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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 000-22007
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SOUTHWEST BANCORPORATION OF TEXAS, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 76-0519693
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(Address of Principal Executive Offices, including zip code)
(713) 235-8800
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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There were 28,485,304 shares of the Registrant's Common Stock outstanding
as of the close of business on August 11, 2000.
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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants..................................... 2
Condensed Consolidated Balance Sheet as of
June 30, 2000 and December 31, 1999 (unaudited)...................... 3
Condensed Consolidated Statement of Income for the
Three Months Ended June 30, 2000 and 1999, and for
the Six Months Ended June 30, 2000 and 1999 (unaudited).............. 4
Condensed Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended June 30, 2000 (unaudited)............ 5
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (unaudited)...................... 6
Notes to Condensed Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and of Financial Condition and
Results of Operations............................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 25
Item 2. Changes in Securities and Use of Proceeds......................... 25
Item 3. Default upon Senior Securities.................................... 25
Item 4. Submission of Matters to a Vote of Security Holders............... 25
Item 5. Other Information................................................. 25
Item 6. Exhibits and Reports on Form 8-K.................................. 25
Signatures................................................................. 26
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Southwest Bancorporation of Texas, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Southwest Bancorporation of Texas, Inc. and Subsidiaries (the "Company") as of
June 30, 2000, the related condensed consolidated statement of income for the
three- and six-month periods ended June 30, 2000 and 1999, the condensed
consolidated statement of changes in shareholders' equity for the six-month
period ended June 30, 2000 and the condensed consolidated statement of cash
flows for the six-month periods ended June 30, 2000 and 1999. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated interim financial
statements for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1999, and the
related consolidated statements of income, of changes in shareholders' equity,
and of cash flows for the year then ended (not presented herein); and, in our
report dated February 11, 2000, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1999,
is fairly stated, in all material respects in relation to the consolidated
financial statements from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
July 17, 2000
2
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
Cash and due from banks ............................... $ 170,459 $ 148,710
Federal funds sold and other cash equivalents ......... 80,819 20,517
----------- -----------
Total cash and cash equivalents ............. 251,278 169,227
Securities -- available for sale ...................... 678,864 652,539
Loans held for sale ................................... 86,265 77,047
Loans held for investment, net ........................ 2,082,762 1,817,094
Premises and equipment, net ........................... 34,554 31,912
Accrued interest receivable ........................... 20,676 17,546
Prepaid expenses and other assets ..................... 100,917 86,831
----------- -----------
Total assets ................................ $ 3,255,316 $ 2,852,196
=========== ===========
LIABILITIES AND SHAREHOLDERS" EQUITY
Deposits:
Demand -- noninterest-bearing ..................... $ 700,874 $ 605,997
Demand -- interest-bearing ....................... 26,564 30,483
Money market accounts ............................ 968,459 906,762
Savings .......................................... 38,390 35,904
Time, $100 and over .............................. 492,285 336,974
Other time ....................................... 271,940 256,634
----------- -----------
Total deposits .............................. 2,498,512 2,172,754
Securities sold under repurchase agreements ........... 234,674 216,838
Other borrowings ...................................... 285,841 248,346
Accrued interest payable .............................. 2,883 3,034
Other liabilities ..................................... 18,492 16,227
----------- -----------
Total liabilities ........................... 3,040,402 2,657,199
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value, 75,000,000
shares authorized and 28,419,181 issued
and outstanding at June 30, 2000 and
50,000,000 shares authorized and
28,018,783 issued and outstanding at
December 31, 1999 ............................... 28,419 28,019
Additional paid-in capital ....................... 67,409 63,182
Retained earnings ................................ 134,139 115,417
Accumulated other comprehensive loss ............. (15,053) (11,621)
----------- -----------
Total shareholders' equity .................. 214,914 194,997
----------- -----------
Total liabilities and shareholders' equity .. $ 3,255,316 $ 2,852,196
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Interest income:
Loans........................... $ 47,940 $ 33,078 $ 90,880 $ 64,554
Securities...................... 10,740 11,549 21,442 22,385
Federal funds sold and other.... 460 397 866 1,151
-------- -------- -------- --------
Total interest income...... 59,140 45,024 113,188 88,090
Interest expense on deposits and
other borrowings................... 26,631 19,340 50,356 37,687
-------- -------- -------- --------
Net interest income........ 32,509 25,684 62,832 50,403
Provision for loan losses............ 1,750 1,515 3,250 3,060
-------- -------- -------- --------
Net interest income after
provision for loan
losses.................. 30,759 24,169 59,582 47,343
-------- -------- -------- --------
Other income:
Service charges................. 3,170 2,490 6,441 5,128
Investment services............. 1,349 1,036 2,543 2,075
Other fee income................ 2,136 1,746 4,153 3,937
Other operating income.......... 1,226 1,321 2,384 2,084
Loss on sale of securities,
net........................... (3) (242) (2) (149)
-------- -------- -------- --------
Total other income......... 7,878 6,351 15,519 13,075
-------- -------- -------- --------
Other expenses:
Salaries and employee
benefits...................... 14,037 11,690 27,717 23,608
Occupancy expense............... 3,449 3,037 6,843 5,971
Merger-related expenses......... -- 4,474 -- 4,474
Other operating expenses........ 6,029 4,611 12,040 9,259
-------- -------- -------- --------
Total other expenses....... 23,515 23,812 46,600 43,312
-------- -------- -------- --------
Income before income taxes
and minority interest... 15,122 6,708 28,501 17,106
Provision for income taxes........... 5,164 2,813 9,779 6,549
-------- -------- -------- --------
Income before minority
interest................ 9,958 3,895 18,722 10,557
Minority interest.................... -- 34 -- (19)
-------- -------- -------- --------
Net income available for
common shareholders..... $ 9,958 $ 3,861 $ 18,722 $ 10,576
======== ======== ======== ========
Earnings per common share:
Basic...................... $ 0.35 $ 0.14 $ 0.66 $ 0.38
======== ======== ======== ========
Diluted.................... $ 0.34 $ 0.13 $ 0.64 $ 0.37
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS" EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS LOSS EQUITY
---------- ------- ---------- -------- -------------- -------------
BALANCE, DECEMBER 31, 1999........... 28,018,783 $28,019 $63,182 $115,417 $(11,621) $194,997
Exercise of stock options.......... 400,398 400 4,244 4,644
Deferred compensation
amortization.................... (17) (17)
Comprehensive income:
Net income for the six months
ended June 30, 2000........... 18,722 18,722
Net change in unrealized
depreciation on securities
available for sale, net of
deferred taxes of $1,123...... (3,432) (3,432)
--------
Total comprehensive income......... 15,290
---------- ------- ------- -------- -------- --------
BALANCE, JUNE 30, 2000............... 28,419,181 $28,419 $67,409 $134,139 $(15,053) $214,914
========== ======= ======= ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
-------------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income ...................................... $ 18,722 $ 10,576
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ................... 3,250 3,060
Depreciation ................................ 3,451 3,662
Realized loss on securities available
for sale, net ............................. 2 149
Amortization ................................ 766 1,781
Minority interest in net (loss) of
consolidated subsidiary ................... -- (19)
Gain on sale of loans, net .................. (88) --
Dividends on Federal Home Loan Bank stock ... (482) (219)
Origination of loans held for sale and
mortgage servicing rights ................. (32,649) (55,336)
Proceeds from sales of loans ................ 22,846 46,547
Increase in accrued interest receivable,
prepaid expenses and other assets ......... (15,302) (23,491)
Increase in accrued interest payable and
other liabilities ......................... 4,749 3,474
Other, net .................................. (43) (83)
--------- ---------
Net cash provided by (used in)
operating activities ................ 5,222 (9,899)
--------- ---------
Cash flows from investing activities:
Proceeds from maturity of securities
available for sale ............................ 3,000 40,000
Proceeds from maturity of securities
held to maturity .............................. -- 2,212
Principal paydowns of mortgage-backed
securities available for sale ................. 36,701 54,423
Principal paydowns of mortgage-backed
securities held to maturity ................... -- 7,315
Proceeds from sale of securities available
for sale ...................................... 136 234,978
Purchase of securities available for sale ....... (70,174) (350,318)
Purchase of Federal Reserve Bank stock .......... (801) --
Net increase in loans receivable ................ (269,024) (95,074)
Purchase of premises and equipment .............. (6,144) (5,272)
Other, net ...................................... 41 380
--------- ---------
Net cash used in investing
activities .......................... (306,265) (111,356)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in
noninterest-bearing demand deposits ........... 94,877 (7,492)
Net increase in time deposits ................... 170,617 42,994
Net increase (decrease) in other
interest-bearing deposits ..................... 60,264 (84,504)
Net increase in securities sold under
repurchase agreements ......................... 17,836 26,420
Net increase in other short-term
borrowings ..................................... 37,495 120,198
Payments on long term borrowings ................ (3) (76)
Net proceeds from exercise of stock
options ....................................... 2,008 855
Payment of dividends on common stock ............ -- (277)
Payment of dividends to minority
stockholders .................................. -- (128)
--------- ---------
Net cash provided by
financing activities ................ 383,094 97,990
--------- ---------
Net increase (decrease) in cash and cash equivalents . 82,051 (23,265)
Cash and cash equivalents at beginning of period ..... 169,227 187,493
--------- ---------
Cash and cash equivalents at end of period ........... $ 251,278 $ 164,228
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Southwest Bancorporation of Texas, Inc. (the "Company") and its direct and
indirect wholly-owned subsidiaries Southwest Holding Delaware, Inc. (the
"Delaware Company"), Southwest Bank of Texas National Association (the "Bank"),
and Mitchell Mortgage Company, LLC ("Mitchell"). These financial statements give
retroactive effect to the merger of Fort Bend Holding Corp., ("Fort Bend") on
April 1, 1999 in a transaction accounted for as a pooling of interests. All
material intercompany accounts and transactions have been eliminated. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the Company's consolidated financial position at
June 30, 2000 and December 31, 1999, consolidated income for the three-month and
six-month periods ended June 30, 2000 and 1999, consolidated cash flows for the
six months ended June 30, 2000 and 1999 and the consolidated changes in
shareholders' equity for the six months ended June 30, 2000. Interim period
results are not necessarily indicative of results of operations or cash flows
for a full-year period.
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, 1999.
PricewaterhouseCoopers LLP is not subject to the liability provisions of
Section 11 of the Securities Act of 1933 for their report on the unaudited
financial information as of June 30, 2000 and for the three months and six
months then ended, because that report is not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of the Act.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, was
issued by the Financial Accounting Standards Board to establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 requires that an entity recognize those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The standard is effective for all
fiscal years beginning after June 15, 2000. The Company is evaluating the effect
of this pronouncement on the Company's consolidated financial position, results
of operations and cash flows.
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
Net income........................... $ 9,958 $ 3,861 $18,722 $10,576
Net change in unrealized
appreciation/(depreciation) on
securities available for sale,
net of tax....................... 1,859 (7,073) (3,432) (9,098)
------- ------- ------- -------
Total comprehensive
income (loss)............ $11,817 $(3,212) $15,290 $ 1,478
======= ======= ======= =======
7
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. EARNINGS PER COMMON SHARE
Earnings per common share is computed as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income........................... $ 9,958 $ 3,861 $18,722 $10,576
Minority interest in net income
(loss) of Mitchell, net of tax..... -- 22 -- (13)
------- ------- ------- -------
Net income, adjusted................. $ 9,958 $ 3,883 $18,722 $10,563
======= ======= ======= =======
Divided by average common shares and
common share equivalents:
Average common shares........... 28,326 27,574 28,202 27,519
Average common shares issuable
under the stock option plan... 1,007 1,078 1,017 1,032
Average common shares issuable
with the conversion of the
minority interest of
Mitchell...................... -- 277 -- 290
------- ------- ------- -------
Total average common shares and
common share equivalents........... 29,333 28,929 29,219 28,841
======= ======= ======= =======
Basic earnings per common share...... $ 0.35 $ 0.14 $ 0.66 $ 0.38
======= ======= ======= =======
Diluted earnings per common share.... $ 0.34 $ 0.13 $ 0.64 $ 0.37
======= ======= ======= =======
4. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES
During the six months ended June 30, 2000 and June 30, 1999, the Company
reduced its federal current income tax liability by approximately $2.6 million
and $591,000, respectively, and recorded a corresponding increase to additional
paid-in capital representing the tax benefit related to the exercise of certain
stock options.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Southwest Bancorporation of Texas, Inc. (the "Company") to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. The words "expect," 'anticipate," 'intend,'
"plan," 'believe," 'seek," 'estimate," and similar expressions are intended to
identify such forward-looking statements. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements due to a variety of factors, including, without limitation: (a) the
effects of future economic conditions on the Company and its customers;
(b) governmental monetary and fiscal policies, as well as legislative and
regulatory changes; (c) the risks of changes in interest rates on the level and
composition of deposits, loan demand, and the values of loan collateral,
securities and interest rate protection agreements, as well as interest rate
risks; (d) the effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions, securities
brokerage firms, insurance companies, money market and other mutual funds and
other financial institutions operating in the Company's market area and
elsewhere, including institutions operating locally, regionally, nationally and
internationally, together with such competitors offering banking products and
services by mail, telephone, computer and the Internet; and (e) the failure of
assumptions underlying the establishment of reserves for loan losses and
estimations of values of collateral and various financial assets and
liabilities. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
OVERVIEW
On April 1, 1999, the Company and Fort Bend Holding Corp. ("Fort Bend")
completed their previously announced merger, which was accounted for as a
pooling of interests. The merger agreement provided for the exchange of 1.45
shares of the Company's Common Stock for each share of Fort Bend Common Stock,
resulting in the issuance of approximately 4.6 million shares of Company Common
Stock on a fully diluted basis. In connection with this merger, the Company
incurred approximately $4.5 million in pretax merger-related expenses and other
charges in the second quarter of 1999. The historical financial data has been
restated to include the accounts and operations of Fort Bend for all periods
presented.
Total assets at June 30, 2000 and December 31, 1999 were $3.26 billion and
$2.85 billion, respectively. Gross loans were $2.19 billion at June 30, 2000, an
increase of $277.4 million or 14% from $1.91 billion at December 31, 1999. This
growth was a result of a strong local economy, and the Company's style of
relationship banking. Shareholders' equity was $214.9 million and
$195.0 million at June 30, 2000 and December 31, 1999, respectively.
For the six months ended June 30, 2000, net income was $18.7 million ($0.64
per diluted share) compared to $10.6 million ($0.37 per diluted share) for the
same period in 1999, an increase of 77%. For the three months ended June 30,
2000, net income was $10.0 million ($0.34 per diluted share) compared to
$3.9 million ($0.13 per diluted share) for the same period in 1999, an increase
of 158%. Return on average assets and return on average common shareholders'
equity for the three months ended June 30, 2000 was 1.32%, and 19.56%,
respectively.
9
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income for the three months ended June 30, 2000 was
$59.1 million, an increase of $14.1 million, or 31% from the three months ended
June 30, 1999. This increase in interest income is due to a $397.0 million
increase in average earning assets to $2.77 billion for the three months ended
June 30, 2000, a 17% increase from the same period last year. For the six months
ended June 30, 2000, interest income was $113.2 million, a $25.1 million, or 28%
increase from the same period a year ago. This increase in interest income is
due to a $367.8 million increase in average earning assets to $2.70 billion for
the six months ended June 30, 2000, a 16% increase from the same period last
year.
Interest income on loans increased $14.9 million to $47.9 million for the
three months ended June 30, 2000. This was due to a $506.5 million increase in
average loans outstanding during the same period. The average yield on loans was
9.20% for the three months ended June 30, 2000, an increase of 86 basis points
when compared to the same period in 1999. Interest income on securities
decreased to $10.7 million, a $809,000 decrease from the three month period
ended June 30, 1999. This decrease was attributable to a $106.4 million decrease
in average securities outstanding, down 14% when compared to the three months
ended June 30, 1999. Partially offsetting the decrease in average balances was a
54 basis point increase in the average yield on securities to 6.73% for the
three months ended June 30, 2000 when compared to the same period in 1999.
For the six months ended June 30, 2000, interest income on loans increased
41% to $90.9 million, up from $64.6 million for the same period last year. This
was due to a $467.7 million increase in average loans outstanding during the
same period. The average yield on loans was 9.03% for the six months ended
June 30, 2000, an increase of 66 basis points when compared to the same period
in 1999. Interest income on securities decreased to $21.4 million, a decrease of
$943,000 or 4% from the six month period ended June 30, 1999. This decrease was
attributable to a $81.2 million decrease in average securities outstanding, down
11% when compared to the six months ended June 30, 1999. This decrease was
partially offset by an increase in the average yield on securities to 6.71% for
the six months ended June 30, 2000 compared to 6.24% for the same period in
1999.
INTEREST EXPENSE
Interest expense on deposits and other borrowings was $26.6 million for the
three months ended June 30, 2000, compared to $19.3 million for the same period
in 1999. For the six months ended June 30, 2000, interest expense on deposits
and other borrowings was $50.4 million compared to $37.7 million for the same
period a year ago. The increase in interest expense was attributable to a
$328.3 million and $302.3 million respective increase in average
interest-bearing liabilities for the three- and six-month comparable periods.
The average yield on interest bearing liabilities was 4.93% for the three months
ended June 30, 2000, an increase of 72 basis points when compared to the same
period in 1999. For the six months ended June 30, 2000, the average yield on
interest bearing liabilities was 4.79%, an increase of 59 basis points when
compared to the same period in 1999.
NET INTEREST INCOME
Net interest income was $32.5 million for the three months ended June 30,
2000, compared with $25.7 million for the same period in 1999, an increase of
27%. For the six months ended June 30, 2000, net interest income increased 25%
from the same period in 1999 to $62.8 million. The increase in net interest
income during the three- and six-months ended June 30, 2000 was largely due to
growth in average interest-earning assets, primarily loans.
The net interest margin was 4.68% for the three months ended June 30, 2000,
compared with 4.34% in the second quarter of 1999. This increase resulted from
an increase in the yield on earning assets of 98 basis points from 7.61% for the
three months ended June 30, 1999 to 8.59% for the three months ended June 30,
2000. This increase in the yield on earning assets was partially offset by an
increase in the cost of funds of 72 basis points, from 4.21% for the three
months ended June 30, 1999, to 4.93% for the three months ended
10
June 30, 2000. The net interest margin was 4.64% for the six months ended
June 30, 2000, up from 4.37% for the first six months of 1999. This increase
resulted from an increase in the yield on earning assets of 81 basis points from
7.63% for the six months ended June 30, 1999 to 8.44% for the six months ended
June 30, 2000. This increase in the yield on earning assets was partially offset
by an increase in the cost of funds of 59 basis points, from 4.20% for the six
months ended June 30, 1999, to 4.79% for the six months ended June 30, 2000.
11
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are daily average balances. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans.............................. $2,096,539 $47,940 9.20% $1,590,012 $33,078 8.34%
Securities......................... 641,801 10,740 6.73 748,156 11,549 6.19
Federal funds sold and other....... 31,328 460 5.91 34,533 397 4.61
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets..................... 2,769,668 59,140 8.59% 2,372,701 45,024 7.61%
------- ---- ------- ----
Less allowance for loan losses.......... (21,799) (16,892)
---------- ----------
Total earning assets, net of
allowance............................. 2,747,869 2,355,809
Nonearning assets....................... 281,553 222,755
---------- ----------
Total assets.................. $3,029,422 $2,578,564
========== ==========
LIABILITIES AND SHAREHOLDERS" EQUITY
Interest-bearing liabilities:
Money market and savings
deposits......................... $1,066,729 11,272 4.25% $ 831,157 7,266 3.51%
Certificates of deposits........... 658,255 9,323 5.70 608,015 7,392 4.88
Repurchase agreements and borrowed
funds............................ 445,226 6,036 5.45 402,751 4,682 4.66
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities................ 2,170,210 26,631 4.93% 1,841,923 19,340 4.21%
------- ---- ------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 626,115 528,153
Other liabilities.................. 28,231 25,288
---------- ----------
Total liabilities............. 2,824,556 2,395,364
Shareholders' equity.................... 204,866 183,200
---------- ----------
Total liabilities and
shareholder's equity....... $3,029,422 $2,578,564
========== ==========
Net interest income..................... 32,509 $25,684
======= =======
Net interest spread..................... 3.66% 3.40%
==== ====
Net interest margin..................... 4.68% 4.34%
==== ====
12
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans.............................. $2,023,115 $90,880 9.03% $1,555,442 $64,554 8.37%
Securities......................... 642,647 21,442 6.71 723,897 22,385 6.24
Federal funds sold and other....... 30,595 866 5.69 49,216 1,151 4.72
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets..................... 2,696,357 113,188 8.44% 2,328,555 88,090 7.63%
------- ---- ------- ----
Less allowance for loan losses.......... (21,088) (16,333)
---------- ----------
Total earning assets, net of
allowance............................. 2,675,269 2,312,222
Nonearning assets....................... 282,392 209,139
---------- ----------
Total assets.................. $2,957,661 $2,521,361
========== ==========
LIABILITIES AND SHAREHOLDERS" EQUITY
Interest-bearing liabilities:
Money market and savings
deposits......................... $1,043,625 21,389 4.12% $ 846,503 14,825 3.53%
Certificates of deposits........... 627,164 17,291 5.54 606,254 14,738 4.90
Repurchase agreements and borrowed
funds............................ 441,425 11,676 5.32 357,154 8,124 4.59
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities................ 2,112,214 50,356 4.79% 1,809,911 37,687 4.20%
------- ---- ------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 619,820 522,005
Other liabilities.................. 25,794 25,442
---------- ----------
Total liabilities............. 2,757,828 2,357,358
Shareholders' equity.................... 199,833 164,003
---------- ----------
Total liabilities and
shareholders' equity....... $2,957,661 $2,521,361
========== ==========
Net interest income..................... $62,832 $50,403
======= =======
Net interest spread..................... 3.65% 3.43%
==== ====
Net interest margin..................... 4.64% 4.37%
==== ====
13
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances, the volatility of interest rates,
and the change in number of days due to leap year. For purposes of this table,
changes attributable to both rate and volume which cannot be segregated have
been allocated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------------
2000 VS. 1999 2000 VS. 1999
-------------------------- ---------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE DAYS TOTAL
------- ------ ------- ------- ------ ---- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $10,418 $4,444 $14,862 $19,286 $6,683 $357 $26,326
Securities.............................. (1,669) 860 (809) (2,581) 1,514 124 (943)
Federal funds sold and other............ (38) 101 63 (439) 148 6 (285)
------- ------ ------- ------- ------ ---- -------
Total increase in interest
income........................... 8,711 5,405 14,116 16,266 8,345 487 25,098
------- ------ ------- ------- ------ ---- -------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits....... 2,037 1,969 4,006 3,421 3,061 82 6,564
Certificates of deposits................ 589 1,342 1,931 470 2,002 81 2,553
Repurchase agreements and borrowed
funds................................. 480 874 1,354 1,900 1,607 45 3,552
------- ------ ------- ------- ------ ---- -------
Total increase in interest
expense.......................... 3,106 4,185 7,291 5,791 6,670 208 12,669
------- ------ ------- ------- ------ ---- -------
Increase in net interest income......... $ 5,605 $1,220 $ 6,825 $10,475 $1,675 $279 $12,429
======= ====== ======= ======= ====== ==== =======
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1.8 million for the three months ended
June 30, 2000 as compared to $1.5 million for the three months ended June 30,
1999. The provision for loan losses was $3.3 million for the six months ended
June 30, 2000 as compared to $3.1 million for the six months ended June 30,
1999. Although no assurance can be given, management believes that the present
allowance for loan losses is adequate considering loss experience, delinquency
trends and current economic conditions. Management regularly reviews the
Company's loan loss allowance as its loan portfolio grows and diversifies.
(See -- Financial Condition -- Loan Review and Allowance for Loan Losses.)
14
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 2000 was
$7.9 million, an increase of $1.5 million or 24% over the same period in 1999.
Noninterest income for the six months ended June 30, 2000 was $15.5 million, an
increase of 19%, from $13.1 million during the comparable period in 1999. The
following table presents for the periods indicated the composition of
noninterest income.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2000 1999 2000 1999
------ ------ ------- -------
(DOLLARS IN THOUSANDS)
Service charges on deposit
accounts........................... $3,170 $2,490 $ 6,441 $ 5,128
Investment services.................. 1,349 1,036 2,543 2,075
Factoring fee income................. 954 766 1,826 1,342
Loan fee income...................... 933 924 1,856 1,787
Bank-owned life insurance income..... 393 343 849 626
Letters of credit fee income......... 249 163 471 355
Loss on sale of securities, net...... (3) (242) (2) (149)
Other income......................... 833 871 1,535 1,911
------ ------ ------- -------
Total noninterest income........ $7,878 $6,351 $15,519 $13,075
====== ====== ======= =======
Service charges were $3.2 million for the three months ended June 30, 2000,
compared to $2.5 million for the three months ended June 30, 1999, an increase
of $680,000 or 27%. Service charges were $6.4 million for the six months ended
June 30, 2000 compared to $5.1 million for the same period in 1999, an increase
of $1.3 million, or 26%. The deposit accounts serviced increased to 87,788 at
June 30, 2000 from 72,654 at June 30, 1999.
For the three months ended June 30, 2000, investment services income grew
to $1.3 million, an increase of 30% over the 1999 level. For the six months
ended June 30, 2000, investment services income grew to $2.5 million or 23% from
the $2.1 million level during the 1999 period. This increase is attributable to
the expanding international and foreign exchange departments, as well as the
continued strategic focus by the Company to increase its competitive position in
providing investment services.
For the three months ended June 30, 2000, factoring fee income was up
$188,000, or 25%, and loan fee income was up $124,000, or 13%. Other
non-interest income was decreased by a reduction in fee income from arbitrage
activities, which contributed $131,000 in fees in the second quarter of 1999
versus zero for the second quarter of 2000.
For the six months ended June 30, 2000, factoring fee income was up
$484,000, or 36%. Other non-interest income was decreased by a reduction in fee
income from arbitrage activities, which contributed $386,000 in fees in the six
months ended June 30, 1999 versus zero for the same period in the current year.
Additionally, other non-interest income declined primarily from a decrease in
the gain on sale of loans of $244,000 from $332,000 for the six months ended
June 30, 1999 to $88,000 for the six months ended June 30, 2000.
NONINTEREST EXPENSES
For the three months ended June 30, 2000, noninterest expenses totaled
$23.5 million, a decrease of $297,000, or 1%, from $23.8 million during 1999.
For the six months ended June 30, 2000, noninterest expenses totaled $46.6
million, an increase of $3.3 million, or 8%, from the same period in 1999.
Included in noninterest expense for the three and six months ended June 30, 1999
is $4.5 million in merger-related expenses and other charges (including
investment banking fees, other professional fees, and severance expense) in
connection with the merger with Fort Bend.
Salaries and employee benefits for the three months ended June 30, 2000 was
$14.0 million, an increase of $2.3 million or 20% from the three months ended
June 30, 1999. Salaries and employee benefits for the six months ended June 30,
2000 was $27.7 million, an increase of $4.1 million or 17% from the
15
same period in 1999. This increase was due primarily to hiring of additional
personnel required to accommodate the Company's growth. Total full-time
employees at June 30, 2000 and 1999 were 1,010 and 889, respectively.
Occupancy expense increased $412,000, or 14% to $3.4 million for the three
months ended June 30, 2000. For the six months ended June 30, 2000, occupancy
expense increased $872,000, or 15% from the same period a year ago to $6.8
million. Major categories within occupancy expense are building lease expense
and maintenance contract expense. Building lease expense increased to $973,000
for the three months ended June 30, 2000 from $837,000 for the same period in
1999. For the six months ended June 30, 2000, building lease expense was $2.0
million, an increase of 20%, or $340,000 from $1.7 million for the first six
months of 1999. This increase resulted from increasing the rentable square feet
at the corporate office to accommodate the Company's growth. Maintenance
contract expense for the three months ended June 30, 2000 was $532,000, a 46% or
$168,000 increase from $364,000 for the same period last year. For the six
months ended June 30, 2000, maintenance contract expense increased $323,000, or
50%, for the same period a year ago to $964,000. This increase was primarily due
to new maintenance contracts purchased during the past year. The Company
purchases maintenance contracts for major operating systems throughout the
organization.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory
rate, plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of nondeductible interest expense, and
the amount of other nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officer salaries, less interest income from federal securities. For the three
months ended June 30, 2000, the provision for income taxes was $5.2 million, an
increase of $2.4 million or 84% from the $2.8 million provided for the same
period in 1999. For the six months ended June 30, 2000, income tax expense was
$9.8 million, an increase of $3.2 million or 49% from the $6.5 million provided
for the same period in 1999.
FINANCIAL CONDITION
LOANS HELD FOR INVESTMENT
Loans were $2.11 billion at June 30, 2000, an increase of $268 million or
15% from $1.84 billion at December 31, 1999.
The following table summarizes the loan portfolio of the Company by type of
loan as of June 30, 2000 and December 31, 1999:
JUNE 30, 2000 DECEMBER 31, 1999
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial real estate... $ 829,074 39.38% $ 721,229 39.27%
Real estate:
Construction and land
development...................... 619,897 29.45 494,755 26.94
1-4 family......................... 285,564 13.56 268,349 14.61
Commercial owner occupied.......... 196,574 9.34 185,679 10.11
Farmland........................... 7,067 0.34 13,056 0.71
Other.............................. 28,348 1.35 20,447 1.10
Consumer................................ 138,486 6.58 133,295 7.26
---------- ------ ---------- ------
Gross loans held for investment......... $2,105,010 100.0% $1,836,810 100.0%
========== ====== ========== ======
The primary lending focus of the Company is on small- and medium-sized
commercial, construction and land development, residential mortgage and consumer
loans. The Company offers a variety of commercial lending products including
term loans, lines of credit and equipment financing. A broad range
16
of short- to medium-term commercial loans, both collateralized and
uncollateralized, are made available to businesses for working capital
(including inventory and receivables), business expansion (including
acquisitions of real estate and improvements) and the purchase of equipment and
machinery. The purpose of a particular loan generally determines its structure.
Generally, the Company's commercial loans are underwritten in the Company's
primary market area on the basis of the borrower's ability to service such debt
from cash flow. As a general practice, the Company takes as collateral a lien on
any available real estate, equipment or other assets. Working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets.
A substantial portion of the Company's real estate loans consists of loans
collateralized by real estate and other assets of commercial customers.
Additionally, a portion of the Company's lending activity consists of the
origination of single-family residential mortgage loans collateralized by
owner-occupied properties located in the Company's primary market area. The
Company offers a variety of mortgage loan products which generally are amortized
over five to 30 years.
Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 90% of appraised value. The
Company requires mortgage title insurance and hazard insurance in the amount of
the loan. Although the contractual loan payment periods for single-family
residential real estate loans are generally for a three to five year period,
such loans often remain outstanding for significantly shorter periods than their
contractual terms.
The Bank originates and purchases residential and commercial mortgage loans
to sell to investors with servicing rights retained. The Bank also provides
residential and commercial construction financing to builders and developers and
acts as a broker in the origination of multi-family and commercial real estate
loans.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 84 months and vary based
upon the nature of collateral and size of loan.
The contractual maturity ranges of the commercial and industrial and real
estate construction loan portfolio and the amount of such loans with fixed
interest rates and floating rates in each maturity range as of June 30, 2000 are
summarized in the following table:
JUNE 30, 2000
----------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
-------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial............... $550,058 $257,065 $21,951 $ 829,074
Real estate construction and land
development........................... 360,400 216,619 42,878 619,897
-------- -------- ------- ----------
Total.............................. $910,458 $473,684 $64,829 $1,448,971
======== ======== ======= ==========
Loans with a fixed interest rate........ $346,261 $177,644 $25,113 $ 590,105
Loans with a floating interest rate..... 564,197 296,040 39,716 858,867
-------- -------- ------- ----------
Total.............................. $910,458 $473,684 $64,829 $1,448,971
======== ======== ======= ==========
LOANS HELD FOR SALE
Loans held for sale of $86.3 million at June 30, 2000 increased from $77.0
million at December 31, 1999. These loans are typically sold to investors within
one month of origination. Approximately $42 million of these loans were
previously recorded as loans held for investment and reclassified after the
merger of Fort Bend.
17
LOAN REVIEW AND ALLOWANCE FOR LOAN LOSSES
The Company's loan review procedures include a Credit Quality Assurance
Process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors, an independent loan review department
staffed with OCC experienced personnel, low individual lending limits for
officers, Senior Loan Committee approval for large credit relationships and
quality loan documentation procedures. The Company also maintains a well
developed monitoring process for credit extensions in excess of $100,000. The
Company performs monthly and quarterly concentration analyses based on various
factors such as industries, collateral types, business lines, large credit
sizes, international investments and officer portfolio loads. The Company has
established underwriting guidelines to be followed by its officers. The Company
also monitors its delinquency levels for any negative or adverse trends. There
can be no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credits due to
general economic conditions.
Historically, the Houston metropolitan area has been affected by the state
of the energy business, but since the mid 1980's the economic impact has been
reduced by a combination of increased industry diversification and less reliance
on debt to finance expansion. When energy prices fluctuate, it is the Company's
practice to review and adjust underwriting standards with respect to companies
affected by oil and gas price volatility, and to continuously monitor existing
credit exposure to companies which are impacted by this price volatility.
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Based on an evaluation of the loan
portfolio, management presents a quarterly review of the allowance for loan
losses to the Board of Directors, indicating any changes in the allowance since
the last review and any recommendations as to adjustments in the allowance. In
making its evaluation, management considers growth in the loan portfolio, the
diversification by industry of the Company's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio of
current economic indicators and their probable impact on borrowers, the amount
of charge-offs for the period, the amount of nonperforming loans and related
collateral security and the evaluation of its loan portfolio by the loan review
function. Charge-offs occur when loans are deemed to be uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. The Company then charges to operations a provision for loan
losses determined on an annualized basis to maintain the allowance for loan
losses at an adequate level determined according to the foregoing methodology.
Management believes that the allowance for loan losses at June 30, 2000 is
adequate to cover losses inherent in the portfolio as of such date. There can be
no assurance, however, that the Company will not sustain losses in future
periods, which could be greater than the size of the allowance at June 30, 2000.
18
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 2000 1999
--------------- -------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses beginning
of period.......................... $19,716 $14,980
Provision for loan losses............ 3,250 6,060
Charge-offs.......................... (889) (1,536)
Recoveries........................... 171 212
------- -------
Allowance for loan losses end of
period............................. $22,248 $19,716
======= =======
Allowance to period-end loans........ 1.06% 1.07%
Net charge-offs to average loans..... 0.07% 0.08%
Allowance to period-end nonperforming
loans.............................. 844.97% 650.91%
The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. Portions of the allowance for loan losses are allocated to
cover the estimated losses inherent in particular risk categories of loans. The
allocation of the allowance for loan losses is based upon the Company's loss
experience over a period of years and is adjusted for subjective factors such as
economic trends, performance trends, portfolio age and concentrations of credit.
The allocation is made for analytical purposes and is not necessarily indicative
of the categories in which future loan losses may occur. The total allowance is
available to absorb losses from any segment of loans.
JUNE 30, 2000 DECEMBER 31, 1999
---------------------- ----------------------
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....... $ 9,638 39.38% $10,125 39.27%
Real estate:
Construction and land
development................... 5,436 29.45 4,054 26.94
1-4 family residential.......... 2,441 13.56 2,012 14.61
Commercial owner occupied....... 1,676 9.34 1,364 10.11
Farmland........................ 45 0.34 89 0.71
Other........................... 1,052 1.35 140 1.10
Consumer............................. 1,960 6.58 1,932 7.26
------- ----- ------- -----
Total allowance for loan
losses................... $22,248 100.0% $19,716 100.0%
======= ===== ======= =====
NONPERFORMING ASSETS AND IMPAIRED LOANS
The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory. All
loans past due 90 days, however, are placed on nonaccrual status, unless the
loan is both well collateralized and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring.
Nonperforming assets were $3.2 million at June 30, 2000 compared with
$4.4 million at December 31, 1999. This resulted in a ratio of nonperforming
assets to loans plus other real estate of 0.15% and 0.24% at June 30, 2000 and
December 31, 1999, respectively.
19
The following table presents information regarding nonperforming assets as
of the dates indicated:
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans ................................... $1,391 $2,388
Accruing loans 90 or more days past due ............ 1,242 641
Other real estate and foreclosed property .......... 539 1,337
------ ------
Total nonperforming assets .................... $3,172 $4,366
====== ======
Nonperforming assets to total loans and
other real estate ................................ 0.15% 0.24%
The Company regularly updates appraisals on loans collateralized by real
estate, particularly those categorized as nonperforming loans and potential
problem loans. In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible writedowns or appropriate additions to
the allowance for loan losses.
A loan is considered impaired when, based upon current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due according to the contractual terms
of the loan agreement. The Company's impaired loans were approximately $3.8
million and $13.7 million at June 30, 2000 and December 31, 1999, respectively.
The largest component of impaired loans had been a commercial energy related
loan of approximately $10.8 million. This loan was not considered impaired at
June 30, 2000 as a result of payments in accordance with terms for a period not
less than twelve months. The average recorded investment in impaired loans
during the six months ended June 30, 2000 and the year ended December 31, 1999
was $8.6 million and $13.9 million, respectively. The total required allowance
for loan losses related to these loans was $0 for each reported period. Interest
income on impaired loans of $198,000 and $415,000 was recognized for cash
payments received during the six months ended June 30, 2000 and June 30, 1999,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
SECURITIES
At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held to maturity, trading or available for sale.
At each reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities are classified as held to maturity and measured
at amortized cost in the financial statements only if management has the
positive intent and ability to hold those securities to maturity. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings. Securities not
classified as either held to maturity or trading are classified as available for
sale and measured at fair value in the financial statements with unrealized
gains and losses reported, net of tax, as a component of accumulated other
comprehensive income (loss) until realized. Gains and losses on sales of
securities are determined using the specific-identification method. The Company
has classified all securities as available for sale at June 30, 2000. This
allows the Company to manage its investment portfolio more effectively and to
enhance the average yield on the portfolio.
20
The amortized cost and approximate fair value of securities classified as
held to maturity and available for sale is as follows:
JUNE 30, 2000
----------------------------------------------------
GROSS UNREALIZED
AMORTIZED --------------------- FAIR
COST GAIN LOSS VALUE
--------- ------ -------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. Government securities...... $102,379 $ 14 $ (2,022) $100,371
Mortgage-backed securities...... 537,139 206 (20,770) 516,575
Federal Reserve Bank stock...... 2,807 -- -- 2,807
Federal Home Loan Bank stock.... 16,168 -- -- 16,168
Other securities................ 42,932 21 (10) 42,943
-------- ------ -------- --------
TOTAL SECURITIES AVAILABLE
FOR SALE................ $701,425 $ 241 $(22,802) $678,864
======== ====== ======== ========
DECEMBER 31, 1999
----------------------------------------------------
GROSS UNREALIZED
AMORTIZED --------------------- FAIR
COST GAIN LOSS VALUE
--------- ------ -------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. Government securities...... $ 78,527 $ 35 $ (1,567) $ 76,995
Mortgage-backed securities...... 560,471 356 (16,852) 543,975
Federal Reserve Bank stock...... 2,408 -- -- 2,408
Federal Home Loan Bank stock.... 14,886 -- -- 14,886
Other securities................ 14,253 22 -- 14,275
-------- ------ -------- --------
TOTAL SECURITIES AVAILABLE
FOR SALE................ $670,545 $ 413 $(18,419) $652,539
======== ====== ======== ========
Securities totaled $678.9 million at June 30, 2000, an increase of
$26.3 million from $652.5 million at December 31, 1999. The yield on the
securities portfolio for the six months ended June 30, 2000 was 6.71% while the
yield was 6.24% for the six months ended June 30, 1999.
The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortgage-backed securities at
June 30, 2000 were $252.5 million in agency issued collateral mortgage
obligations.
At June 30, 2000, $479.3 million of the mortgage-backed securities held by
the Company had final maturities of more than 10 years. At June 30, 2000,
approximately $28.3 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase.
21
The following table summarizes the contractual maturity of investments
(including securities, federal funds sold and interest-bearing deposits) and
their weighted average yields at June 30, 2000. The yield on the securities
portfolio is based on average historical cost balances and does not give effect
to changes in fair value that are reflected as a component of other
comprehensive income.
JUNE 30, 2000
-----------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
--------------- ---------------- ---------------- -----------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED
COST YIELD COST YIELD COST YIELD COST YIELD TOTAL YIELD
--------- ----- --------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
U.S. Government securities.... $ 1,000 6.15% $ 86,379 6.27% $ 15,000 6.45% $ -- --% $102,379 6.30%
Mortgage-backed securities.... 2,242 5.22 16,106 6.77 39,529 6.46 479,262 6.56 537,139 6.55
Federal Reserve Bank stock.... 2,807 6.00 -- -- -- -- -- -- 2,807 6.00
Federal Home Loan Bank stock.. 16,168 6.26 -- -- -- -- -- -- 16,168 6.26
Other securities.............. 29,119 6.38 2,587 7.07 606 6.99 10,620 7.52 42,932 6.71
Federal funds sold............ 76,200 6.34 -- -- -- -- -- -- 76,200 6.34
Interest-bearing deposits..... 4,619 7.80 -- -- -- -- -- -- 4,619 7.80
-------- ---- -------- ---- --------- ---- -------- ---- -------- ----
Total investments......... $132,155 6.36% $105,072 6.37% $ 55,135 6.46% $489,882 6.58% $782,244 6.50%
======== ==== ======== ==== ========= ==== ======== ==== ======== ====
PREPAID EXPENSES AND OTHER ASSETS
Total prepaid expenses and other assets were $100.9 million at June 30,
2000, an increase of $14.1 million from $86.8 million at December 31, 1999.
Significant components within prepaid expenses and other assets include the cash
value of bank owned life insurance of $27.3 million and accounts receivable
purchased of $23.3 million.
DEPOSITS
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings, NOW
accounts, money market and time accounts. The Company relies primarily on
advertising, competitive pricing policies and customer service to attract and
retain these deposits. As of June 30, 2000, the Company had less than 6% of its
deposits classified as brokered funds and does not anticipate any significant
increase. Deposits provide the primary source of funding for the Company's
lending and investment activities, and the interest paid for deposits must be
managed carefully to control the level of interest expense.
The Company's ratio of average non-interest bearing demand deposits to
average total deposits for the periods ended June 30, 2000 and December 31,
1999, was 27% for both periods.
22
The average daily balances and weighted average rates paid on deposits for
the six months ended June 30, 2000 and the year ended December 31, 1999, are
presented below:
JUNE 30, 2000 DECEMBER 31, 1999
--------------------- ---------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
BALANCE RATE BALANCE RATE
----------- ---- ----------- ----
(DOLLARS IN THOUSANDS)
NOW accounts......................... $ 19,452 0.82% $ 28,807 2.31%
Regular savings...................... 37,782 2.49 36,201 2.44
Premium Yield........................ 622,821 5.02 472,501 4.24
Money market savings................. 363,570 2.93 332,525 2.92
CD's less than $100,000.............. 213,278 5.23 221,161 4.92
CD's $100,000 and over............... 359,875 5.73 345,060 4.97
IRA's, QRP's and other............... 54,011 5.54 43,201 5.43
---------- ---- ---------- ----
Total interest-bearing
deposits...................... 1,670,789 4.66% 1,479,456 4.17%
==== ====
Noninterest-bearing deposits......... 619,820 543,961
---------- ----------
Total deposits.................. $2,290,609 $2,023,417
========== ==========
The following table sets forth the maturity of the Company's time deposits
that are $100,000 or greater as of the dates indicated:
JUNE 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(DOLLARS IN THOUSANDS)
3 months or less.............................. $245,352 $177,432
Between 3 months and 6 months................. 123,255 68,476
Between 6 months and 1 year................... 93,964 67,388
Over 1 year................................... 29,714 23,678
-------- --------
Total time deposits $100,000 and over.... $492,285 $336,974
======== ========
BORROWINGS
Securities sold under repurchase agreements and other short-term
borrowings, consisting of federal funds purchased and other bank borrowings,
generally represent borrowings with maturities ranging from one to thirty days.
Information relating to these borrowings is summarized as follows:
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $207,954 $184,815
Period-end...................... 234,674 216,838
Maximum month-end balance during
period........................ 234,674 216,838
Interest rate:
Average......................... 4.48% 4.06%
Period-end...................... 4.90% 4.03%
Other short-term borrowings:
Average......................... $233,470 $189,929
Period-end...................... 285,841 248,346
Maximum month-end balance during
period........................ 371,841 265,440
Interest rate:
Average......................... 6.07% 5.33%
Period-end...................... 7.11% 5.23%
Securities sold under repurchase agreements are maintained in safekeeping
by correspondent banks.
23
LIQUIDITY AND CAPITAL RESOURCES
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. For the six months ended June 30, 2000, the
Company's liquidity needs have primarily been met by growth in deposits.
The Company's risk-based capital ratios including Leverage Capital, Tier 1
Risk-Based Capital and the Total Risk-Based Capital Ratio were 7.84%, 9.39% and
10.28%, respectively, at June 30, 2000.
OTHER MATTERS
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, was
issued by the Financial Accounting Standards Board to establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 requires that an entity recognize those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The standard is effective for all
fiscal years beginning after June 15, 2000. The Company is evaluating the effect
of this pronouncement on the Company's consolidated financial position, results
of operations and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes since December 31, 1999. See the
Company's Annual Report on Form 10-K, "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Interest Rate Sensitivity and Liquidity."
24
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders (the "Annual Meeting")
was held on April 26, 2000.
(b) The following Class I directors were elected for a three year term at
the Annual Meeting: John B. Brock III, J. David Heaney, Andres
Palandjoglou and Stanley D. Stearns, Jr. Additionally, Lane Ward was
elected for a Class III director to fill a new position in that Class
created by the Board of Directors in May 1999. The following Class II
and III directors also continued in office after the Annual Meeting:
John W. Johnson, Walter E. Johnson, Wilhelmina R. Morian, Ernest H.
Cockrell, Paul B. Murphy, Jr., Adolph A. Pfeffer, Jr., and Michael T.
Willis. A total of 23,528,917 votes were cast in favor of and 220,791
abstained from each director, except Mr. Ward. A total of 23,527,975
were cast in favor of and 221,733 abstained from the election of Lane
Ward. No votes were cast against any of the Directors.
(c) At the Annual Meeting the Company amended the Company's 1996 Stock
Option Plan to increase the number of shares of Common Stock issuable
thereunder from 2,000,000 shares to 3,000,000 shares. A total of
21,799,050 votes were cast in favor of the amendment and 1,883,289
votes against the amendment and there were 67,369 votes abstaining.
(d) At the Annual Meeting, the Company amended the Articles of
Incorporation increasing the number of authorized shares of Common
Stock from 50,000,000 to 75,000,000 shares. A total of 23,126,112
votes were cast in favor of the amendment and 561,783 votes against
the amendment and there were 61,813 votes abstaining.
(e) At the Annual Meeting, the Company also ratified the selection of
PricewaterhouseCoopers LLP, as the Company's independent auditors for
the year ending December 31, 2000. A total of 23,702,754 votes were
cast in favor of such proposal with 23,004 votes being cast against
the proposal and 23,950 votes abstaining from voting on the proposal.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
*Exhibit 4.1 -- Loan Agreement (and form of $5,000,000 Promissory
Note) dated June 30, 2000, between the Company and Bank of Oklahoma,
N.A.
Exhibit 10.1 -- Change in Control Agreement, dated as of January 1,
2000, between the Company and Paul B. Murphy, Jr.
Exhibit 10.2 -- Form of Change in Control Agreement, dated as of
January 1, 2000, between the Company and each of
Joseph H. Argue III, J. Nolan Bedford, David C.
Farries, and Steve D. Stephens.
Exhibit 15.1 -- Awareness Letter of PricewaterhouseCoopers LLP
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Company during the three months ended
June 30, 2000.
- ------------
* This Exhibit is not filed herewith because it meets the exclusion set forth
in (ss)601(b)(4)(iii) of Regulation S-K and the Company hereby agrees to
furnish a copy thereof to the Commission upon request.
25
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PAUL B. MURPHY, JR. Chief Executive Officer August 11, 2000
Paul B. Murphy, JR. and President
(Principal Executive Officer)
/s/ DAVID C. FARRIES Executive Vice President, August 11, 2000
David C. Farries Treasurer and Secretary
(Principal Financial Officer)
/s/ R. JOHN McWHORTER Senior Vice President and August 11, 2000
R. John McWhorter Controller (Principal
Accounting Officer)
26