1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 1996.
Comission File No. 0-19968
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SOUTHWEST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3811042
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4062 Southwest Highway
Hometown, Illinois 60456
(Address of principal executive offices) (Zip Code)
(708) 636-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
----------- ------------
(2) Yes X No
----------- ------------
As of August 1, 1996, the Registrant had 1,791,514 shares of Common Stock
outstanding.
2
SOUTHWEST BANCSHARES, INC.
Form 10-Q
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of
June 30, 1996 and December 31, 1995 3
Consolidated Income Statement
for the three and six months ended
June 30, 1996 and June 30, 1995 4
Consolidated Statement of Cash
Flows for the six months ended
June 30, 1996 and June 30, 1995 5
Notes to Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-16
PART II. OTHER INFORMATION 17-18
Signatures 19
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SOUTHWEST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands)
June 30, December 31,
1996 1995
-------------- ---------------
(UNAUDITED) (AUDITED)
ASSETS:
Cash and amounts due from depository institutions ............. $ 6,201 8,294
Interest-bearing deposits ..................................... 1,500 7,574
U.S. Government and agency obligations, available for sale .... 38,168 41,983
Mortgage-backed securities, available for sale ................ 29,011 31,268
Loans receivable, net ......................................... 251,757 242,859
Foreclosed real estate ........................................ 47 47
Stock in Federal Home Loan Bank of Chicago .................... 3,108 3,319
Other investments, available for sale ......................... 8,140 8,003
Investment in joint ventures .................................. 6,713 5,694
Accrued interest receivable ................................... 2,304 2,165
Office property and equipment, net ............................ 3,195 2,822
Prepaid expenses and other assets ............................. 6,548 5,455
-------------- --------------
Total assets ............................................. 356,692 359,483
============== ==============
LIABILITIES:
Deposits ...................................................... 250,166 255,308
Federal Home Loan Bank advances ............................... 59,158 52,658
Advance payments by borrowers for taxes and insurance ......... 2,412 2,090
Other liabilities ............................................. 4,946 3,607
-------------- --------------
Total liabilities ........................................ 316,682 313,663
-------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
1,000,000 shares; none outstanding .......................... 0 0
Common stock, $.01 par value; authorized
5,000,000 shares; issued 2,949,935 shares
and outstanding 1,794,474 shares at June 30, 1996
and 1,995,374 shares at December 31, 1995 ................... 29 29
Additional paid-in capital .................................... 29,046 28,197
Retained earnings, substantially restricted ................... 40,367 39,518
Unrealized loss on available for sale securities .............. (1,417) (425)
Treasury stock, at cost (1,155,461 shares at June 30, 1996
and 902,761 shares at December 31, 1995) .................... (26,970) (20,172)
Common stock acquired by Employee Stock
Ownership Plan .............................................. (800) (960)
Common stock awarded by Management Recognition
Plan ........................................................ (245) (367)
-------------- ---------------
Total stockholders' equity................................ 40,010 45,820
-------------- ---------------
Total liabilities and stockholders' equity ............... $ 356,692 359,483
============== ===============
See notes to consolidated financial statements.
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SOUTHWEST BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENT
(In Thousands)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
Interest Income:
Interest on loans ........................................ $ 5,357 5,257 10,655 10,392
Interest on mortgage-backed securities ................... 506 570 1,020 1,143
Interest on investment securities ........................ 664 801 1,330 1,598
Interest on other financial assets ....................... 55 38 184 85
Dividends on FHLB stock .................................. 47 53 99 103
------------ ------------ ------------ ------------
Total interest income ............................... 6,629 6,719 13,288 13,321
------------ ------------ ------------ ------------
Interest Expense:
Interest on deposits ..................................... 2,768 2,935 5,582 5,389
Interest on borrowings ................................... 827 656 1,653 1,475
------------ ------------ ------------ ------------
Total interest expense .............................. 3,595 3,591 7,235 6,864
------------ ------------ ------------ ------------
Net interest income before provision for loan losses........... 3,034 3,128 6,053 6,457
Provision for loan losses ..................................... 6 4 12 4
------------ ------------ ------------ ------------
Net interest income after provision for loan losses............ 3,028 3,124 6,041 6,453
------------ ------------ ------------ ------------
Non-interest Income:
Fees and service charges ................................. 36 51 53 101
Insurance commissions .................................... 38 33 74 58
Income from joint ventures ............................... 203 113 316 130
Gain on sale of securities available for sale ............ 0 0 0 80
Gain on sale of loans .................................... 0 4 0 6
Gain (loss) on sale of real estate owned (net) ........... 6 (9) 6 (9)
Miscellaneous income ..................................... 115 82 217 152
------------ ------------ ------------ ------------
Total non-interest income ............................ 398 274 666 518
------------ ------------ ------------ ------------
Non-interest Expense:
Compensation, employee benefits and related expenses ..... 1,099 991 2,183 1,967
Advertising and promotion ................................ 47 13 78 44
Occupancy and equipment expense .......................... 299 267 611 524
Data processing .......................................... 48 43 119 107
Insurance premiums ....................................... 213 197 437 415
Legal, audit and examination services .................... 49 44 97 90
Other operating expenses ................................. 181 171 373 360
------------ ------------- ----------- ------------
Total non-interest expense .......................... 1,936 1,726 3,898 3,507
------------ ------------- ----------- ------------
Income before income taxes .................................... 1,490 1,672 2,809 3,464
Provision for federal and state income taxes .................. 503 550 947 1,191
------------ ------------- ----------- ------------
Net income .................................................... $ 987 1,122 1,862 2,273
========== ============= =========== ============
Net income per share (primary) ................................ $ 0.51 0.47 0.94 0.95
Net income per share (fully diluted) .......................... $ 0.51 0.47 0.94 0.95
Dividends declared per common share ........................... $ 0.27 0.25 0.54 0.50
See notes to consolidated financial statements.
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SOUTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six Months Ended June 30,
----------------------------------------
1996 1995
----------------------------------------
Cash flows from operating activities: (UNAUDITED) (UNAUDITED)
Net income ................................................ $ 1,862 2,273
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation ......................................... 210 158
Amortization of cost of stock benefit plans .......... 282 282
Net gain on sale of investment securities, available
for sale .......................................... 0 (80)
Net gain on sale of loans, available for sale ........ 0 (6)
Net loss (gain) on sale of foreclosed real estate .... (6) 9
Provision for loan losses-net ........................ 12 4
Decrease in prepaid and deferred federal
and state income taxes ............................ 437 141
Increase in accrued interest receivable .............. (139) (191)
Increase (decrease) in accrued interest payable ...... 34 (19)
Federal Home Loan Bank stock dividend ................ 0 (50)
Increase in other assets ............................. (497) (297)
Increase in other liabilities ........................ 1,305 118
--------------- --------------
Net cash provided by operating activities ...................... 3,500 2,342
--------------- --------------
Cash flows from investing activities:
Purchase of investment securities, available for sale .... (6,211) (6)
Proceeds from maturities of mortgage-backed securities,
available for sale .................................... 1,407 425
Proceeds from maturities of mortgage backed securities,
held to maturity ....................................... 0 286
Proceeds from sales of investment securities, available
for sale ............................................... 45 550
Proceeds from maturities of investment securities,
available for sale ..................................... 9,000 0
Purchase of stock in Federal Home Loan Bank ............... (476) (100)
Proceeds from sale of stock in Federal Home Loan Bank ..... 687 0
Proceeds from sale of loans available for sale ............ 0 1,345
Participation loans purchased ............................. (1,022) 0
Participation loans sold .................................. 1,450 1,526
Proceeds from sale of foreclosed real estate .............. 74 172
Loan disbursements ........................................ (33,682) (22,652)
Loan repayments ........................................... 24,276 16,595
Property and equipment expenditures ....................... (583) (821)
Investments in joint ventures ............................. (1,019) 157
--------------- --------------
Net cash provided for investing activities ..................... (6,054) (2,523)
--------------- --------------
Cash flows from financing activities:
Deposit receipts .......................................... 162,886 185,135
Deposit withdrawals ....................................... (173,050) (164,661)
Interest credited to deposit accounts ..................... 5,022 4,900
Proceeds of borrowed money ................................ 13,500 31,900
Repayment of borrowed funds ............................... (7,000) (53,700)
Increase in advance payments by borrowers for
taxes and insurance ..................................... 322 236
Proceeds from exercise of stock options ................... 518 57
Purchase of treasury stock ................................ (6,798) (1,952)
Dividends paid on common stock ............................ (1,013) (1,141)
--------------- --------------
Net cash provided by (for) financing activities ................ (5,613) 774
--------------- --------------
Increase (decrease) in Cash and cash equivalents ............... (8,167) 593
Cash and cash equivalents at beginning of period ............... 15,868 6,830
--------------- --------------
Cash and cash equivalents at end of period ..................... $ 7,701 7,423
=============== ==============
Cash paid during the period for:
Interest .................................................. $ 7,201 6,883
Income taxes .............................................. 538 1,050
Non-cash investing activities:
Transfer of loans to foreclosed real estate ............... 68 45
=============== ==============
See notes to consolidated financial statements.
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SOUTHWEST BANCSHARES, INC.
Notes to Consolidated Financial Statements
- - ------------------------------------------
1. Statement of Information Furnished
- - --------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and in the opinion of management contain all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position as of June 30, 1996, the results of operations for the three and six
months ended June 30, 1996 and 1995 and the cash flows for the six months ended
June 30, 1996 and 1995. These results have been determined on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The attached consolidated statements are those of Southwest
Bancshares, Inc. and its consolidated subsidiaries Southwest Federal Savings and
Loan Association of Chicago and Southwest Bancshares Development Corporation.
The results of operations for the six month period ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
These consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto, included in the Company's
Annual Report to Stockholders for the year ended December 31, 1995.
2. Earnings Per Share
- - -----------------------
Southwest Bancshares, Inc. presents earnings per share on a primary and a
fully diluted basis. Earnings per share were computed by dividing net income by
the average number of common equivalent shares outstanding during the period.
Common equivalent shares include shares issuable under the stock option plans.
3. Impact of New Accounting Standards
- - ---------------------------------------
Statement of Financial Accounting Standards No. 121 (the "SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" is effective for fiscal years beginning after December 15, 1995.
The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows is less than the carrying amount of the asset. The
Company adopted SFAS No. 121 effective January 1, 1996, resulting in no material
impact on the Company's consolidated financial position or results of
operations.
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Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
Statement of Financial Accounting Standards No. 122 (the "SFAS No. 122"),
"Accounting for Mortgage Servicing Rights". This statement amends Statement of
Financial Accounting Standards No. 65 (the "SFAS No. 65"), "Accounting for
Certain Mortgage Banking Activities" to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. SFAS No. 122 requires that
a mortgage banking enterprise assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. SFAS No. 122 is
effective for fiscal years beginning after December 15, 1995. The Company
adopted SFAS No. 122 effective January 1, 1996, resulting in no material impact
on the Company's consolidated financial position or results of operations.
Accounting for Stock-Based Compensation. In October, 1995 the FASB issued
Statement of Financial Accounting Standards No. 123 (the "SFAS No. 123"),
"Accounting for Stock-Based Compensation". This statement establishes a fair
value-based method of accounting for stock options which encourages employers to
account for stock compensation awards based on their fair value at the date the
awards are granted. The resulting compensation award would be shown as an
expense on the income statement.
SFAS No. 123 also permits entities to continue to use the intrinsic value
method, allowing them to continue to apply current accounting requirements,
which generally result in no compensation cost for most fixed stock option
plans. If the intrinsic value method is retained, SFAS No. 123 requires
significantly expanded disclosure, including disclosure of the pro forma amount
of net income and earnings per share as if the fair value-based method were used
to account for stock-based compensation. SFAS No. 123 is effective for fiscal
years beginning after December 15, 1995, however, employers will be required to
include in that year's financial statements, information about options granted
in 1995. The Company has determined that it will continue to apply the APB
Opinion #25 method in preparing its consolidated financial statements.
-7-
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- - -------
Southwest Bancshares, Inc. (the "Company") is the holding company for Southwest
Federal Savings and Loan Association of Chicago (the "Association") and
Southwest Bancshares Development Corporation, a participant in real estate
development. The Association operates a wholly-owned subsidiary, Southwest
Service Corporation, which engages in real estate development activity and
operates a full service insurance agency.
The Company's results of operations depend primarily on its level of net
interest income, which is the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
and related securities and investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits. The Company's
earnings also are affected by the level of its other income, including fee
revenue, joint venture income and gain on sale of investments and loans, as well
as its level of non-interest expenses, including employee compensation and
benefits, occupancy and equipment costs, federal deposit insurance premiums and
other general and administrative expenses. The Company's results of operations
are also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company's primary sources of funds are the Association's deposits and
proceeds from principal and interest payments on loans and mortgage-backed
securities, advances from the FHLB-Chicago and proceeds from the maturity of
investments. While maturities and scheduled amortization of loans and
mortgage-backed securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. As of June 30, 1996 the Association had outstanding
loan commitments of $12.7 million, with an average interest rate of 8.23%, of
which the majority were fixed-rate loans. Management anticipates that it will
have sufficient funds available to meet its current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
June 30, 1996 totalled $114.5 million. Based upon the Association's experience,
management believes that a significant portion of such deposits will remain with
the Association.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows from operating activities were $3.5 million for the six months ended
June 30, 1996 as compared to $2.3 million for the same period in 1995. Net cash
provided for investing activities was $6.1 million for the six months ended June
30, 1996 as compared to $2.5 million for the comparable period in 1995. Net cash
provided for financing activities was $5.6 million for the six months ended June
30, 1996 as compared to $774,000 provided by investing activities for the six
month period ended June 30, 1995.
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The primary investment activity of the Association is the origination of
mortgage loans and the purchase of mortgage-backed and mortgage-related
securities. The Association disbursed $33.7 million in mortgage loans for the
six month period ended June 30, 1996 as compared to $22.7 million for the same
six month period of 1995. The Company did not purchase mortgage-backed
securities in either six month period ended June 30, 1996 or 1995. Other
investing activities include primarily investing in U.S. Government and agency
obligations and other investments which totalled $6.2 million and $6,000 for the
six month periods ended June 30, 1996 and 1995, respectively.
The Association is required to maintain minimum levels of liquid assets as
defined by the Office of Thrift Supervision (OTS) regulations. This requirement,
which may be varied at the direction of the OTS depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The required ratio is currently 5%. The Association's
liquidity ratio was 13.45% at June 30, 1996.
The Association's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on the Association's operating, financing, lending
and investing activities during any given period. At June 30, 1996, cash and
cash equivalents totalled $7.7 million.
The OTS capital regulations require savings institutions to meet three capital
standards: a 1.5% tangible capital standard; a 3% leverage (core capital) ratio;
and an 8% risk-based capital standard. The core capital requirement was
effectively increased to 4% since OTS regulations stipulate that an institution
with less than 4% core capital will be deemed to be "undercapitalized". As of
June 30, 1996, the Association's actual capital percentages for tangible capital
of 7.83%, core capital of 7.83%, and current risk-based capital of 15.65% exceed
the regulatory requirement for each category and is considered a well
capitalized institution under the OTS prompt corrective active regulation. On
August 23, 1993, the OTS issued a final rule which sets forth the methodology
for calculating an interest rate risk component that would be incorporated into
the OTS risk-based regulatory capital rule. The effective date for the proposed
has been delayed by the OTS. This regulation is not expected to have a material
impact on the financial condition of the Association.
The Company invests in mortgage-backed and related securities as part of its
asset and liability management strategy and to complement its mortgage lending
and investment activities. The Company has designated its entire portfolio of
mortgage-backed and related securities as "available for sale" and are accounted
for at fair market value, and unrealized gains or losses are reported net of
taxes as a separate component of stockholders' equity.
As of June 30, 1996, all of the mortgage-backed and related securities owned by
the Company are issued, insured or guaranteed either directly or indirectly by a
federal agency and are typically rated in one of the two highest rated
categories by a nationally recognized rating agency.
Consistent with its asset and liability management strategy, $14.2 million or
48.86% of the Company's mortgage-backed and related securities have adjustable
interest rates, thereby reducing the impact of changing interest rates on these
securities. However, because these securities are subject to prepayments, the
Company's yield on this portfolio could be adversely affected if significant
prepayments occur.
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Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs") purchased by the Company are not classified as "high risk"
under regulatory guidelines and are subject to normal effects of changes in
interest rates. To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of CMO and REMIC securities. This policy, which has been adopted
by the OTS, requires the Company to annually test its CMOs and REMICs to
determine whether they are high risk or non-high risk securities. All CMOs and
REMICs are subjected to this stress test quarterly and at June 30, 1996, all
were considered to be low risk securities.
Non-Performing Assets - The following table sets forth information regarding
loans which are 90 days or more delinquent. The Association continues accruing
interest on delinquent loans 90 days or more past due, but reserves 100% of the
interest due on such loans, thus effecting a non-accrual status. At June 30,
1996 there were no other known problem assets except as included in the table
below.
NON-PERFORMING ASSETS
(Dollars in Thousands)
(Unaudited)
- - -----------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
1996 1996 1995 1995 1995
- - -----------------------------------------------------------------------------------------------------
Non-accrual delinquent
mortgage loans............... $430 $752 $764 $777 $871
Total real estate owned,
net of related allowance
for loan losses.............. 47 115 47 111 0
--------------------------------------------------------------------
Total non-performing
assets....................... $477 $867 $811 $888 $871
====================================================================
Allowance for loan
losses....................... $766 $760 $754 $748 $742
Total non-performing
assets to total assets....... 0.13% 0.25% 0.23% 0.24% 0.24%
Total non-performing
loans to gross loans......... 0.16% 0.30% 0.30% 0.30% 0.34%
Allowance for loan losses
to total non-performing
loans........................ 178.14% 101.06% 98.69% 96.27% 85.19%
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Interest Rate Sensitivity
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1996 which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each of
the future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability. The Association has assumed that
its passbook savings, NOW and money market accounts, which totalled $110.7
million at June 30, 1996, are withdrawn at the annual percentage rates of 6%,
38% and 15%, respectively. These withdrawal rates, as well as loan prepayment
assumptions, are based on the Association's historical experience regarding loan
prepayments and deposit withdrawals.
At June 30, 1996
-----------------------------------------------------------------------------------------
More Than More Than More Than More Than
0-3 4-12 One Year to Three Years Five Years 10 Years More Than
Months Months Three Years to Five Years to 10 Years to 20 Years to 20 Years Total
------ ------ ----------- ------------- ----------- ----------- ----------- -----
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1) ................... 23,713 20,914 48,194 37,611 63,514 50,051 8,019 252,016
Other loans (1) ...................... 4,139 --- --- 107 --- --- --- 4,246
Interest-bearing deposits ............ 1,305 95 100 --- --- --- --- 1,500
Mortgage-backed securities ........... 14,943 985 2,333 1,958 3,621 5,314 927 30,081
Investment securities ................ 20,915 5,750 7,005 6,160 11,000 --- --- 50,830
-------- ------- -------- -------- -------- -------- ------- --------
Total interest-earning
assets ........................ 65,015 27,744 57,632 45,836 78,135 55,365 8,946 338,673
Less:
Unearned discount and
deferred fees ...................... (320) (282) (651) (508) (857) (676) (108) (3,402)
-------- -------- ------ ------ -------- -------- ------- --------
Net interest-earning
assets ............................. 64,695 27,462 56,981 45,328 77,278 54,689 8,838 335,271
======== ======== ====== ====== ======== ======== ======= ========
Interest-bearing liabilities:
Passbook accounts .................... 744 2,188 2,816 2,641 2,476 2,321 34,884 48,070
NOW accounts ......................... 2,442 6,050 7,481 1,998 2,682 1,470 267 22,390
Money market accounts ................ 1,521 4,337 5,215 4,447 3,791 3,232 17,661 40,204
Certificate accounts ................. 36,160 78,330 25,012 --- --- --- --- 139,502
Borrowed funds ....................... 9,000 16,308 25,200 7,450 1,200 --- --- 59,158
-------- ------- ------ ------ -------- -------- ------- --------
Total interest-bearing
liabilities ................... 49,867 107,213 65,724 16,536 10,149 7,023 52,812 309,324
======== ======= ====== ====== ======== ======== ======= ========
Interest sensitivity gap ............. 14,828 (79,751) (8,743) 28,792 67,129 47,666 (43,974) 25,947
Cumulative interest sensitivity gap .. 14,828 (64,923) (73,666) (44,874) 22,255 69,921 25,947
Cumulative interest sensitivity gap
as a percentage of total assets .... 4.16 % (18.20) % (20.65)% (12.58)% 6.24 % 19.60 % 7.27 %
Cumulative net interest-earning
assets as a percentage of interest-
sensitive liabilities .............. 129.74 % 58.67 % 66.94 % 81.25 % 108.92 % 127.26 % 108.39 %
- - ----------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced for non-performing loans and undisbursed loan proceeds
but are not reduced by the allowance for loan losses. At June 30, 1996, non-performing loans and undisbursed loan proceeds
totalled $430,000 and $7.2 million, respectively.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table.
In this current environment of narrowing interest margins, management intends to
decrease the interest rate sensitivity by extending liability maturities and
shortening the investment portfolio.
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Average Balance Sheet
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition for the periods indicated and
reflects the average yield on assets and average cost of liabilities. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Average
balances are derived from average monthly balances. Management does not believe
that the use of month-end balances instead of average daily balances has caused
any material differences in the information presented. The yields and costs
include fees which are considered adjustments to yields.
Three Months Ended June 30,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Assets:
Interest-earning assets:
Mortgage loans, net ................... $244,897 $5,282 8.63% $239,595 $5,227 8.73%
Other loans ........................... 3,437 75 8.73 1,165 30 10.30
Mortgage-backed securities ............ 30,392 506 6.66 33,466 570 6.81
Interest-bearing deposits ............. 3,715 55 5.92 2,333 38 6.52
Investment securities ................. 50,508 711 5.63 60,230 854 5.67
-------- ------ ------ -------- ------ ------
Total interest-earning assets ..... 332,949 6,629 7.96 336,789 6,719 7.98
Non-interest earning assets ............... 20,845 18,162
-------- --------
Total assets ................. $353,794 $354,951
======== ========
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposits:
Passbook ........................ 47,062 356 3.03 47,613 361 3.03
Certificate ..................... 143,764 1,949 5.42 150,830 2,111 5.60
NOW and money market accounts.... 61,136 463 3.03 59,239 463 3.13
Borrowed funds:
FHLB advances and other ......... 53,283 827 6.21 39,625 656 6.62
------- ------ ------ -------- ------ -----
Total interest-bearing
liabilities ............... 305,245 3,595 4.71 297,307 3,591 4.83
Other liabilities ......................... 6,558 7,136
------- --------
Total liabilities ........... 311,803 304,443
Stockholders' equity ...................... 41,991 50,508
------- --------
Total liabilities and
stockholders' equity ...... $353,794 $354,951
======== ========
Net interest income/interest rate
spread (1) .............................. 3,034 3.25 3,128 3.15
Net earning assets/net interest
margin (2) ............................. $27,704 3.65% $39,482 3.72%
======== ====== ======== =====
Ratio of interest-earning assets to
interest-bearing liabilities ............ 1.09x 1.13x
======== ========
13
Six Months Ended June 30,
-------------------------------------------------------------- At June 30,
1996 1995 1996
----------------------------- ------------------------------ -------------------
Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Yield/Cost
------- -------- ---------- ------- --------- ---------- ------- ----------
Assets:
Interest-earning assets:
Mortgage loans, net ................... $244,242 $10,545 8.63 % $238,892 $10,334 8.65 % $247,511 8.12 %
Other loans ........................... 2,637 110 8.34 1,135 58 10.22 4,246 8.63
Mortgage-backed securities ............ 30,743 1,020 6.64 33,634 1,143 6.80 29,988 6.67
Interest-bearing deposits ............. 5,696 184 6.46 2,713 85 6.27 1,500 5.21
Investment securities ................. 51,104 1,429 5.59 60,393 1,701 5.63 50,830 5.55
-------- ------- ------ -------- ------ ----- -------- ----
Total interest-earning assets ..... 334,422 13,288 7.95 336,767 13,321 7.91 334,075 7.59
Non-interest earning assets ............... 20,583 18,003 22,617
-------- -------- --------
Total assets ................. $355,005 $354,770 $356,692
======== ======== ========
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposits:
Passbook ........................ 46,970 712 3.03 48,717 734 3.01 48,070 3.01
Certificate ..................... 144,490 3,933 5.44 139,823 3,696 5.29 139,502 5.36
NOW and money market accounts.... 60,981 937 3.07 62,232 959 3.08 62,594 3.06
Borrowed funds:
FHLB advances and other ......... 52,158 1,653 6.34 46,946 1,475 6.28 59,158 6.29
-------- ------- ----- ------- ------ ------ -------- ------
Total interest-bearing
liabilities ............... 304,599 7,235 4.75 297,718 6,864 4.61 309,324 4.71
Other liabilities ......................... 6,583 7,429 7,358
------- ------- --------
Total liabilities ........... 311,182 305,147 316,682
Stockholders' equity ...................... 43,823 49,623 40,010
------- --------
Total liabilities and
stockholders' equity....... $355,005 $354,770 $356,692
======== ======== ========
Net interest income/interest rate
spread (1) .............................. 6,053 3.20 6,457 3.30 2.88
Net earning assets/net interest
margin (2) ............................. $29,823 3.62 % $ 39,049 3.83 % 3.23 %
======== ===== ======== ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities ............ 1.10x 1.13x 1.08x
======== ======== ========
(1) Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of
interest-bearing liabilities.
(2) Net interest margin represents net interest income before the provision for loan losses divided by average interest-earning
assets.
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13
FINANCIAL CONDITION
- - -------------------
The assets of Southwest Bancshares, Inc. (the "Company") decreased $2.8 million,
or 0.78%, to $356.7 million for the six month period ended June 30, 1996. This
decrease was primarily the result of the $14.2 million decrease in cash,
interest-bearing deposits, government and mortgage-backed securities which were
partially offset by the $8.9 million increase in loans receivable, along with
the $1.0 million and $1.1 million increase in investment in joint ventures and
prepaid expenses and other assets, respectively.
During the six month period ended June 30, 1996, cash and interest-bearing
deposits decreased by $8.2 million, or 51.47%, which provided ordinary operating
liquidity. U.S. Government and agency obligations, available for sale decreased
$3.8 million, or 9.09%, to $38.2 million at June 30, 1996 from $42.0 million at
December 31, 1995, as the proceeds from maturities of $9.0 million were not
fully reinvested. Mortgage-backed securities, available for sale decreased $2.3
million, or 7.22%, to $29.0 million at June 30, 1996 from $31.3 million at
December 31, 1995, as a result of $1.4 million securities maturing and a market
value decrease of approximately $900,000 during the period.
Loans receivable increased to $251.8 million, an $8.9 million or 3.66% increase,
for the six months ended June 30, 1996 from $242.9 million at December 31, 1995.
This resulted primarily from funding $33.7 million in new loans which was offset
by loan repayments of $24.3 million and the sale of participation loans of $1.5
million which was offset by $1.0 million of participation loans purchased.
Other investments, available for sale increased $137,000, or 1.71%, to $8.1
million at June 30, 1996 from $8.0 million at December 31, 1995, as a result of
the reinvestment of dividends in the ARM portfolio fund.
Investment in joint ventures increased $1.0 million, or 17.90%, to $6.7 million
at June 30, 1996 from $5.7 million at December 31, 1995 as the Company increased
its investment in joint venture activities.
Office property and equipment increased $373,000, or 13.22%, to $3.2 million at
June 30, 1996 from $2.8 million at December 31, 1995, primarily as a result of
final disbursements for construction and equipment of the Orland Park office
which opened February 6, 1996.
Prepaid expenses and other assets increased to $6.5 million at June 30, 1996
from $5.5 million at December 31, 1995, an increase of $1.0 million, or 20.04%
as a result of amortization of prepaid expenses and a decrease in interest
earning assets.
Savings deposits for the six month period ended June 30, 1996 decreased by $5.1
million, or 2.01%, as the withdrawal activity of $173.0 million exceeded deposit
receipts of $162.9 million and interest credited to deposit accounts of $5.0
million. This decrease is primarily the result of withdrawals from the special
rate 8 month CDs which matured in the second quarter.
Federal Home Loan Bank advances increased $6.5 million, or 12.34%, in the six
month period ended June 30, 1996, to $59.2 million from $52.7 million at
December 31, 1995, as advances were used to provide operating liquidity.
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14
Stockholders' equity decreased $5.8 million, or 12.68%, for the six month period
ended June 30, 1996 to $40.0 million from $45.8 million at December 31, 1995.
The decrease is primarily the result of the stock repurchase program during the
period which increased treasury stock by $6.8 million, or 33.70%, as the Company
repurchased 252,700 shares of treasury stock.
ANALYSIS OF OPERATIONS
- - ----------------------
Net income for the three months ended June 30, 1996 decreased by $135,000, or
12.03%, to $1.0 million from $1.1 million for the three month period ended June
30, 1995. For the six month period ended June 30, 1996, net income decreased
$411,000, or 18.08%, to $1.9 million from $2.3 million in the same period in
1995. The decrease for both the three and six month periods is primarily
attributable to the Association's increase in cost of funds and non-interest
expense. If market interest rates continue to increase, the interest rate spread
and interest rate margin are expected to narrow.
Interest income decreased for the quarter ended June 30, 1996 to $6.6 million
from $6.7 million for the same quarter in 1995, a $90,000 or 1.34% decrease.
Interest income decreased $33,000, or 0.25%, for the six month period ended June
30, 1996 from the $13.3 million for the same six month period ended June 30,
1995. The decrease in interest income for both the three month and six month
periods was primarily attributed to the decrease in total interest-earning
assets.
Interest expense remained at $3.6 million for both the quarter ended June 30,
1996 and 1995. For the six month period ended June 30, 1996, interest expense
increased $371,000, or 5.41%, to $7.2 million from $6.9 million for the same
period in 1995. The increase for the six month period ending June 30, 1996, is
directly related to the increase in the cost of funds along with an increase in
average interest-bearing liabilities. For the six month period the cost of funds
increased 0.14%, a 3.04% increase, to 4.75% as compared to 4.61% for the same
period in 1995.
The Association calculates any allowance for possible loan losses based upon its
ongoing evaluation of pertinent factors underlying the types and quality of its
loans, including the risk inherent in its loan portfolio and other factors such
as the current regulatory and economic environment. As a result of this review,
loan loss provisions are recorded. A provision of $6,000 was established for the
three month period ended June 30, 1996 as compared to a $4,000 provision for the
first quarter of 1995. For the six month period ended June 30, 1996 a provision
of $12,000 was established as compared to $4,000 for the six month period ended
June 30, 1995. The ratio of non-performing loans to total loans was .16% as of
June 30, 1996 as compared to .30% as of December 31, 1995. The allowance for
loan losses to non-performing loans was 178.14% as of June 30, 1996 as compared
to 98.69% as of December 31, 1995. Management believes its provision for loan
losses is adequate, given the risks inherent in its loan portfolio and the
current regulatory and economic environment. Although the Association believes
its allowance for losses is at a level which it considers to be adequate to
provide for potential losses, there can be no assurance that such losses will
not exceed the estimated amounts.
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15
Activity in the allowance for loan losses for all periods presented in the
consolidated income statement is included in the following table.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
Balance at beginning of period..... $760 $738 $754 $738
Provision for loan losses.......... 6 4 12 4
Write downs charged to allowance... 0 0 0 0
Recoveries of amounts previously
charged off..................... 0 0 0 0
---- ---- ---- ----
Balance at end of period........... $766 $742 $766 $742
==== ==== ==== ====
Non-interest income increased $124,000, or 45.26%, for the three month period
ended June 30, 1996, to $398,000 from $274,000 in 1995. The increase for the six
month period ended June 30, 1996 was $148,000, or 28.57%, to $666,000 in 1996
from $518,000 in 1995. The increase in non-interest income for the three month
period ended June 30, 1996 primarily resulted from a $90,000 increase in income
from joint ventures and a $33,000 increase in miscellaneous income. The
non-interest income increase for the six month period primarily resulted from a
$186,000 increase in income from joint ventures and the $65,000 increase in
miscellaneous income partially offset by the $48,000 reduction in fees and
service charges and the $80,000 reduction of gains on sale of securities from
the six month period in 1995.
Non-interest expense increased approximately 11% for both the three and six
month periods ended June 30, 1996. A $210,000 increase for the three month
period to $1.9 million from $1.7 million in 1995 and a $391,000 increase for the
six month period to $3.9 million from $3.5 million. The increase for both
periods resulted from increases in all expense categories, primarily as a result
of nominal salary increases and expenses related to the operation of the
expanded office network.
The provision for federal and state income taxes in both periods decreased as a
result of the decrease in net income before taxes. The provision was decreased
by $47,000, or 8.55%, for the three month period ended June 30, 1996 and
decreased by $244,000, or 20.49%, for the six month period ended June 30, 1996.
RECENT DEVELOPMENTS
- - -------------------
On May 15, 1996 the Company announced a quarterly cash dividend of 27 cents per
share which was paid on June 12, 1996 to shareholders of record on May 29, 1996.
On July 16, 1996, the Company announced its intention to repurchase up to
100,000 shares, or approximately 5.6% of its outstanding shares. This program
will start after the completion of the repurchase program announced March 21,
1996, of which 95,060 shares have been purchased as of August 1, 1996.
-15-
16
Legislative initiates regarding the recapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"),
deposit insurance premiums, FICO bond interest payments, the merger of SAIF and
Bank Insurance Fund ("BIF"), financial industry regulatory structure and
revision of thrift and bank charters are still pending before Congress.
Management cannot predict the ultimate impact any final legislation or
regulatory actions may have on the operations of the Company. Without passage of
legislation addressing the FDIC insurance premium disparity, the Association,
like other thrifts, will continue to pay deposit insurance premiums
significantly higher than commercial banking institutions. As long as such
premium differential continues, it may have adverse consequences on the
Company's earnings and the Company may be placed at a substantial competitive
disadvantage to commercial banking organizations insured by the BIF.
Legislation regarding bad debt recapture has been passed by Congress and sent to
the President for signature. The legislation requires recapture of reserves
accumulated after 1987. The recapture tax on post 1987 reserves must be paid
over a six year period starting in 1996. The payment of the tax can be deferred
in each of 1996 and 1997 if an institution originates at least the same average
annual principal amount of mortgage loans that it originated in the six years
prior to 1996. Management does not believe that this legislation will have a
material impact on the operations of the Company.
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17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor its subsidiaries are involved in any
pending legal proceedings, other than routine legal matters
occurring in the ordinary course of business, which in the
aggregate involve amounts which are believed by management to be
immaterial to the consolidated financial condition or results of
operations of the Company.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders
a. The Annual Meeting of Stockholders of Southwest Bancshares,
Inc., was held April 9, 1996, at 9:30 A.M., at the Oak Lawn
Hilton Hotel, 9333 South Cicero Avenue, Oak Lawn, Illinois.
b. Proxies for the meeting were solicited pursuant to Regulation
14 of the Securities and Exchange Act, there was no
solicitation in opposition and all nominees were elected.
c. The results of the election of Directors are as follows:
Broker
For % Withheld Non-Vote
--- - -------- --------
Richard E. Webber 1,798,617 91.6 4,646 0
James W. Gee, Sr. 1,798,617 91.6 4,646 0
Joseph A. Herbert 1,798,617 91.6 4,646 0
------------------
The continuing Directors are:
Expiration
of Term as
Director
--------
Lawrence M. Cox 1997
Robert E. Lawler 1997
Frank J. Muriello 1998
Albert Rodrigues 1998
The results of the voting for the resolution to appoint Cobitz,
VandenBerg and Fennessy as auditors for the fiscal year ending
December 31, 1996 are as follows:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
1,791,192 9,400 2,671 0
91.2% .5% .1% 0
d. Does not apply
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18
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1 Amended Certificate of Incorporation of Southwest
Bancshares, Inc.*
3.2 Bylaws of Southwest Bancshares, Inc.*
11.0 Statement regarding Computation of Earnings Per
Share
Quarter Ended
June 30, 1996
---------------
Net Income $ 987,000
============
Weighted average shares outstanding 1,846,655
------------
Common stock equivalents due to
dilutive effect on stock options 81,232
------------
Total weighted average common shares
and equivalents outstanding 1,927,887
============
Primary earnings per share $ 0.51
============
Total weighted average common shares
and equivalents outstanding 1,927,887
Additional dilutive shares using the end
of period market value versus the
average market value when applying
the treasury stock method 157 *
------------
Total weighted average common shares
and equivalents outstanding for
fully diluted computation 1,928,044
============
Fully diluted earnings per share $ 0.51
============
*Note: If average share price is greater than ending price, the average price
is used for both primary and fully diluted calculation.
27.0 Financial Data Schedule (filed herewith)
b. Report on Form 8-K
None
- - ---------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, and Pre-Effective Amendment No. 1, filed on
March 13, 1992 and April 24, 1992, respectively, Registration No. 33-46409.
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19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Bancshares, Inc.
Dated: August 9, 1996 By: /s/ Richard E. Webber
-------------------------------------
Richard E. Webber
President and Chief Financial Officer
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