 million purchase price paid in cash and the remainder paid through the issuance of 747,468 common shares of the Company. These shares were valued at the average of the closing price of the Company’s common stock for the fifteen business days ended five business days prior to the merger date. The cash portion of the purchase price was funded through the proceeds of $36.1 million of junior subordinated deferrable interest debentures and $75.0 million of senior subordinated debentures issued in 2004.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the merger:
Reunion | Klein | |||||||
January 31, | October 1, | |||||||
2004 | 2004 | |||||||
(Dollars in thousands) | ||||||||
| Cash | $ | 30,596 | $ | 78,060 | ||||
| Securities | 30,946 | 329,864 | ||||||
| Loans | 163,822 | 163,086 | ||||||
| Loan premium (discount) | (1,038 | ) | 5,574 | |||||
| Allowance for loan losses | (2,116 | ) | (1,354 | ) | ||||
| Goodwill | 29,755 | 94,827 | ||||||
| Core deposit intangibles | 6,379 | 19,629 | ||||||
| Other assets | 3,779 | 23,969 | ||||||
| Deposits | (207,026 | ) | (535,644 | ) | ||||
| Deposit (premium) discount | (39 | ) | 684 | |||||
| Borrowings | (2,000 | ) | — | |||||
| Other liabilities | (2,458 | ) | (13,695 | ) | ||||
| Cost | $ | 50,600 | $ | 165,000 | ||||
8
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Core deposit intangibles (“CDI”) are amortized using an economic life method based on deposit attrition projections derived from nationally-observed patterns within the banking industry. As a result, CDI amortization will decline over time with most of the amortization during the initial years. The Reunion CDI is being amortized over a weighted average period of thirteen and one-third years with no residual value. The Klein CDI is being amortized over a weighted average period of twelve years with no residual value.
The pro forma combined historical results, as if Reunion and Klein had been included in operations at January 1, 2004, are estimated to be as follows:
Pro forma | Pro forma | |||||||
Three Months Ended | Nine Months Ended | |||||||
September 30, 2004 | September 30, 2004 | |||||||
(Dollars in thousands, | ||||||||
except per share amounts) | ||||||||
| Net interest income after provision for loan losses and noninterest income | $ | 90,968 | $ | 256,583 | ||||
| Income before income taxes | 31,142 | 81,413 | ||||||
| Net income | 22,284 | 56,569 | ||||||
| Earnings per common share, basic | $ | 0.32 | $ | 0.82 | ||||
| Earnings per common share, diluted | $ | 0.31 | $ | 0.80 | ||||
| 3. | Securities |
The amortized cost and approximate fair value of securities classified as available for sale and held to maturity are as follows:
September 30, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
Gross Unrealized | Gross Unrealized | ||||||||||||||||||||||||||||||||||
Amortized | Amortized | ||||||||||||||||||||||||||||||||||
Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value | ||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Available for sale: | |||||||||||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | 447,494 | $ | — | $ | (8,842 | ) | $ | 438,652 | $ | 388,061 | $ | 246 | $ | (2,623 | ) | $ | 385,684 | |||||||||||||||||
| Mortgage-backed securities | 1,108,250 | 412 | (25,997 | ) | 1,082,665 | 1,237,420 | 3,820 | (11,076 | ) | 1,230,164 | |||||||||||||||||||||||||
| Municipal securities | 229,534 | 4,868 | (1,056 | ) | 233,346 | 246,705 | 7,564 | (1,392 | ) | 252,877 | |||||||||||||||||||||||||
| Federal Reserve Bank stock | 15,240 | — | — | 15,240 | 8,511 | — | — | 8,511 | |||||||||||||||||||||||||||
| Federal Home Loan Bank stock | 32,259 | — | — | 32,259 | 32,772 | — | — | 32,772 | |||||||||||||||||||||||||||
| Other securities | 43,710 | 12 | — | 43,722 | 17,196 | — | — | 17,196 | |||||||||||||||||||||||||||
| Total securities available for sale | $ | 1,876,487 | $ | 5,292 | $ | (35,895 | ) | $ | 1,845,884 | $ | 1,930,665 | $ | 11,630 | $ | (15,091 | ) | $ | 1,927,204 | |||||||||||||||||
| Held to maturity: | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 47,005 | $ | — | $ | (170 | ) | $ | 46,835 | $ | 58,033 | $ | 536 | $ | — | $ | 58,569 | ||||||||||||||||||
| Total securities held to maturity | $ | 47,005 | $ | — | $ | (170 | ) | $ | 46,835 | $ | 58,033 | $ | 536 | $ | — | $ | 58,569 | ||||||||||||||||||
9
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table displays the gross unrealized losses and fair value of investments as of September 30, 2005 that were in a continuous unrealized loss position for the periods indicated:
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||||
Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | 304,684 | $ | (4,631 | ) | $ | 133,967 | $ | (4,211 | ) | $ | 438,651 | $ | (8,842 | ) | |||||||||||
| Mortgage-backed securities | 543,763 | (9,879 | ) | 518,710 | (16,118 | ) | 1,062,473 | (25,997 | ) | |||||||||||||||||
| Municipal securities | 46,698 | (359 | ) | 30,848 | (697 | ) | 77,546 | (1,056 | ) | |||||||||||||||||
| Total securities available for sale | $ | 895,145 | $ | (14,869 | ) | $ | 683,525 | $ | (21,026 | ) | $ | 1,578,670 | $ | (35,895 | ) | |||||||||||
| Held to maturity: | ||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 46,835 | $ | (170 | ) | $ | — | $ | — | $ | 46,835 | $ | (170 | ) | ||||||||||||
| Total securities held to maturity | $ | 46,835 | $ | (170 | ) | $ | — | $ | — | $ | 46,835 | $ | (170 | ) | ||||||||||||
Declines in the fair value of individual securities below their cost that are other than temporary would result in write-downs, as a realized loss, of the individual securities to their fair value. Management believes that based upon the credit quality of the debt securities and the Company’s intent and ability to hold the securities until their recovery, none of the unrealized loss on securities should be considered other than temporary.
| 4. | Allowance for Loan Losses |
The allowance for loan losses is established through a provision for such losses charged against operations, which represents management’s estimate of probable losses inherent in the loan portfolio. The allowance is increased by provisions charged against current earnings and reduced by net charge-offs. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes is 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 current and prior periods, the amount of nonperforming loans and related collateral, and the evaluation of its loan portfolio by the loan review function.
The allowance has several components, which include specific reserves, migration analysis reserves, qualitative adjustments, a general reserve component, and a separate reserve for international, cross-border risk (allocated transfer risk reserve).
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 are reported in the period such adjustments become known or are reasonably estimable.
10
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reflects the distribution of the allowance for loan losses among the various categories of loans based on collateral types for the dates indicated. The Company has allocated portions of its allowance for loan losses to cover the estimated losses inherent in particular risk categories of loans. This allocation is made for analytical purposes only and is not necessarily indicative of the categories in which loan losses may occur. The total allowance is available to absorb losses from any category of loans.
September 30, 2005 | December 31, 2004 | |||||||||||||||||
Percent of | Percent of | |||||||||||||||||
Loans to | Loans to | |||||||||||||||||
Amount | Total Loans | Amount | Total Loans | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||
| Balance of allowance for loan losses applicable to: | ||||||||||||||||||
| Commercial and industrial | $ | 27,807 | 40.29 | % | $ | 26,285 | 45.12 | % | ||||||||||
| Real estate: | ||||||||||||||||||
| Construction and land development | 5,730 | 20.70 | 7,547 | 17.55 | ||||||||||||||
| 1-4 family residential | 7,233 | 15.31 | 6,569 | 16.06 | ||||||||||||||
| Commercial | 5,411 | 19.16 | 5,778 | 16.65 | ||||||||||||||
| Farmland | 184 | 0.29 | 156 | 0.30 | ||||||||||||||
| Other | 575 | 1.68 | 868 | 1.39 | ||||||||||||||
| Consumer | 2,249 | 2.57 | 2,205 | 2.93 | ||||||||||||||
| Total allowance for loan losses | $ | 49,189 | 100.00 | % | $ | 49,408 | 100.00 | % | ||||||||||
| 5. | Comprehensive Income (Loss) |
Total comprehensive income is reported in the accompanying condensed consolidated statement of changes in shareholders’ equity. Information related to net other comprehensive income (loss) is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||
| Change in fair value during the period | $ | (20,929 | ) | $ | 32,060 | $ | (26,326 | ) | $ | (3,007 | ) | |||||||
| Reclassification adjustment for gains included in income | (1,005 | ) | (855 | ) | (816 | ) | (599 | ) | ||||||||||
| (21,934 | ) | 31,205 | (27,142 | ) | (3,606 | ) | ||||||||||||
| Deferred tax effect | 7,677 | (10,814 | ) | 9,493 | 1,371 | |||||||||||||
| Net other comprehensive income (loss) | $ | (14,257 | ) | $ | 20,391 | $ | (17,649 | ) | $ | (2,235 | ) | |||||||
The components of accumulated other comprehensive loss, net of tax, are as follows:
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
(Dollars in thousands) | ||||||||
| Net unrealized loss on securities available for sale | $ | (19,899 | ) | $ | (2,250 | ) | ||
| Minimum pension liability | (971 | ) | (971 | ) | ||||
| Total accumulated other comprehensive loss | $ | (20,870 | ) | $ | (3,221 | ) | ||
11
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 6. | Mortgage Servicing Rights |
The Company originates residential and commercial mortgage loans both for its own portfolio and to sell to investors with servicing rights retained primarily through its ownership of Amegy Mortgage. Amegy Mortgage also purchases mortgage servicing rights.
Mortgage servicing assets are periodically evaluated for impairment based upon the fair value of the rights as compared with amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and original loan term (primarily 15 and 30 years). Fair value is determined by using quoted market prices for mortgage servicing rights with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. In periods of falling market interest rates, accelerated loan prepayment speeds can adversely impact the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets increases in the future, the Company can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Any provision and subsequent recovery would be recorded as a component of other fee income in the condensed consolidated statement of income.
The following table summarizes the changes in capitalized mortgage servicing rights for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(Dollars in thousands) | |||||||||||||||||
| Balance, beginning of period | $ | 7,253 | $ | 7,593 | $ | 7,121 | $ | 8,299 | |||||||||
| Originations | 307 | 257 | 1,010 | 757 | |||||||||||||
| Purchases | — | — | 287 | — | |||||||||||||
| Amortization | (415 | ) | (471 | ) | (1,273 | ) | (1,677 | ) | |||||||||
| Balance, end of period | $ | 7,145 | $ | 7,379 | $ | 7,145 | $ | 7,379 | |||||||||
Loans serviced for others totaled $912.5 million at September 30, 2005 and $868.8 million at September 30, 2004. Capitalized mortgage servicing rights represent 78 basis points and 85 basis points of the portfolio serviced at September 30, 2005 and 2004, respectively.
12
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 7. | Earnings Per Common Share |
Earnings per common share is computed as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||
| Net income | $ | 21,448 | $ | 19,666 | $ | 57,549 | $ | 51,174 | |||||||||
| Divided by average common shares and common share equivalents: | |||||||||||||||||
| Average common shares outstanding | 70,646 | 69,100 | 70,354 | 68,798 | |||||||||||||
| Average common shares issuable under the stock option plan | 1,739 | 1,730 | 1,490 | 1,746 | |||||||||||||
| Total average common shares and common share equivalents | 72,385 | 70,830 | 71,844 | 70,544 | |||||||||||||
| Basic earnings per common share | $ | 0.30 | $ | 0.28 | $ | 0.82 | $ | 0.74 | |||||||||
| Diluted earnings per common share | $ | 0.30 | $ | 0.28 | $ | 0.80 | $ | 0.73 | |||||||||
Stock options outstanding of 48,116 and 647 for the three months ended September 30, 2005 and 2004, respectively, and 715,070 and 241 for the nine months ended September 30, 2005 and 2004, respectively, have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented. Stock options are antidilutive when the exercise price is higher than the current market price of the Company’s common stock.
| 8. | Segment Information |
The Company has two operating segments: the Bank and Amegy Mortgage. Each segment is managed separately because each business requires different marketing strategies and each offers different products and services.
The Company evaluates each segment’s performance based on the revenue and expenses from its operations. Intersegment financing arrangements are accounted for at current market rates as if they were with third parties.
13
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summarized financial information by operating segment for the three and nine months ended September 30, 2005 and 2004 follows:
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||||||||||||
Bank | Mortgage | Eliminations | Consolidated | Bank | Mortgage | Eliminations | Consolidated | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Interest income | $ | 97,147 | $ | 7,063 | $ | (3,517 | ) | $ | 100,693 | $ | 69,287 | $ | 3,939 | $ | (1,609 | ) | $ | 71,617 | ||||||||||||||
| Interest expense | 36,946 | 3,517 | (3,517 | ) | 36,946 | 14,618 | 1,609 | (1,609 | ) | 14,618 | ||||||||||||||||||||||
| Net interest income | 60,201 | 3,546 | — | 63,747 | 54,669 | 2,330 | — | 56,999 | ||||||||||||||||||||||||
| Provision for loan losses | 1,800 | 100 | — | 1,900 | 1,852 | 1,026 | — | 2,878 | ||||||||||||||||||||||||
| Noninterest income | 29,009 | 1,654 | — | 30,663 | 24,059 | 1,266 | — | 25,325 | ||||||||||||||||||||||||
| Noninterest expenses | 59,957 | 2,556 | — | 62,513 | 50,497 | 1,787 | — | 52,284 | ||||||||||||||||||||||||
| Income before income taxes | $ | 27,453 | $ | 2,544 | $ | — | $ | 29,997 | $ | 26,379 | $ | 783 | $ | — | $ | 27,162 | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||||||||||||
Bank | Mortgage | Eliminations | Consolidated | Bank | Mortgage | Eliminations | Consolidated | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Interest income | $ | 270,631 | $ | 20,201 | $ | (9,293 | ) | $ | 281,539 | $ | 193,772 | $ | 10,988 | $ | (4,258 | ) | $ | 200,502 | ||||||||||||||
| Interest expense | 93,210 | 9,293 | (9,293 | ) | 93,210 | 36,688 | 4,258 | (4,258 | ) | 36,688 | ||||||||||||||||||||||
| Net interest income | 177,421 | 10,908 | — | 188,329 | 157,084 | 6,730 | — | 163,814 | ||||||||||||||||||||||||
| Provision for loan losses | 6,105 | 395 | — | 6,500 | 5,596 | 2,114 | — | 7,710 | ||||||||||||||||||||||||
| Noninterest income | 86,961 | 4,040 | — | 91,001 | 66,398 | 3,328 | — | 69,726 | ||||||||||||||||||||||||
| Noninterest expenses | 184,744 | 8,229 | — | 192,973 | 147,234 | 5,379 | — | 152,613 | ||||||||||||||||||||||||
| Income before income taxes | $ | 73,533 | $ | 6,324 | $ | — | $ | 79,857 | $ | 70,652 | $ | 2,565 | $ | — | $ | 73,217 | ||||||||||||||||
| Total assets | $ | 7,857,014 | $ | 452,903 | $ | (415,546 | ) | $ | 7,894,371 | $ | 6,601,850 | $ | 322,221 | $ | (290,701 | ) | $ | 6,633,370 | ||||||||||||||
Intersegment interest was paid to the bank by the mortgage company in the amount of $3.5 million and $1.6 million for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, intersegment interest was $9.3 million and $4.3 million, respectively. Advances from the bank to the mortgage company of $415.5 million and $290.7 million were eliminated in consolidation at September 30, 2005 and 2004, respectively.
| 9. | Off-Balance Sheet Credit Commitments |
In the normal course of business, the Company becomes a party to various financial transactions which, in accordance with generally accepted accounting principles, are not included in its consolidated balance sheet. These transactions involve various risks, including market and credit risks. Because these transactions generally are not funded, they do not necessarily represent future liquidity requirements. The Company offers these financial instruments to enable its customers to meet their financing objectives and to manage their interest rate risk. Supplying these instruments provides the Company with an ongoing source of fee income. These financial instruments include loan commitments and letters of credit. The Company has commitments to make additional equity investments in enterprises that primarily make investments in middle market businesses in the form of debt and equity capital. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the financial statements.
14
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amount of the Company’s financial instruments with off-balance sheet risk as of September 30, 2005 and December 31, 2004 is presented below:
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
Contract | Contract | |||||||
Amount | Amount | |||||||
(Dollars in thousands) | ||||||||
| Unfunded loan commitments including unfunded lines of credit | $ | 3,091,354 | $ | 2,720,246 | ||||
| Standby letters of credit | 404,486 | 352,555 | ||||||
| Commercial letters of credit | 37,466 | 19,496 | ||||||
| Unfunded commitments to unconsolidated investees | 21,980 | 12,621 | ||||||
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. Commitments to extend credit 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. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do 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. As of September 30, 2005 and December 31, 2004, $264,000 and $402,000, respectively, has been recorded as a liability for the fair value of the Company’s potential obligations under these letters of credit.
| 10. | Goodwill and Core Deposit Intangibles |
Changes in the carrying amount of the Company’s goodwill and core deposit intangibles for the nine months ended September 30, 2005 were as follows:
Core Deposit | |||||||||
Goodwill | Intangibles | ||||||||
(Dollars in thousands) | |||||||||
| Balance, December 31, 2004 | $ | 149,846 | $ | 27,246 | |||||
| Adjustment to acquisition of Klein | 580 | — | |||||||
| Amortization | — | (6,461 | ) | ||||||
| Balance, September 30, 2005 | $ | 150,426 | $ | 20,785 | |||||
The following table shows the estimated future amortization expense for core deposit intangibles:
Core Deposit | ||||
Intangibles | ||||
(Dollars in thousands) | ||||
| Remaining 2005 | $ | 1,517 | ||
| 2006 | 5,432 | |||
| 2007 | 4,141 | |||
| 2008 | 3,137 | |||
| 2009 | 2,212 | |||
| Thereafter | 4,346 | |||
15
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 11. | Subordinated Debentures |
| Junior Subordinated Deferrable Interest Debentures |
The Company has issued a total of $149.5 million of junior subordinated deferrable interest debentures to three wholly owned statutory business trusts, Statutory Trust I, Statutory Trust II, and Statutory Trust III (collectively, “the Trusts”). The Trusts are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, the accounts of the Trusts are not included in the Company’s consolidated financial statements. See “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” for additional information about the Company’s consolidation policy. Details of the Company’s transactions with these Trusts are presented below.
Trust | Junior | Interest | ||||||||||||||||||||||||||
Preferred | Subordinated | Rate at | ||||||||||||||||||||||||||
Issuance | Maturity | Securities | Debt Owned | September 30, | Redemption | |||||||||||||||||||||||
Description | Date | Date | Outstanding | by Trust | Interest Rate | 2005 | Date | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
| Statutory Trust I | 10/7/2003 | 12/17/2033 | $ | 50,000 | $ | 51,547 | 3-month LIBOR plus 2.85 | % | 6.74 | % | 12/17/2008 | |||||||||||||||||
| Statutory Trust II | 9/24/2004 | 10/7/2034 | 35,000 | 36,083 | 3-month LIBOR plus 1.90 | % | 5.50 | % | 10/7/2009 | |||||||||||||||||||
| Statutory Trust III | 12/13/2004 | 12/15/2034 | 60,000 | 61,856 | 3-month LIBOR plus 1.78 | % | 5.65 | % | 12/15/2009 | |||||||||||||||||||
| $ | 145,000 | $ | 149,486 | |||||||||||||||||||||||||
The Debentures are the sole assets of the Trusts and are subordinate to all of the Company’s existing and future obligations for borrowed or purchased money, obligations under letters of credit and certain derivative contracts, and any guarantees by the Company of any of such obligations. The proceeds, net of issuance costs, from these offerings were used to fund the cash purchase price for Reunion and Klein and to augment the Company’s capital ratios to support its loan growth. See “Note 2 — Merger Related Activity” for further discussion of the mergers.
The Company’s obligations under the Debentures, the related indentures, the trust agreements relating to the trust securities, and the guarantees constitute full and unconditional guarantees by the Company of the obligations of the Trusts under the trust preferred securities.
The Debentures are subject to redemption at the option of the Company, subject to prior regulatory approval, in whole or in part on or after the dates indicated in the table above, or in full within 90 days after the occurrence of certain events that either would have a negative tax effect on the Trusts or the Company, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in the Trusts being treated as an investment company. Upon repayment of the Debentures at their stated maturity or following their earlier redemption, the Trusts will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities.
| Senior Subordinated Debentures |
On September 22, 2004, the Company entered into a Subordinated Debenture Purchase Agreement. Under the terms of this agreement, the Company issued an aggregate principal amount of $75.0 million in floating rate subordinated debt. All amounts due and owed under the Subordinated Debenture are to be repaid in full on September 22, 2014. At the Company’s election, the Subordinated Debenture bears interest at LIBOR plus 125 basis points or US Bank NA prime rate less 100 basis points. The interest rate on the Subordinated Debenture was 4.74% at September 30, 2005. This agreement includes a financial covenant that the Company shall maintain such capital as may be necessary to cause the Company to be classified as “adequately capitalized” and the Bank shall maintain such capital as may be necessary to cause it to be classified as “well capitalized” as of the end of each calendar quarter. Upon declaration of or a continuing event of default, the Company will be restricted from declaring or paying or causing or permitting any
16
AMEGY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
subsidiary to pay a cash dividend or other distribution to parties that are ranked junior to the holders of the subordinated debt. The Company has agreed to certain restrictions on its ability to incur additional indebtedness that is senior to the Subordinated Debenture. If the subordinated debt ceases to qualify as Tier 2 capital under the applicable rules and regulations promulgated by the Board of Governors of the Federal Reserve System, the Company and the lender may restructure the debt as a senior unsecured obligation of the Company or the Company may repay the debt. The Company used the proceeds of the debenture to fund the cash purchase price for Klein and to augment the Company’s capital ratios to support its loan growth. See “Note 2 — Merger Related Activity” for further discussion of the merger.
| 12. | Common Stock Cash Dividend |
On August 3, 2005, the Company’s Board of Directors declared a cash dividend of $0.11 cents per common share paid on September 15, 2005 to shareholders of record as of September 1, 2005.
| 13. | Common Stock Split |
On June 17, 2004, the Company declared a stock split effected by a stock dividend payable at the rate of one share of the Company’s common stock for each share of the Company’s common stock issued and outstanding as of July 1, 2004, payable on July 15, 2004, to the holders of record as of the close of business on July 1, 2004. This stock split has been given retroactive effect in the accompanying financial statements and related notes. In addition, earnings and dividends per share data has been restated for all periods presented.
| 14. | Supplemental Cash Flow Information |
On January 31, 2004, the Company purchased all of the capital stock of Reunion for $50.0 million. In conjunction with this acquisition, liabilities were assumed as follows:
Reunion | |||||
January 31, | |||||
2004 | |||||
(Dollars in | |||||
thousands) | |||||
| Fair value of assets acquired | $ | 261,523 | |||
| Cash paid for the capital stock | (50,000 | ) | |||
| Liabilities assumed | $ | 211,523 | |||
| 15. | Subsequent Events |
On October 11, 2005, the shareholders of the Company approved a definitive agreement under which Zions Bancorporation (“Zions”) will acquire the Company. Upon completion of the transaction, the Company is expected to operate under its current name, charter and management as a separate Zions banking subsidiary. The merger is subject to regulatory approval and is expected to close during the fourth quarter of this year.
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