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, 1997.
Commission File No. 0-19968
SOUTHWEST BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3811042
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4062 SOUTHWEST HIGHWAY
HOMETOWN, ILLINOIS 60456
- ---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(708) 636-2700
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
----- -----
(2) Yes X No
----- -----
As of July 25, 1997, the Registrant had 2,650,532 shares of Common Stock
outstanding.
SOUTHWEST BANCSHARES, INC.
Form 10-Q
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of
June 30, 1997 and December 31, 1996 3
Consolidated Income Statement
for the three and six months ended
June 30, 1997 and June 30, 1996 4
Consolidated Statement of Cash
Flows for the six months ended
June 30, 1997 and June 30, 1996 5
Notes to Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-15
PART II. OTHER INFORMATION 16-17
Signatures 18
-2-
SOUTHWEST BANCSHARES, INC.
CONSOLDIATED BALANCE SHEET
(In Thousands)
June 30, December 31,
1997 1996
------------ ------------
(UNAUDITED) (AUDITED)
ASSETS:
Cash and amounts due from depository institutions.......................... $ 5,646 6,300
Interest-bearing deposits.................................................. 1,008 5,380
U.S. Government and agency obligations, available for sale................. 46,815 46,591
Mortgage-backed securities, available for sale............................. 30,116 32,840
Loans receivable, net...................................................... 272,993 262,431
Foreclosed real estate..................................................... 0 117
Stock in Federal Home Loan Bank of Chicago................................. 2,734 3,108
Other investments, available for sale...................................... 725 7,428
Investment in joint ventures............................................... 7,229 7,072
Accrued interest receivable................................................ 2,410 2,274
Office property and equipment, net......................................... 2,925 3,080
Prepaid expenses and other assets.......................................... 5,724 5,740
------------ ------------
Total assets.......................................................... 378,325 382,361
============ ============
LIABILITIES:
Deposits................................................................... 278,345 280,434
Borrowed Money............................................................. 50,850 55,158
Advance payments by borrowers for taxes and insurance...................... 2,809 2,335
Other liabilities.......................................................... 4,722 4,575
------------ ------------
Total liabilities..................................................... 336,726 342,502
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000 shares;
none outstanding......................................................... 0 0
Common stock, $.01 par value; authorized 5,000,000 shares; issued
4,452,995 shares and outstanding 2,652,332 shares at June 30,
1997 and 2,637,461 shares at December 31, 1996........................... 45 44
Additional paid-in capital................................................. 29,387 29,140
Retained earnings, substantially restricted................................ 41,260 40,257
Unrealized loss on available for sale securities........................... (422) (637)
Treasury stock, at cost (1,800,663 shares at June 30, 1997 and
1,800,259 shares at December 31, 1996)................................... (28,191) (28,183)
Common stock acquired by Employee Stock Ownership Plan..................... (480) (640)
Common stock awarded by Management Recognition Plan........................ 0 (122)
------------ ------------
Total stockholders' equity............................................ 41,599 39,859
------------ ------------
Total liabilities and stockholders' equity............................ $ 378,325 382,361
============ ============
See notes to consolidated financial statements.
-3-
SOUTHWEST BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENT
(In Thousands)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
1997 1996 1997 1996
-------- ------ ------ ------
Interest Income:
Interest on loans ........................................ $ 5,715 5,357 11,365 10,655
Interest on mortgage-backed securities ................... 511 506 1,046 1,020
Interest on investment securities ........................ 695 664 1,420 1,330
Interest on other financial assets ....................... 50 55 143 184
Dividends on FHLB stock .................................. 45 47 97 99
-------- ------ ------ ------
Total interest income ............................... 7,016 6,629 14,071 13,288
-------- ------ ------ ------
Interest Expense:
Interest on deposits ..................................... 3,228 2,768 6,426 5,582
Interest on borrowings ................................... 779 827 1,593 1,653
-------- ------ ------ ------
Total interest expense .............................. 4,007 3,595 8,019 7,235
-------- ------ ------ ------
Net interest income before provision for loan losses........... 3,009 3,034 6,052 6,053
Provision for loan losses ..................................... 6 6 12 12
-------- ------ ------ ------
Net interest income after provision for loan losses............ 3,003 3,028 6,040 6,041
-------- ------ ------ ------
Non-interest Income:
Fees and service charges ................................. 31 36 83 53
Insurance commissions .................................... 57 38 97 74
Income from joint ventures ............................... 105 203 207 316
Gain on sale of securities available for sale ............ 78 0 93 0
Gain (loss) on sale of real estate owned (net) ........... 0 6 (4) 6
Miscellaneous income ..................................... 84 115 161 217
-------- ------ ------ ------
Total non-interest income ........................... 355 398 637 666
-------- ------ ------ ------
Non-interest Expense:
Compensation, employee benefits and related expenses ..... 1,090 1,099 2,177 2,183
Advertising and promotion ................................ 22 47 48 78
Occupancy and equipment expense........................... 309 299 612 611
Data processing .......................................... 58 48 135 119
Insurance premiums ....................................... 112 213 220 437
Legal, audit and examination services .................... 51 49 106 97
Other operating expenses ................................. 163 181 309 373
-------- ------ ------ ------
Total non-interest expense .......................... 1,805 1,936 3,607 3,898
-------- ------ ------ ------
Income before income taxes .................................... 1,553 1,490 3,070 2,809
Provision for federal and state income taxes .................. 542 503 1,063 947
-------- ------ ------ ------
Net income .................................................... $ 1,011 987 2,007 1,862
======== ====== ====== ======
Net income per share (primary) ................................ $ 0.37 0.34 0.73 0.63
Net income per share (fully diluted) .......................... $ 0.37 0.34 0.73 0.63
Dividends declared per common share ........................... $ 0.19 0.18 0.38 0.36
-4-
See notes to consolidated financial statements.
SOUTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six Months Ended June 30,
------------------------------
1997 1996
------------------------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income ................................................ $ 2,007 1,862
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation ......................................... 199 210
Amortization of cost of stock benefit plans .......... 282 282
Net loss on sale of mortgage-backed securities,
available for sale ................................ 33 0
Net gain on sale of investment securities, available
for sale .......................................... (126) 0
Net loss <gain> on sale of foreclosed real estate .... 4 (6)
Provision for loan losses-net ........................ 12 12
Decrease in prepaid and deferred federal
and state income taxes ............................. 235 437
Increase in accrued interest receivable .............. (136) (139)
Increase in accrued interest payable ................. 10 34
Increase in other assets ............................. (224) (497)
Increase in other liabilities ........................ 137 1,305
-------- --------
Net cash provided by operating activities ...................... 2,433 3,500
-------- --------
Cash flows from investing activities:
Purchase of investment securities, available for sale ..... (3,001) (6,211)
Proceeds from sales of mortgage-backed securities,
available for sale ..................................... 1,473 0
Proceeds from maturities of mortgage backed securities,
available for sale ..................................... 1,341 1,407
Proceeds from sales of investment securities, available
for sale ............................................... 6,849 45
Proceeds from maturities of investment securities,
available for sale ..................................... 3,000 9,000
Purchase of stock in Federal Home Loan Bank ............... (171) (476)
Proceeds from sale of stock in Federal Home Loan Bank ..... 545 687
Participation loans purchased ............................. (2,131) (1,022)
Participation loans sold .................................. 2,219 1,450
Proceeds from sale of foreclosed real estate .............. 113 74
Loan disbursements ........................................ (31,268) (33,682)
Loan repayments ........................................... 20,606 24,276
Property and equipment expenditures ....................... (44) (583)
Investments in joint ventures ............................. (157) (1,019)
-------- --------
Net cash provided for investing activities ..................... (626) (6,054)
-------- --------
Cash flows from financing activities:
Deposit receipts .......................................... 182,112 162,886
Deposit withdrawals ....................................... (190,013) (173,050)
Interest credited to deposit accounts ..................... 5,812 5,022
Proceeds of borrowed money ................................ 15,000 13,500
Repayment of borrowed funds ............................... (19,308) (7,000)
Increase in advance payments by borrowers for
taxes and insurance ..................................... 474 322
Proceeds from exercise of stock options ................... 102 518
Purchase of treasury stock ................................ (8) (6,798)
Dividends paid on common stock ............................ (1,004) (1,013)
-------- --------
Net cash provided for financing activities ..................... (6,833) (5,613)
-------- --------
Decrease in Cash and cash equivalents .......................... (5,026) (8,167)
Cash and cash equivalents at beginning of period ............... 11,680 15,868
-------- --------
Cash and cash equivalents at end of period ..................... $ 6,654 7,701
======== ========
Cash paid during the period for:
Interest .................................................. $ 8,009 7,201
Income taxes .............................................. 837 538
Non-cash investing activities:
Transfer of loans to foreclosed real estate ............... 0 68
======== ========
See notes to consolidated financial statements. -5-
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, 1997, the results of operations for the three and six
months ended June 30, 1997 and 1996 and the cash flows for the six months ended
June 30, 1997 and 1996. These results have been determined on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The attached consolidated statements are those of Southwest
Bancshares, Inc. and its consolidated subsidiaries Southwest Federal Savings and
Loan Association of Chicago and Southwest Bancshares Development Corporation.
The results of operations for the six month period ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
These consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto, included in the Company's
Annual Report to Stockholders for the year ended December 31, 1996.
2. Earnings Per Share
- -----------------------
Southwest Bancshares, Inc. presents earnings per share on a primary and a
fully diluted basis. Earnings per share were computed by dividing net income by
the average number of common equivalent shares outstanding during the period.
Common equivalent shares include shares issuable under the stock option plans.
3. Impact of New Accounting Standards
- ---------------------------------------
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement, among other things,
applies a "financial-components approach" that focuses on control, whereby an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The Company has adopted SFAS No.
125 effective January 1, 1997, resulting in no material impact on its
consolidated financial condition or results of operations.
-6-
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 ("SFAS No. 127"), "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125". The statement delays for one year the
implementation of SFAS No. 125, as it relates to (1) secured borrowings and
collateral, and (2) for the transfers of financial assets that are part of
repurchase agreement, dollar-roll, securities lending and similar transactions.
The Company has adopted portions of SFAS No. 125 (those not deferred by SFAS No.
127) effective January 1, 1997. Adoption of these portions did not have a
significant effect on the Company's financial condition or results of
operations. Based on its review of SFAS No. 125, management does not believe
that adoption of the portions of SFAS No. 125 which have been deferred by SFAS
No. 127 will have a material effect on the Company.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share". The statement is
effective for periods ending after December 15, 1997, and will require
restatement of all prior-period earnings per share ("EPS") data presented. The
statement establishes standards for computing and presenting EPS, and requires
dual presentation of basic and diluted EPS on the face of the income statement.
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Based on its review of the statement, management believes the adoption of SFAS
No. 128 will have no material effect on diluted earnings per share of the
Company.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 ("SFAS No. 129"), "Disclosure of Information about Capital
Structure". This statement establishes standards for disclosing information
about an entity's capital structure. It supersedes specific disclosure
requirements of APB Opinions No. 10, "Omnibus Opinion-1996" and No. 15,
"Earnings Per Share", and Statement of Financial Accounting Standards No. 47
("SFAS No. 47"), "Disclosure of Long-Term Obligations", and consolidates them in
this statement for ease of retrieval and for greater visibility to nonpublic
entities. This statement is effective for financial statements for periods
ending after December 15, 1997. It contains no changes in disclosure
requirements for entities that were previously subject to the requirements of
Opinions No. 10 and No. 15 and SFAS No. 47, and, therefore, is not expected to
have a significant impact on the consolidated financial condition or results of
operations of the Company.
-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Southwest Bancshares, Inc. (the "Company") is the holding company for Southwest
Federal Savings and Loan Association of Chicago (the "Association") and
Southwest Bancshares Development Corporation, a company engaged in real estate
development through joint venture partnerships. The Association operates a
wholly-owned subsidiary, Southwest Service Corporation, which also engages in
real estate development activities as well as operates a full service insurance
agency.
The Company's results of operations depend primarily on its level of net
interest income, which is the difference between interest earned on interest-
earning assets, consisting primarily of mortgage loans, mortgage-backed and
related securities and investment securities, and the interest paid on interest-
bearing liabilities, consisting primarily of deposits. The Company's earnings
also are affected by the level of its other income, including fee revenue, joint
venture income and gain on sale of investments and loans, as well as its level
of non-interest expenses, including employee compensation and benefits,
occupancy and equipment costs, federal deposit insurance premiums and other
general and administrative expenses. The Company's results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are the Association's deposits and
proceeds from principal and interest payments on loans and mortgage-backed
securities, advances from the FHLB-Chicago and proceeds from the maturity of
investments. While maturities and scheduled amortization of loans and mortgage-
backed securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. As of June 30, 1997 the Association had outstanding
loan commitments of $11.7 million, with an average interest rate of 8.56%, 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, 1997 totalled $145.6 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 $2.4 million for the six months ended
June 30, 1997 as compared to $3.5 million for the same period in 1996. Net cash
provided for investing activities was $626,000 for the six months ended June 30,
1997 as compared to $6.1 million for the comparable period in 1996. Net cash
provided for financing activities was $6.8 million for the six months ended June
30, 1997 as compared to $5.6 million provided for financing activities for the
six month period ended June 30, 1996.
-8-
The primary investment activity of the Company is the origination of mortgage
loans and the purchase of mortgage-backed and mortgage-related securities. The
Company disbursed $31.3 million in mortgage loans for the six month period ended
June 30, 1997 as compared to $33.7 million for the same six month period of
1996. The Company also purchased $2.1 million in participation loans for the six
month period ended June 30, 1997 as compared to $1.0 million in the comparable
period of 1996 and sold $2.2 million in participation loans during the six month
period ended June 30, 1997 as compared to $1.5 million in the comparable period
of 1996. The Company purchased $3.0 million of investment securities during the
six months ended June 30, 1997 as compared to $6.2 million in the same period of
1996. Proceeds from sales of mortgage-backed securities and from sales of
investment securities during the six month period ended June 30, 1997 of $1.5
million and $6.8 million, respectively, compared to no sales of mortgage-backed
securities and $45,000 in sales of investment securities during the same period
of 1996. Proceeds from maturities of mortgage-backed securities of $1.3 million
during the six month period ended June 30, 1997 compares to $1.4 million for the
same period of 1996 and proceeds from maturities of investment securities of
$3.0 million during the six month period ended June 30, 1997 compares to $9.0
million in the same period of 1996.
The Association is required to maintain minimum levels of liquid assets as
defined by the Office of Thrift Supervision (OTS) regulations. This requirement,
which may be varied at the direction of the OTS depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and short-
term borrowings. The required ratio is currently 5%. The Association's liquidity
ratio was 14.78% at June 30, 1997.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The levels of these assets
are dependent on the Association's operating, financing, lending and investing
activities during any given period. At June 30, 1997, cash and cash equivalents
totalled $6.7 million.
The OTS capital regulations require savings institutions to meet three capital
standards: a 1.5% tangible capital standard; a 3% leverage (core capital) ratio;
and an 8% risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in equity accounts of
consolidated subsidiaries less intangibles other than certain qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The core
capital requirement was effectively increased to 4% since OTS regulations
stipulate that an institution with less than 4% core capital will be deemed to
be "undercapitalized". As of June 30, 1997, the Association's actual capital
percentages for tangible capital of 8.23%, core capital of 8.23%, and current
risk-based capital of 16.97% significantly exceed the regulatory requirement for
each category. In addition, under the OTS's prompt corrective action
regulations, the Association is considered a "well capitalized" institution.
Mortgage-Backed Securities - As part of its asset and liability management
strategy and to complement its mortgage lending and investment activities, the
Company invests in mortgage-backed and mortgage-related securities. The Company
has designated its entire portfolio of mortgage-backed and mortgage-related
securities as "available for sale" and are accounted for at fair market value,
and unrealized gains or losses are reported net of taxes as a separate component
of stockholders' equity.
-9-
As of June 30, 1997, 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, $17.8 million or
59.25% 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.
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, 1997 all were
considered to be low risk securities.
Non-Performing Assets - The following table sets forth information regarding
loans which are 90 days or more delinquent. The Association continues accruing
interest on delinquent loans 90 days or more past due, but reserves 100% of the
interest due on such loans, thus effecting a non-accrual status. At June 30,
1997 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
1997 1997 1996 1996 1996
------- -------- ------- -------- -------
Non-accrual delinquent
mortgage loans............... $ 1,133 $ 671 $ 811 $ 781 $ 430
Total real estate owned,
net of related allowance
for loan losses.............. 0 0 117 47 47
------- -------- ------- -------- -------
Total non-performing
assets....................... $ 1,133 $ 671 $ 928 $ 828 $ 477
======= ======== ======= ======== =======
Allowance for loan
losses....................... $ 763 $ 757 $ 751 $ 772 $ 766
Total non-performing
assets to total assets....... 0.30% 0.18% 0.24% 0.22% 0.13%
Total non-performing
loans to gross loans......... 0.40% 0.24% 0.30% 0.29% 0.16%
Allowance for loan losses
to total non-performing
loans........................ 67.34% 112.82% 92.60% 98.85% 178.14%
-10-
Interest Rate Sensitivity
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997 which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each of
the future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability. The Association has assumed that
its passbook savings, NOW and money market accounts, which totalled $107.0
million at June 30, 1997, are withdrawn at the annual percentage rates of 6%,
38% and 15%, respectively. These withdrawal rates, as well as loan prepayment
assumptions, are based on the Association's historical experience regarding loan
prepayments and deposit withdrawals.
At June 30, 1997
-----------------------------------------------------------------------------------------
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 20 years Total
-----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1)............... $ 22,773 23,185 53,425 41,492 66,803 52,490 7,251 267,419
Other loans (1).................. 8,249 - 92 - - - - 8,341
Interest-bearing deposits........ 913 95 - - - - - 1,008
Mortgage backed securities....... 18,541 971 2,239 1,818 3,221 3,160 739 30,689
Investment securities............ 10,084 12,850 12,000 5,630 10,000 - - 50,564
-------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning
assets.................. 60,560 37,101 67,756 48,940 80,024 55,650 7,990 358,021
Less:
Unearned discount and
deferred fees................. (281) (286) (658) (511) (823) (647) (90) (3,296)
-------- ------- ------- ------- ------- ------- ------- -------
Net interest-earning
assets.................. $ 60,279 36,815 67,098 48,429 79,201 55,003 7,900 354,725
======== ======= ======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Passbook accounts................ $ 729 2,145 2,761 2,588 2,427 2,275 34,191 47,116
NCW accounts..................... 2,301 5,701 7,051 1,883 2,528 1,386 260 21,110
Money market accounts............ 1,458 4,160 5,007 4,269 3,640 3,104 17,188 38,826
Certificate accounts............. 36,005 109,574 25,714 - - - - 171,293
Borrowed funds................... 13,000 9,500 26,700 1,650 - - - 50,850
-------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities............. $ 53,493 131,080 67,233 10,390 8,595 6,765 51,639 329,195
======== ======= ======= ======= ======= ======= ======= =======
Interest sensitivity gap......... $ 6,786 (94,265) (135) 38,039 70,606 48,238 (43,739) 25,530
Cumulative interest sensitivity
gap........................... $ 6,786 (87,479) (87,614) (49,575) 21,031 69,269 25,530
Cumulative interest senstivity
gap as a percentage of
total assets.................. 1.79% (23.12) (23.16) (13.10) 5.56 18.31 6.75
Cumulative net interest-earning
assets as a percentage of
interest-sensitive
liabilities................... 112.69% 52.60 65.21 81.09 107.77 124.96 107.76
- ----------
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, 1997, non-performing loans and
undisbursed loan proceeds totalled $1.1 million and $8.1 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.
-11-
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,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- --------- -------- ----------
(dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans, net ........................... $ 262,001 $ 5,533 8.45% 244,897 5,282 8.63
Other loans ................................... 8,171 182 8.91 3,437 75 8.73
Mortgage-backed securities .................... 30,816 511 6.63 30,392 506 6.66
Interest-bearing deposits ..................... 2,490 50 8.03 3,715 55 5.92
Investment securities ......................... 50,148 740 5.90 50,508 711 5.63
--------- -------- ---------- --------- -------- ----------
Total interest-earning assets ............ 353,626 7,016 7.94 332,949 6,629 7.96
Non-interest earning assets ........................ 21,995 20,845
--------- ---------
Total assets ........................ $ 375,621 353,794
========= =========
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposits:
Passbook ................................. 47,163 $ 365 3.09% 47,062 356 3.03
Certificate .............................. 171,619 2,391 5.57 143,764 1,949 5.42
NOW and money market accounts ............ 59,288 472 3.18 61,136 463 3.03
Borrowed funds:
FHLB advances and other .................. 49,325 779 6.32 53,283 827 6.21
--------- -------- ---------- --------- -------- ----------
Total interest-bearing liabilities .. 327,395 4,007 4.90 305,245 3,595 4.71
Other liabilities .................................. 7,817 6,558
--------- ---------
Total liabilities ................... 335,212 311,803
Stockholders' equity ............................... 40,409 41,991
--------- ---------
Total liabilities and stockholders'
equity ............................ $ 375,621 353,794
========= =========
Net interest income/interest rate spread (1) ....... $ 3,009 3.04% 3,034 3.25
Net earning assets/net interest margin (2) ......... $ 26,231 3.40% 27,704 3.65
========= ========== ========= ==========
Ratio of interest-earning assets to interest-
bearing liabilities ................................ 1.08 x 1.09
========= ==========
Six Months Ended June 30,
--------------------------------------------------------------
1997 1996
----------------------------- ------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- --------- -------- -----------
(dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans, net ........................... 260,077 11,026 8.48 244,242 10,545 8.63
Other loans ................................... 7,778 339 8.72 2,637 110 8.34
Mortgage-backed securities .................... 31,566 1,046 6.63 30,743 1,020 6.64
Interest-bearing deposits ..................... 4,612 143 6.20 5,696 184 6.46
Investment securities ......................... 51,604 1,517 5.88 51,104 1,429 5.59
--------- -------- ---------- --------- -------- -----------
Total interest-earning assets ............ 355,637 14,071 7.91 334,422 13,288 7.95
Non-interest earning assets ........................ 22,635 20,583
--------- ---------
Total assets ........................ 378,272 355,005
========= =========
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposits:
Passbook ................................. 47,187 720 3.05 46,970 712 3.03
Certificate .............................. 172,119 4,768 5.54 144,490 3,933 5.44
NOW and money market accounts ............ 59,515 938 3.15 60,981 937 3.07
Borrowed funds:
FHLB advances and other .................. 50,767 1,593 6.28 52,158 1,653 6.34
--------- -------- ---------- --------- -------- -----------
Total interest-bearing liabilities .. 329,588 8,019 4.87 304,599 7,235 4.75
Other liabilities .................................. 8,171 6,583
--------- ---------
Total liabilities ................... 337,759 311,182
Stockholders' equity ............................... 40,513 43,823
--------- ---------
Total liabilities and stockholders'
equity ............................ 378,272 355,005
========= =========
Net interest income/interest rate spread (1) ....... 6,052 3.04 6,053 3.20
Net earning assets/net interest margin (2) ......... 26,049 3.40 29,823 3.62
========= ========== ========= ===========
Ratio of interest-earning assets to interest-
bearing liabilities ................................ 1.08 1.10
========= =========
At June 30,
1997
---------------------
Average
Balance Yield/Cost
--------- -----------
Assets:
Interest-earning assets:
Mortgage loans, net ........................... 264,652 8.09
Other loans ................................... 8,341 8.94
Mortgage-backed securities .................... 30,530 6.67
Interest-bearing deposits ..................... 1,008 5.32
Investment securities ......................... 50,564 5.83
--------- ----------
Total interest-earning assets ............ 355,095 7.66
Non-interest earning assets ........................ 23,230
---------
Total assets ........................ 378,325
=========
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposits:
Passbook ................................. 47,116 3.01
Certificate .............................. 171,293 5.68
NOW and money market accounts ............ 59,936 3.07
Borrowed funds:
FHLB advances and other .................. 50,850 6.36
--------- ----------
Total interest-bearing liabilities .. 329,195 4.93
Other liabilities .................................. 7,531
---------
Total liabilities ................... 336,726
Stockholders' equity ............................... 41,599
---------
Total liabilities and stockholders'
equity ............................ 378,325
=========
Net interest income/interest rate spread (1) ....... 2.73
Net earning assets/net interest margin (2) ......... 3.09
==========
Ratio of interest-earning assets to interest-
bearing liabilities ................................ 1.08
=========
(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.
-12-
FINANCIAL CONDITION
- -------------------
The assets of the Company decreased $4.0 million, or 1.06%, to $378.3 million
for the six month period ended June 30, 1997 from $382.4 million at December 31,
1996. This decrease primarily resulted from a $5.0 million decrease in cash and
interest-bearing deposits, a $2.7 million decrease in mortgage-backed
securities, available for sale, and a $6.7 million decrease in other
investments, available for sale, all partially offset by the $10.6 million
increase in net loans receivable.
During the six month period ended June 30, 1997, cash and interest-bearing
deposits decreased by $5.0 million, or 43.03%, to $6.7 million at June 30, 1997
from $11.7 million at December 31, 1996. U.S. Government and agency obligations,
available for sale, increased $224,000, or 0.48%, to $46.8 million at June 30,
1997 from $46.6 million at December 31, 1996, as a result of market value
adjustments.
Mortgage-backed securities, available for sale decreased $2.7 million, or 8.29%,
to $30.1 million at June 30, 1997 from $32.8 million at December 31, 1996, as a
result of sales of $1.5 million along with principal repayments and market value
adjustments.
Loans receivable increased $10.6 million, or 4.02%, to $273.0 million for the
six months ended June 30, 1997 from $262.4 million at December 31, 1996. This
resulted primarily from funding $33.4 million in new loans and participation
loan purchases which were offset by loan repayments and participation loans sold
of $22.8 million.
The Association has no foreclosed real estate at June 30, 1997 as compared to
$117,000 at December 31, 1996.
Other investments, available for sale decreased $6.7 million, or 90.24%, to
$725,000 at June 30, 1997 as compared to $7.4 million at December 31, 1996,
primarily as a result of the sale of an ARM loan mutual fund.
Savings deposits for the six month period ended June 30, 1997 decreased by $2.1
million, or 0.74%, as withdrawal activity of $190.0 million exceeded deposit
receipts of $182.1 million and $5.8 million in interest credited to deposit
accounts.
Borrowed money decreased $4.3 million, or 7.81%, in the six month period ended
June 30, 1997, to $50.9 million from $55.2 million at December 31, 1996, as
borrowings were repaid.
Stockholders' equity increased $1.7 million, or 4.37%, for the six month period
ended June 30, 1997, to $41.6 million at June 30, 1997 from $39.9 million at
December 31, 1996, as a result of net income of $2.0 million, an increase of
$102,000 from the exercise of stock options, a decrease of $215,000 in
unrealized loss on available for sale securities and the decrease in the
amortization of $160,000 and $122,000 of the ESOP and MRP plans, respectively,
which were partially offset by the dividend payment of $1.0 million.
ANALYSIS OF OPERATIONS
- ----------------------
Net income for the three months ended June 30, 1997 increased by $24,000, or
2.43%, to $1.0 million from $987,000 for the three month period ended June 30,
1996. For the six month period ended June 30, 1997, net income increased
$145,000, or 7.79%, to $2.0 million from $1.9 million in the same
-13-
period in 1996. The increase for both the three and six month periods is
primarily attributable to the reduction in non-interest expense resulting from
the reduced FDIC insurance expense.
Interest income increased for the quarter ended June 30, 1997 to $7.0 million
from $6.6 million for the same quarter in 1996, a $387,000 or 5.84% increase.
Interest income increased $783,000, or 5.89%, to $14.1 million for the six month
period ended June 30, 1997 from $13.3 million for the same six month period
ended June 30, 1996. The increase in interest income for both the three and six
month periods was primarily attributed to the increase in total interest-earning
assets, particularly the $10.6 million increase in loans receivable.
Interest expense increased to $4.0 million, an increase of $412,000, or 11.46%,
for the quarter ended June 30, 1997 as compared to $3.6 million for the quarter
ended June 30, 1996. For the six month period ended June 30, 1997, interest
expense increased $784,000, or 10.84%, to $8.0 million from $7.2 million for the
same period in 1996. The increase for both the three and six month periods
ending June 30, 1997 is directly related to the increase in the cost of funds
along with an increase in average interest-bearing liabilities. For the three
month period the cost of funds increased 0.19%, a 4.03% increase, to 4.90% as
compared to 4.71% for the same period in 1996. For the six month period the cost
of funds increased 0.12%, a 2.53% increase, to 4.87% as compared to 4.75% for
the same period in 1996.
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
both the three month periods ended June 30, 1997 and 1996. A provision of
$12,000 was established for both the six month periods ended June 30, 1997 and
1996. The ratio of non-performing loans to total loans was .40% as of June 30,
1997 as compared to .30% as of December 31, 1996. The allowance for loan losses
to non-performing loans was 67.34% as of June 30, 1997 as compared to 92.60% as
of December 31, 1996. Management believes its provision for loan losses is
adequate, given the risks inherent in its loan portfolio and the current
regulatory and economic environment. Although the Association believes its
allowance for loan losses is at a level which it considers to be adequate to
provide for potential losses, there can be no assurance that such losses will
not exceed the estimated amounts.
Activity in the allowance for loan losses for all periods presented in the
consolidated income statement is included in the following table.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
Balance at beginning of period........... $ 757 $ 760 $ 751 $ 754
Provision for loan losses................ 6 6 12 12
Write downs charged to allowance......... 0 0 0 0
Recoveries of amounts previously
charged off........................... 0 0 0 0
------ ------ ------ ------
Balance at end of period................. $ 763 $ 766 $ 763 $ 766
====== ====== ====== ======
-14-
Non-interest income decreased $43,000, or 10.80%, for the three month period
ended June 30, 1997, to $355,000 from $398,000 in 1996. The decrease for the six
month period ended June 30, 1997 was $29,000, or 4.35%, to $637,000 in 1997 from
$666,000 in 1996. The decrease in non-interest income for the three month period
ended June 30, 1997 primarily resulted from a $19,000 increase in insurance
commissions and a $78,000 increase in gain on sale of securities offset by the
$98,000 decrease in joint venture income and the $31,000 decrease in
miscellaneous income. The non-interest income decrease for the six month period
primarily resulted from increases in fees and service charges of $30,000,
insurance commissions of $23,000 and gain on sale of securities of $93,000 which
were offset by the $109,000 reduction in joint venture income and the $56,000
reduction in miscellaneous income.
Non-interest expense decreased $131,000, or 6.77%, for the three month period
ended June 30, 1997 to $1.8 million from $1.9 million in the same period 1996.
For the six month period ended June 30, 1997, non-interest expense decreased
$291,000, or 7.47%, to $3.6 million from $3.9 million for the same six month
period in 1996. The decrease for the three month period resulted from the
significant reduction of $101,000 in insurance premium expense along with the
$25,000 reduction in advertising and promotion expenses and the $18,000
reduction in other operating expenses which were partially offset by nominal
increases in occupancy and equipment expenses of $10,000, data processing
expenses of $10,000 and legal and audit expenses of $2,000. The decrease for the
six month period resulted from the reduction of insurance premium expense of
$217,000, other operating expenses of $64,000 and advertising and promotion
expenses of $30,000 which were partially offset by nominal increases in data
processing expenses of $16,000 and legal and audit services of $9,000.
Compensation, employee benefits and related expenses remained relatively stable
for both the three and six month periods.
The provision for federal and state income taxes in both periods increased as a
result of the increase in net income before taxes. The provision was increased
by $39,000, or 7.75%, for the three month period ended June 30, 1997 and
increased by $116,000, or 12.25%, for the six month period ended June 30, 1997.
RECENT DEVELOPMENTS
- -------------------
On May 14, 1997 the Company announced a quarterly cash dividend of 19 cents per
share which was paid on June 10, 1997 to shareholders of record on May 27, 1997.
On July 16, 1996, the Company announced its intention to repurchase up to
100,000 shares, or approximately 5% of its outstanding shares at that time. With
the 3-for-2 stock split announced in the fourth quarter of 1996 the amount of
shares authorized to repurchase increased to 150,000. This repurchase program
continues and is to be accomplished by purchasing shares in open market
transactions, from time to time, subject to availability. As of July 25, 1997
the purchase of 53,641 shares had been completed.
Thrift Rechartering Legislation. The proposed legislation regarding elimination
of the federal thrift charter and related issues remains pending before
Congress. The Company is unable to predict whether such legislation would be
enacted, the extent to which the legislation would restrict or disrupt its
operations or whether the BIF and SAIF funds will eventually merge. See Form 10-
K for the fiscal year ended December 31, 1996 for a discussion of the proposed
legislation.
-15-
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 22, 1997, 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
--------- ---- -------- --------
Lawrence M. Cox 2,326,398 88.2 7,272 0
Robert E. Lawler 2,329,118 88.3 4,552 0
----------------------
The continuing Directors are:
Expiration
of Term as
Director
----------
Frank J. Muriello 1998
Albert Rodrigues 1998
Richard E. Webber 1999
James W. Gee, Sr. 1999
Joseph A. Herbert 1999
The results of the voting for the resolution to appoint Cobitz,
VandenBerg and Fennessy as auditors for the fiscal year ending
December 31, 1997 are as follows:
Broker
For Against Abstain Non-Vote
--------- ------- ------- --------
2,326,256 525 6,889 0
88.1% .0% .3% 0
d. Does not apply
-16-
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, 1997
-------------
Net Income $ 1,011,000
============
Weighted average shares outstanding 2,640,848
Common stock equivalents due to
dilutive effect on stock options 109,277
------------
Total weighted average common shares
and equivalents outstanding 2,750,125
============
Primary earnings per share $ 0.37
============
Total weighted average common shares
and equivalents outstanding 2,750,125
Additional dilutive shares using the end
of period market value versus the average
market value when applying the treasury
stock method 2,843**
------------
Total weighted average common shares
and equivalents outstanding for
fully diluted computation 2,752,968
============
Fully diluted earnings per share $ 0.37
============
**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.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Bancshares, Inc.
Dated: August 7, 1997 By: /s/ Richard E. Webber
--------------- ------------------------------------------
Richard E. Webber
President and Chief Financial Officer
-18-