SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 1998.
Commission File No. 0-19968
SOUTHWEST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3811042
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4062 Southwest Highway
Hometown, Illinois 60456
(Address of principal executive offices) (Zip Code)
(708) 636-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
--------- ----------
(2) Yes X No
--------- ----------
As of May 5, 1998, the Registrant had 2,787,585 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
March 31, 1998 and December 31, 1997.................. 3
Consolidated Income Statement
for the three months ended
March 31, 1998 and March 31, 1997..................... 4
Consolidated Statement of Changes
in Stockholders' Equity for three
months ended March 31, 1998........................... 5
Consolidated Statement of Cash
Flows for the three months ended
March 31, 1998 and March 31, 1997..................... 6
Notes to Consolidated Financial Statements............ 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 9-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................... 9-15
See Item 2
PART II. OTHER INFORMATION..................................... 16
Signatures............................................ 17
-2-
SOUTHWEST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands)
March 31, December 31,
1998 1997
--------------- ---------------
(UNAUDITED) (AUDITED)
ASSETS:
Cash and amounts due from depository institutions ................... $ 6,945 7,399
Interest-bearing deposits ........................................... 27,916 6,491
U.S. Government and agency obligations, available for sale........... 38,319 41,364
Mortgage-backed securities, available for sale ...................... 22,959 20,912
Loans receivable, net ............................................... 275,289 270,592
Foreclosed real estate .............................................. 0 0
Stock in Federal Home Loan Bank of Chicago .......................... 2,734 2,734
Other investments, available for sale ............................... 410 650
Investment in joint ventures ........................................ 7,857 7,615
Accrued interest receivable ......................................... 2,182 2,190
Office property and equipment, net .................................. 2,836 2,907
Prepaid expenses and other assets ................................... 5,515 5,429
--------------- ---------------
Total assets .............................................. $ 392,962 368,283
=============== ===============
LIABILITIES:
Deposits ............................................................ $ 307,280 283,053
Borrowed Money ...................................................... 33,850 33,850
Advance payments by borrowers for taxes and insurance ............... 1,531 2,684
Other liabilities ................................................... 4,640 4,666
--------------- ---------------
Total liabilities ......................................... 347,301 324,253
--------------- ---------------
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 4,463,358 shares
and outstanding 2,787,585 shares at March 31, 1998
and 2,714,655 shares at December 31, 1997 ......................... 45 45
Additional paid-in capital .......................................... 30,432 29,800
Retained earnings, substantially restricted ......................... 41,764 41,780
Unrealized gain (loss) on available for sale securities ............. (77) 130
Treasury stock, at cost (1,675,773 shares at March 31, 1998
and 1,748,703 shares at December 31, 1997) ........................ (26,263) (27,405)
Common stock acquired by Employee Stock
Ownership Plan .................................................... (240) (320)
--------------- ---------------
Total stockholders' equity ................................ 45,661 44,030
--------------- ---------------
Total liabilities and stockholders' equity ................ $ 392,962 368,283
=============== ===============
See notes to consolidated financial statements.
-3-
SOUTHWEST BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENT
(In Thousands)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
------------ ------------
Interest Income:
Interest on loans............................................... $ 5,686 5,650
Interest on mortgage-backed securities.......................... 338 535
Interest on investment securities............................... 541 725
Interest on other financial assets.............................. 425 93
Dividends on FHLB stock......................................... 45 52
------------ ------------
Total interest income................................... 7,035 7,055
------------ ------------
Interest Expense:
Interest on deposits............................................ 3,431 3,198
Interest on borrowings.......................................... 564 814
------------ ------------
Total interest expense.................................. 3,995 4,012
------------ ------------
Net interest income before provision for loan losses.................. 3,040 3,043
Provision for loan losses............................................. 6 6
------------ ------------
Net interest income after provision for loan losses................... 3,034 3,037
------------ ------------
Non-interest Income:
Fees and service charges........................................ 40 52
Insurance commissions........................................... 36 40
Income from joint ventures...................................... 241 102
Gain on sale of securities available for sale................... 178 15
Gain (loss) on sale of real estate owned (net).................. 0 (4)
Miscellaneous income............................................ 110 77
------------ ------------
Total non-interest income............................... 605 282
------------ ------------
Non-interest Expense:
Compensation, employee benefits and related expenses............ 963 1,087
Advertising and promotion....................................... 28 26
Occupancy and equipment expense................................. 300 303
Data processing................................................. 131 77
Insurance premiums.............................................. 107 108
Legal, audit and examination services........................... 107 55
Other operating expenses........................................ 170 146
------------ ------------
Total non-interest expense.............................. 1,806 1,802
------------ ------------
Income before income taxes............................................ 1,833 1,517
Provision for federal and state income taxes.......................... 648 521
------------ ------------
Net income............................................................ $ 1,185 996
============ ============
Net income per share (Basic).......................................... $ 0.43 0.38
Net income per share (Diluted)........................................ $ 0.43 0.36
Dividends declared per common share................................... $ 0.20 0.19
See notes to consolidated financial statements.
-4-
SOUTHWEST BANCSHARES, INC.
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended March 31, 1998
(In Thousands)
(Unaudited)
Accumulated Common
Additional Other Stock
Common Paid-in Retained Comprehensive Treasury Acquired
Stock Capital Earnings Income Stock by ESOP Total
========================================================================================
Balance at December 31, 1997......... $ 45 29,800 41,902 8 (27,405) (320) 44,030
Comprehensive income:
Net Income......................... --- --- 1,185 --- --- --- 1,185
Adjustment of securities
available for sale to fair
value, net of tax effect......... --- --- --- (207) --- --- (207)
----------------------------------------------------------------------------------------
Comprehensive income................. --- --- 1,185 (207) --- --- 978
Exercise of stock options............ --- --- (657) --- 1,142 --- 485
Tax benefit related to
employee stock plans............... --- 632 --- --- --- 632
Contribution to fund ESOP loan....... 80 80
Payment of dividends................. --- --- (544) --- --- --- (544)
----------------------------------------------------------------------------------------
Balance at March 31, 1998............ $ 45 30,432 41,886 (199) (26,263) (240) 45,661
========================================================================================
-5-
SOUTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three Months Ended March 31,
-------------------------------
1998 1997
-------------------------------
Cash flows from operating activities: (UNAUDITED) (UNAUDITED)
Net income..................................................................... $ 1,185 996
Adjustments to reconcile net income to net cash from operating activities:
Depreciation............................................................... 91 99
Amortization of cost of stock benefit plans................................ 80 141
Net loss on sale of mortgage-backed securities, available for sale......... 0 32
Net gain on sale of investment securities, available for sale.............. (178) (47)
Net loss on sale of foreclosed real estate................................. 0 4
Provision for loan losses-net.............................................. 6 6
Decrease in prepaid and deferred federal and state income taxes............ 726 517
Decrease in accrued interest receivable.................................... 8 (92)
Increase in accrued interest payable....................................... 43 23
Increase in other assets................................................... (35) (257)
Decrease in other liabilities.............................................. (69) 104
------------- -------------
Net cash provided by operating activities.............................................. 1,857 1,526
------------- -------------
Cash flows from investing activities:
Purchase of mortgage backed securities, available for sale..................... (2,883) 0
Purchase of investment securities, available for sale.......................... (11,995) (1,000)
Proceeds from sales of mortgage backed securities, available for sale.......... 0 1,473
Proceeds from maturities of mortgage-backed securities, available for sale..... 767 777
Proceeds from sales of investment securities, available for sale............... 234 6,736
Proceeds from maturities of investment securities, available for sale.......... 14,941 3,000
Participation loans purchased.................................................. (293) (1,345)
Participation loans sold....................................................... 0 2,078
Proceeds from sale of foreclosed real estate................................... 0 113
Loan disbursements............................................................. (18,736) (13,484)
Loan repayments................................................................ 14,326 7,806
Property and equipment expenditures............................................ (20) (10)
Investments in joint ventures.................................................. (242) (52)
------------- -------------
Net cash provided by (for) investing activities........................................ (3,901) 6,092
------------- -------------
Cash flows from financing activities:
Deposit receipts............................................................... 144,666 90,162
Deposit withdrawals............................................................ (123,561) (95,363)
Interest credited to deposit accounts.......................................... 3,122 2,860
Proceeds of borrowed money..................................................... 0 2,000
Repayment of borrowed funds.................................................... 0 (9,708)
Decrease in advance payments by borrowers for taxes and insurance.............. (1,153) (1,098)
Proceeds from exercise of stock options........................................ 485 12
Purchase of treasury stock..................................................... 0 (8)
Dividends paid on common stock................................................. (544) (502)
------------- -------------
Net cash provided by (for) financing activities........................................ 23,015 (11,645)
------------- -------------
Increase in Cash and cash equivalents.................................................. 20,971 (4,027)
Cash and cash equivalents at beginning of period....................................... 13,890 11,680
------------- -------------
Cash and cash equivalents at end of period ............................................ $ 34,861 7,653
============= =============
Cash paid during the period for:
Interest....................................................................... $ 3,952 3,989
Income taxes................................................................... 7 4
============= =============
See notes to consolidated financial statements.
-6-
SOUTHWEST BANCSHARES, INC.
Notes to Consolidated Financial Statements
- ------------------------------------------
1. Statement of Information Furnished
- -------------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and in the opinion of management contain all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position as of March 31, 1998, the results of operations for the three months
ended March 31, 1998 and 1997 and the cash flows for the three months ended
March 31, 1998 and 1997. These results have been determined on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The attached consolidated statements are those of Southwest
Bancshares, Inc. and its consolidated subsidiaries Southwest Federal Savings and
Loan Association of Chicago and Southwest Bancshares Development Corporation.
The results of operations for the three month period ended March 31, 1998 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 Form 10-K/A-1 for the year ended December 31, 1997.
2. Earnings Per Share
- ---------------------------
Southwest Bancshares, Inc. presents earnings per share on a basic and
a 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
- -------------------------------------------
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. 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) the transfers of financial assets
that are part of repurchase agreements, dollar-rolls, 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.
Reporting Comprehensive Income. In June 1997, the FASB issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement establishes standards for reporting
and the display of comprehensive income and its components (revenues, expenses,
gains, losses) in a full set of general-purpose financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. The
Company has not yet determined the impact of adopting this statement.
-7-
Disclosures about Segments of an Enterprise and Related Information.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") which becomes effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and requires
enterprises to report selected information about operating segments in interim
financial reports. The Company has not yet determined the impact of adopting
this statement
Employers' Disclosures about Pension and Other Employee Benefits. In
February 1998, the FASB issued Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"). SFAS No. 132 alters current disclosure requirements regarding
pensions and other postretirement benefits in the financial statements of
employers who sponsor such benefit plans. The revised disclosure requirements
are designed to provide additional information to assist readers in evaluating
future costs related to such plans. Additionally, the revised disclosures are
designed to provide changes in the components of pension and benefit costs in
addition to the year end components of those factors in the resulting asset or
liability related to such plans. The statement is effective for fiscal years
beginning after December 15, 1997 with earlier application available. The
Company has not yet determined the impact of adopting this statement.
The foregoing does not constitute a comprehensive summary of all
material changes or developments affecting the manner in which the Company keeps
its books and records and performs its financial accounting responsibilities.
It is intended only as a summary of some of the recent pronouncements made by
the FASB which are of particular interest to financial institutions.
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Southwest Bancshares, Inc. (the "Company") is the holding company for Southwest
Federal Savings and Loan Association of Chicago (the "Association") and
Southwest Bancshares Development Corporation, a company engaged in real estate
development through joint venture partnerships. The Association operates a
wholly-owned subsidiary, Southwest Service Corporation, which also engages in
real estate development activities as well as operates a full service insurance
agency.
The Company's results of operations depend primarily on its level of net
interest income, which is the difference between interest earned on interest-
earning assets, consisting primarily of mortgage loans, mortgage-backed and
related securities and investment securities, and the interest paid on interest-
bearing liabilities, consisting primarily of deposits. The Company's earnings
also are affected by the level of its other income, including fee revenue, joint
venture income and gain on sale of investments and loans, as well as its level
of non-interest expenses, including employee compensation and benefits,
occupancy and equipment costs, federal deposit insurance premiums and other
general and administrative expenses. The Company's results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are the Association's deposits and
proceeds from principal and interest payments on loans and mortgage-backed
securities, advances from the FHLB-Chicago and proceeds from the maturity of
investments. While maturities and scheduled amortization of loans and mortgage-
backed securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. As of March 31, 1998 the Association had
outstanding loan commitments of $16.9 million, with an average interest rate of
7.54%, of which the majority were fixed-rate loans. Management anticipates that
it will have sufficient funds available to meet its current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
March 31, 1998 totalled $97.5 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 $1.9 million for the three months
ended March 31, 1998 as compared to $1.5 million for the three months ended
March 31, 1997. Net cash provided for investing activities was $3.9 million for
the three months ended March 31, 1998 as compared to $6.1 million provided by
investing activities in the comparable period of 1997. Net cash provided by
financing activities was $23.0 million for the three month period ended March
31, 1998, as compared to $11.6 million provided for financing activities for the
three month period ended March 31, 1997, resulting from increased deposit
receipts of $144.7 million in the 1998 period, compared to $90.2 million for the
1997 period.
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 $18.7 million in mortgage loans for the three month period
ended March 31, 1998 as compared to $13.5 million for the same three month
period of 1997. The Company also purchased $293,000 in participation loans for
the three month period ended March 31, 1998 as compared to $1.3 million in the
comparable period of 1997 and sold no participation loans during the three month
period ended March 31, 1998 while selling $2.1 million in participation loans
during this same period of 1997. The Company purchased $12.0 million of
investment securities and $2.9 million of mortgage-backed securities during the
three months ended March 31, 1998 as compared to $1.0 million in investment
securities and no mortgage-backed securities in the same period of
-9-
1997. No sales of mortgage-backed securities were conducted during the three
month period ended March 31, 1998 as compared to sales of $1.5 million in the
same three month period of 1997. Proceeds from sales of investment securities
of $234,000 in the three month period ended March 31, 1998 compares to $6.7
million in the three month period ended March 31, 1997. Proceeds from
maturities of mortgage-backed securities of $767,000 during the three month
period ended March 31, 1998 compares to $777,000 for the same period of 1997 and
proceeds from maturities of investment securities of $14.9 million during the
three month period ended March 31, 1998 compares to $3.0 million in the same
period of 1997.
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 discretion 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 4%. The
Association's liquidity ratio was 20.07% at March 31, 1998.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The levels of these
assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At March 31, 1998, cash and cash
equivalents totalled $34.9 million.
The OTS capital regulations require savings institutions to meet three capital
standards: a 1.5% tangible capital standard; a 3% leverage (core capital) ratio;
and an 8% risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in equity accounts of
consolidated subsidiaries less intangibles other than certain qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The core
capital requirement was effectively increased to 4% since OTS regulations
stipulate that an institution with less than 4% core capital will be deemed to
be "undercapitalized". As of March 31, 1998, the Association's actual capital
percentages for tangible capital of 7.94%, core capital of 7.94%, and current
risk-based capital of 13.97% 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", which 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 March 31, 1998, all of the mortgage-backed and mortgage-related securities
owned by the Company are issued, insured or guaranteed either directly or
indirectly by a federal agency and are typically rated in one of the two highest
rated categories by a nationally recognized rating agency.
Consistent with its asset and liability management strategy, $19.5 million or
85.13% of the Company's mortgage-backed and mortgage-related securities have
adjustable interest rates, thereby reducing the impact of changing interest
rates on these securities. However, because these securities are subject to
prepayments, the Company's yield on this portfolio could be adversely affected
if significant prepayments occur.
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs") purchased by the Company are not classified as "high risk"
under regulatory guidelines and are subject to normal effects of changes in
interest rates. To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of CMO and REMIC securities. This policy, which has been adopted
by the OTS, requires the Company to annually test its CMOs and REMICs to
determine whether they are high risk or non-high risk securities. All CMOs and
REMICs are subjected to this stress test quarterly and at March 31, 1998, all
were considered to be low risk securities.
-10-
Non-Performing Assets - The following table sets forth information regarding
loans which are 90 days or more delinquent. The Association continues accruing
interest on delinquent loans 90 days or more past due, but reserves 100% of the
interest due on such loans, thus effecting a non-accrual status. At March 31,
1998 there were no other known problem assets except as included in the table
below.
NON-PERFORMING ASSETS
(Dollars in Thousands)
(Unaudited)
- ------------------------------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------
Non-accrual delinquent
mortgage loans...................... $ 639 $ 671 $ 761 $ 1,133 $ 671
Total real estate owned,
net of related allowance
for loan losses..................... 0 0 0 0 0
-------------------------------------------------------------
Total non-performing assets......... $ 639 $ 671 $ 761 $ 1,133 $ 671
=============================================================
Allowance for loan losses........... $ 781 $ 775 $ 769 $ 763 $ 757
Total non-performing
assets to total assets.............. 0.16% 0.18% 0.20% 0.30% 0.18%
Total non-performing
loans to gross loans................ 0.23% 0.24% 0.27% 0.40% 0.24%
Allowance for loan losses
to total non-performing loans....... 122.22% 115.50% 101.05% 67.34% 112.82%
Amount of interest that would have
been recorded on a non-accrual
basis if loans had been current
within their original terms......... $30,000 $28,000 $38,000 $43,000 $26,000
-11-
Interest Rate Sensitivity
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1998 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 $107.6
million at March 31, 1998, are withdrawn at the annual percentage rates of 6%,
38% and 16%, 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 March 31, 1998
------------------------------------------------------
More Than More Than
0-3 4-12 One Year to Three Years
Months Months Three Years to Five Years
---------- --------- ----------- -------------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1)................... $ 17,049 25,284 57,324 43,249
Other loans (1)...................... 7,950 -- 52 --
Interest-bearing deposits............ 27,816 100 -- --
Mortgage-backed securities........... 19,831 292 648 497
Investment securities................ 6,985 7,500 7,100 --
---------- -------- ----------- -----------
Total interest-earning assets..... 79,631 33,176 65,124 43,746
Less:
Unearned discount and
deferred fees....................... (185) (274) (621) (469)
---------- -------- ----------- -----------
Net interest-earning assets....... $ 79,446 32,902 64,503 43,277
========== ======== =========== ===========
Interest-bearing liabilities:
Passbook accounts.................... $ 741 2,177 2,799 2,625
NOW accounts......................... 2,508 6,216 7,687 2,053
Money market accounts................ 1,500 4,276 5,144 4,385
Certificate accounts................. 46,965 50,565 102,109 --
Borrowed funds....................... 5,500 17,700 9,450 1,200
---------- -------- ----------- -----------
Total interest-bearing
liabilities...................... $ 57,214 80,934 127,189 10,263
========== ======== =========== ===========
Interest sensitivity gap............. $ 22,232 (48,032) (62,686) 33,014
Cumulative interest sensitivity gap.. $ 22,232 (25,800) (88,486) (55,472)
Cumulative interest sensitivity gap
as a percentage of total assets..... 5.66 % (6.57) (22.52) (14.12)
Cumulative net interest-earning
assets as a percentage of interest
sensitive liabilities............... 138.86 % 81.32 66.65 79.87
At March 31, 1998
--------------------------------------------------
More Than More Than
Five Years 10 Years More Than
to 10 Years to 20 Years 20 Years Total
----------- ----------- ---------- ---------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1)................... 67,653 51,197 8,586 270,342
Other loans (1)...................... -- -- -- 8,002
Interest-bearing deposits............ -- -- -- 27,916
Mortgage-backed securities........... 817 720 166 22,971
Investment securities................ 20,000 -- -- 41,585
----------- ----------- --------- ---------
Total interest-earning assets..... 88,470 51,917 8,752 370,816
Less:
Unearned discount and
deferred fees....................... (733) (555) (92) (2,929)
----------- ----------- --------- ---------
Net interest-earning assets....... 87,737 51,362 8,660 367,887
=========== =========== ========= =========
Interest-bearing liabilities:
Passbook accounts.................... 2,461 2,307 34,667 47,777
NOW accounts......................... 2,756 1,511 257 22,988
Money market accounts................ 3,739 3,188 14,644 36,876
Certificate accounts................. -- -- -- 199,639
Borrowed funds....................... -- -- -- 33,850
----------- ----------- --------- ---------
Total interest-bearing
liabilities...................... 8,956 7,006 49,568 341,130
=========== =========== ========= =========
Interest sensitivity gap............. 78,781 44,356 (40,908) 26,757
Cumulative interest sensitivity gap.. 23,309 67,665 26,757
Cumulative interest sensitivity gap
as a percentage of total assets..... 5.93 17.22 6.81
Cumulative net interest-earning
assets as a percentage of interest
sensitive liabilities............... 108.19 123.21 107.84
- --------
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
nonperforming loans and undisbursed loan proceeds but are not reduced by
the allowance for loan losses. At March 31, 1998, nonperforming loans and
undisbursed loan proceeds totalled $639,000 and $4.6 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.
-12-
Average Balance Sheet
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition for the periods indicated and
reflects the average yield on assets and average cost of liabilities. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Average
balances are derived from average monthly balances. Management does not believe
that the use of month-end balances instead of average daily balances has caused
any material differences in the information presented. The yields and costs
include fees which are considered adjustments to yields
Three Months Ended March 31,
------------------------------------------------------------------ At March 31,
1998 1997 1998
-------------------------------- ------------------------------- ---------------------
Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Yield/Cost
-------- -------- ---------- ------- -------- ---------- ------- ----------
Assets:
Interest-earning assets:
Mortgage loans, net............... $263,153 $5,497 8.36% $258,060 $5,493 8.51% $267,287 7.96%
Other loans....................... 8,641 189 8.75 7,357 157 8.54 8,002 8.81
Mortgage-backed securities........ 21,155 338 6.39 32,198 535 6.65 22,955 6.38
Interest-bearing deposits......... 25,665 425 6.62 6,095 93 6.10 27,916 5.25
Investment securities............. 41,609 586 5.63 52,401 777 5.93 41,585 5.91
-------- -------- --------- -------- ------- ------- --------- -------
Total interest-earning
assets................ 360,223 7,035 7.81 356,111 7,055 7.92 367,745 7.44
Non-interest earning assets.............. 28,356 23,135 25,217
-------- -------- ---------
Total assets............ $388,579 $379,246 $392,962
======== ======== =========
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposits:
Passbook..................... 46,803 306 2.62 47,277 355 3.00 47,777 2.51
Certificate.................. 191,487 2,712 5.67 172,640 2,377 5.51 199,639 5.71
NOW and money market accounts 60,219 413 2.74 59,473 466 3.13 59,864 2.66
Borrowed funds:
FHLB advances and other...... 33,850 564 6.66 51,379 814 6.34 33,850 6.67
-------- -------- --------- -------- ------- ------- --------- -------
Total interest-bearing
liabilities............ 332,359 3,995 4.81 330,769 4,012 4.85 341,130 4.82
Other liabilities........................ 11,817 8,507 6,171
-------- -------- ---------
Total liabilities....... 344,176 339,276 347,301
Stockholders' equity..................... 44,403 39,970 45,661
-------- -------- ---------
Total liabilities and
stockholders' equity... $388,579 $379,246 $392,962
======== ======== =========
Net interest income/interest
rate spread (1)......................... 3,040 3.00 3,043 3.07 2.62
Net earning assets/net interest
margin (2).............................. $27,864 3.38% $25,342 3.42% 2.97%
======== ========= ======== ======= =======
Ratio of interestearning assets to
interest-bearing liabilities............ 1.08x 1.08x 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.
-13-
FINANCIAL CONDITION
The assets of the Company increased $24.7 million, or 6.70%, to $393.0 million
at March 31, 1998 from $368.3 million at December 31, 1997. This increase
primarily resulted from a $21.0 million increase in cash and interest-bearing
deposits, a $2.0 million increase in mortgage-backed securities, available for
sale, and a $4.7 million increase in net loans receivable, all partially offset
by the $5.0 million decrease in U.S. Government and agency obligations,
available for sale.
During the three month period ended March 31, 1998, cash and interest-bearing
deposits increased by $21.0 million, or 150.98%, to $34.9 million at March 31,
1998 from $13.9 million at December 31, 1997. U.S. Government and agency
obligations, available for sale, decreased $3.0 million, or 7.36%, to $36.3
million at March 31, 1998 from $41.4 million at December 31, 1997, primarily as
a result of not fully reinvesting the entire proceeds from maturing securities.
Mortgage-backed securities, available for sale increased $2.0 million, or 9.79%,
to $23.0 million at March 31, 1998 from $21.0 million at December 31, 1997, as a
result of purchases of $2.9 million which were offset by maturities of $767,000.
Loans receivable increased $4.7 million, or 1.74%, to $275.3 million at March
31, 1998 from $270.6 million at December 31, 1997. This increase primarily from
funding $19.0 million in new loans and participation loan purchases, offset by
loan repayments of $14.3 million.
The Association had no foreclosed real estate at March 31, 1998 or December 31,
1997.
Savings deposits at March 31, 1998 increased by $24.2 million, or 8.56%, to
$307.3 million as compared to $283.1 million at December 31, 1997, primarily as
a result of a special rate on an 18 month CD offered during the first quarter of
1998.
Borrowed money remained at $33.9 million at March 31, 1998 as well as at
December 31, 1997.
Stockholders' equity increased $1.7 million, or 3.70%, to $45.7 million at March
31, 1998 from $44.0 million at December 31, 1997, primarily as a result of net
income of $1.2 million, along with the $485,000 proceeds from the exercise of
stock options and $630,000 in tax benefits related to employee stock plans which
were partially offset by the dividend payment of $544,000 and the $207,000 net
decrease in the securities valuation adjustment.
ANALYSIS OF OPERATIONS
Net income of $1.2 million for the three months ended March 31, 1998 increased
by $189,000, or 18.98%, from $1.0 million for the three month period ended March
31, 1997. The increase is primarily attributable to the increase in non-
interest income of $323,000, due to increased income from joint ventures and
gain on sale of securities, which was partially offset by the increase in the
provision for federal and state income taxes of $127,000.
Interest income remained stable at $7.0 million for both three month periods
ending March 31, 1998 and 1997. The 1998 quarter reflected a slight decrease of
$20,000 as the increase in the balance of loans receivable and interest-bearing
deposits tempered the lower interest rates.
Interest expense also remained stable at $4.0 million for each of the three
month periods ended March 31, 1998 and 1997. The 1998 quarter reflected a
slight decrease of $17,000 as the reduced interest expense on borrowed money was
more than offset by the increased cost of interest on deposits.
The Association calculates any allowance for loan losses based upon its ongoing
evaluation of pertinent factors underlying the types and quality of its loans,
including the risk inherent in its loan portfolio, and other factors such as the
current regulatory and economic environment. As a result of this review, loan
loss provisions are recorded. A provision of $6,000 was established for the
three months ended March 31, 1998, which is the same as the $6,000 provision
established for the three months ended March 31, 1997. The ratio of non-
performing loans to total loans was .23% as of March 31, 1998 as compared to
.24% at December 31, 1997. The allowance for loan losses to non-performing
loans was 122.22% as of March 31, 1998 as compared to 115.50% as of December 31,
1997. Management believes its provision for loan losses is
-14-
adequate, given the risks inherent in its loan portfolio and the current
regulatory and economic environment. Although the Association believes its
allowance for losses is at a level which it considers to be adequate to provide
for potential losses, there can be no assurance that such losses will not exceed
the estimated amounts.
Activity in the allowance for loan losses for all periods presented in
the consolidated income statement is included in the following table.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
Three Months Ended
March 31,
------------------
1998 1997
----- -----
Balance at beginning of period.... $ 775 $ 763
Provision for loan losses......... 6 6
Write downs charged to allowance.. 0 0
Recoveries of amounts previously
charged off...................... 0 0
----- -----
Balance at end of period.......... $ 781 $ 769
===== =====
Non-interest income increased $323,000, or 114.54%, to $605,000 for the quarter
ended March 31, 1998 from $282,000 for the three month period ended March 31,
1997. This increase is primarily the result of increases in joint venture
income of $139,000, gain on sale of securities available for sale of $163,000
and miscellaneous income of $33,000, which was partially offset by the reduction
in fees and service charges of $12,000.
Non-interest expense for the three months ended March 31, 1998 and 1997 remained
stable at $1.8 million for both periods. For the 1998 quarter the decrease of
$124,000 in compensation and employee benefits was partially offset by increases
in data processing expenses of $54,000; legal, audit and examination services of
$52,000; and other operating expenses of $24,000. The increased data processing
and legal expenses were preparatory expenses relating to the impending merger.
The provision for federal and state income taxes increased $127,000, or 24.38%,
for the first quarter of 1998 as a result of the increase in pre-tax income of
$316,000, or 20.83%. The provision was increased to $648,000 for the three
month period ended March 31, 1998 from $521,000 for the three month period ended
March 31, 1997.
RECENT DEVELOPMENTS
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/A-1 for the fiscal year ended December 31, 1997 for a discussion of the
proposed legislation.
On December 17, 1997 the Company announced the signing of a definitive agreement
to merge with Alliance Bancorp (NASDAQ/ABCL) of Hinsdale, Illinois, the parent
holding company of Liberty Federal Bank, also headquartered in Hinsdale. This
agreement, subject to shareholder approval of both institutions, is expected to
be completed in the second quarter of 1998.
On February 11, 1998 the Company announced a quarterly cash dividend of 20 cents
per share which was paid on March 11, 1998 to shareholders of record on February
25, 1998.
The Company has established June 30, 1998 as the date of its annual meeting to
be held at 9:30 A.M. at The Oak Lawn Hilton Hotel, 9333 South Cicero Avenue, Oak
Lawn, Illinois. The record date for voting at the annual meeting is May 14,
1998.
On May 8, 1998 the Company announced a quarterly cash dividend of 20 cents per
share to be paid on June 16, 1998 to shareholders of record on June 1, 1998.
-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
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1 Amended Certificate of Incorporation of Southwest
Bancshares, Inc.*
3.2 Bylaws of Southwest Bancshares, Inc.*
11.0 Statement regarding Computation of Earnings Per Share
Three Months Ended
March 31,
---------------------
1998 1997
---------- ---------
Weighted-average number of
common shares outstanding
used in basic earnings per
share calculation............ 2,725,514 2,638,422
Add common stock equivalents
for shares issuable under
Stock Option Plan............ 0 116,996
--------- ---------
Weighted-average number of
shares outstanding adjusted
for common stock equivalent.. 2,725,514 2,755,418
========= =========
Net income...................... $1,185,000 996,000
========= =========
Basic earnings per share........ $ .43 .38
Diluted earnings per share...... $ .43 .36
27.0 Financial Data Schedule (filed herewith)
b. Report on Form 8-K
None
*Incorporated herein by reference into this document from the Exhibits to Form
S-1, Registration Statement, and Pre-Effective Amendment No. 1, filed on March
13, 1992 and April 24, 1992, respectively, Registration No. 33-46409.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Bancshares, Inc.
Dated: May 15, 1998 By: /s/ Richard E. Webber
------------ ---------------------
Richard E. Webber
President and Chief Financial Officer
-17-