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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
COMMISSION FILE NUMBER: 000-22007
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SOUTHWEST BANCORPORATION OF TEXAS, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 76-0519693
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(Address of Principal Executive Offices, including zip code)
(713) 235-8800
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
------------------------
There were 32,839,950 shares of the Registrant's Common Stock outstanding
as of the close of business on May 7, 2001.
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2
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants......................... 2
Condensed Consolidated Balance Sheet as of March 31, 2001
and December 31, 2000 (unaudited)...................... 3
Condensed Consolidated Statement of Income for the Three
Months Ended March 31, 2001 and 2000 (unaudited)....... 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Three Months Ended March
31, 2001 (unaudited)................................... 5
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 2001 and 2000
(unaudited)............................................ 6
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 22
Item 2. Changes in Securities and Use of Proceeds.......... 22
Item 3. Defaults upon Senior Securities.................... 22
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 22
Item 5. Other Information.................................. 22
Item 6. Exhibits and Reports on Form 8-K................... 22
Signatures.................................................. 23
1
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Southwest Bancorporation of Texas, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Southwest Bancorporation of Texas, Inc. and Subsidiaries (the "Company") as of
March 31, 2001, the related condensed consolidated statements of income and of
cash flows for the three-month periods ended March 31, 2001 and 2000 and the
condensed consolidated statement of changes in shareholders' equity for the
three-month period ended March 31, 2001. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2000, and the related consolidated statements of income, of changes
in shareholders' equity, and of cash flows for the year then ended (not
presented herein), and in our report dated February 23, 2001, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet
information as of December 31, 2000 is fairly stated, in all material respects,
in relation to the consolidated financial statements from which it has been
derived.
PricewaterhouseCoopers LLP
Houston, Texas
April 16, 2001
2
4
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
ASSETS
Cash and due from banks..................................... $ 160,343 $ 331,965
Federal funds sold and other cash equivalents............... 72,517 79,341
---------- ----------
Total cash and cash equivalents........................ 232,860 411,306
Securities -- available for sale............................ 797,086 848,164
Loans held for sale......................................... 66,452 85,939
Loans held for investment................................... 2,511,341 2,425,498
Allowance for loan losses................................... (29,067) (28,150)
Premises and equipment, net................................. 55,866 52,462
Accrued interest receivable................................. 24,977 27,334
Other assets................................................ 168,758 117,789
---------- ----------
Total assets........................................... $3,828,273 $3,940,342
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing............................. $ 827,502 $ 892,296
Demand -- interest-bearing................................ 61,858 62,773
Money market accounts..................................... 1,289,858 1,154,808
Savings................................................... 80,649 76,715
Time, $100 and over....................................... 424,452 506,629
Other time................................................ 411,958 400,649
---------- ----------
Total deposits......................................... 3,096,277 3,093,870
Securities sold under repurchase agreements................. 224,083 211,800
Other borrowings............................................ 155,647 305,961
Accrued interest payable.................................... 5,165 5,505
Other liabilities........................................... 25,785 23,883
---------- ----------
Total liabilities...................................... 3,506,957 3,641,019
---------- ----------
Minority interest in consolidated subsidiary................ 1,382 1,313
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value, 75,000,000 shares
authorized; 32,808,402 issued and 32,807,370
outstanding at March 31, 2001 and 32,705,909 issued and
32,704,877 outstanding at December 31, 2000............ 32,808 32,706
Additional paid-in capital................................ 71,465 69,735
Retained earnings......................................... 211,235 198,720
Accumulated other comprehensive income (loss)............. 4,470 (3,107)
Treasury stock, at cost -- 1,032 shares................... (44) (44)
---------- ----------
Total shareholders' equity............................. 319,934 298,010
---------- ----------
Total liabilities and shareholders' equity............. $3,828,273 $3,940,342
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
5
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Interest income:
Loans..................................................... $55,977 $45,796
Securities................................................ 13,593 14,339
Federal funds sold and other.............................. 1,126 569
------- -------
Total interest income.................................. 70,696 60,704
Interest expense on deposits and other borrowings........... 31,946 26,097
------- -------
Net interest income.................................... 38,750 34,607
Provision for loan losses................................... 1,750 1,561
------- -------
Net interest income after provision for loan losses.... 37,000 33,046
------- -------
Noninterest income:
Service charges on deposit accounts....................... 5,684 4,993
Investment services....................................... 1,693 1,388
Other fee income.......................................... 2,864 2,155
Other operating income.................................... 3,206 1,889
Gain on sale of securities, net........................... 17 1
------- -------
Total noninterest income............................... 13,464 10,426
------- -------
Noninterest expenses:
Salaries and employee benefits............................ 18,787 15,929
Occupancy expense......................................... 4,987 4,175
Other operating expenses.................................. 8,225 7,938
------- -------
Total noninterest expenses............................. 31,999 28,042
------- -------
Income before income taxes and minority interest....... 18,465 15,430
Provision for income taxes.................................. 5,920 5,187
------- -------
Income before minority interest........................ 12,545 10,243
Minority interest........................................... 30 43
------- -------
Net income............................................. $12,515 $10,200
======= =======
Earnings per common share
Basic..................................................... $ 0.38 $ 0.32
======= =======
Diluted................................................... $ 0.37 $ 0.31
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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6
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY
---------- ------- ---------- -------- ------------- -------- -------------
BALANCE, DECEMBER 31, 2000............. 32,704,877 $32,706 $69,735 $198,720 $(3,107) $(44) $298,010
Exercise of stock options............ 102,493 102 1,721 1,823
Deferred compensation amortization... 9 9
Comprehensive income:
Net income for the three months
ended March 31, 2001............. 12,515 12,515
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $(4,091)....... 7,577 7,577
--------
Total comprehensive income......... 20,092
---------- ------- ------- -------- ------- ---- --------
BALANCE, MARCH 31, 2001................ 32,807,370 $32,808 $71,465 $211,235 $ 4,470 $(44) $319,934
========== ======= ======= ======== ======= ==== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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7
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income................................................ $ 12,515 $ 10,200
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 1,750 1,561
Depreciation............................................ 2,352 1,987
Realized gain on securities available for sale, net..... (17) (1)
Amortization............................................ 608 456
Minority interest in net income of consolidated
subsidiary............................................ 30 43
Gain on sale of loans, net.............................. (720) (130)
Dividends on Federal Home Loan Bank stock............... (505) (232)
Origination of loans held for sale and mortgage
servicing rights...................................... (2,793) (24,001)
Proceeds from sales of loans............................ 22,273 11,374
Increase in accrued interest receivable and other
assets................................................ (1,805) (2,610)
Increase in accrued interest payable and other
liabilities........................................... 2,511 4,706
Other, net.............................................. (275) 158
--------- ---------
Net cash provided by operating activities.......... 35,924 3,511
--------- ---------
Cash flows from investing activities:
Proceeds from maturity of securities available for sale... 35,695 1,000
Proceeds from maturity of securities held to maturity..... -- 2,875
Principal paydowns of mortgage-backed-securities available
for sale................................................ 38,984 22,242
Principal paydowns of mortgage-backed securities held to
maturity................................................ -- 2,319
Proceeds from sale of securities available for sale....... -- 135
Purchase of securities available for sale................. (11,380) (38,374)
Purchase of securities held to maturity................... -- (8,954)
Net increase in loans receivable.......................... (87,477) (108,782)
Purchase of Bank-owned life insurance policies............ (50,000) --
Purchase of premises and equipment........................ (5,878) (3,346)
Proceeds from sale of premises and equipment.............. 436 --
--------- ---------
Net cash used in investing activities.............. (79,620) (130,885)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits... (64,794) 33,412
Net increase (decrease) in time deposits.................. (70,868) 11,107
Net increase in other interest-bearing deposits........... 138,069 84,675
Net increase (decrease) in securities sold under
repurchase agreements................................... 12,283 (1,662)
Net decrease in other short-term borrowings............... (150,299) (17,885)
Payments on long-term borrowings.......................... (15) (64)
Net proceeds from exercise of stock options............... 874 418
Purchase of treasury stock................................ -- (117)
--------- ---------
Net cash provided by (used in) financing
activities....................................... (134,750) 109,884
--------- ---------
Net decrease in cash and cash equivalents................... (178,446) (17,490)
Cash and cash equivalents at beginning of period............ 411,306 214,074
--------- ---------
Cash and cash equivalents at end of period.................. $ 232,860 $ 196,584
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
8
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Southwest Bancorporation of Texas, Inc. (the "Company") and its direct and
indirect wholly-owned subsidiaries, Southwest Holding Delaware Inc. (the
"Delaware Company") Southwest Bank of Texas National Association (the "Bank"),
and Mitchell Mortgage Company, LLC ("Mitchell"). The consolidated financial
statements also include the accounts of First National Bank of Bay City, a 58%
owned subsidiary of the Delaware Company. In connection with the Company's
merger with Citizens Bankers, Inc. ("Citizens") and acquisition of all of the
assets and liabilities of Citizens Bankers Limited Partnership ("CBLP"), the
historical financial data has been restated to include the accounts and
operations of Citizens and CBLP for all periods presented. All material
intercompany accounts and transactions have been eliminated. In the opinion of
management, the unaudited condensed consolidated financial statements reflect
all adjustments, consisting only of normal and recurring adjustments, necessary
to present fairly the Company's consolidated financial position at March 31,
2001 and December 31, 2000, consolidated income for the three months ended March
31, 2001 and 2000, consolidated cash flows for the three months ended March 31,
2001 and 2000, and the consolidated changes in shareholders' equity for the
three months ended March 31, 2001. Interim period results are not necessarily
indicative of results of operations or cash flows for a full-year period.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 2000.
PricewaterhouseCoopers LLP is not subject to the liability provisions of
Section 11 of the Securities Act of 1933 for their report on the unaudited
financial information as of March 31, 2001 and for the three months then ended,
because that report is not a "report" or a "part" of the registration statement
prepared or certified by PricewaterhouseCoopers LLP within the meaning of
Sections 7 and 11 of the Act.
New Accounting Pronouncement
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, was
issued by the Financial Accounting Standards Board to establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires that an entity recognize those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The Company adopted SFAS No. 133 on
January 1, 2001. The impact of the adoption was not material to the Company's
consolidated financial position, results of operations or cash flows as the
Company does not engage in significant derivative activity.
7
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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. COMPREHENSIVE INCOME
Comprehensive income consists of the following:
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Net income.................................................. $12,515 $10,200
Net change in unrealized appreciation (depreciation) on
securities available for sale, net of tax................. 7,577 (5,469)
------- -------
Total comprehensive income.................................. $20,092 $ 4,731
======= =======
3. EARNINGS PER COMMON SHARE:
Earnings per common share is computed as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Net income.................................................. $12,515 $10,200
======= =======
Divided by average common shares and common share
equivalents:
Average common shares..................................... 32,775 32,087
Average common shares issuable under the stock option
plan................................................... 1,366 1,027
------- -------
Total average common shares and common share
equivalents............................................ 34,141 33,114
======= =======
Basic earnings per common share............................. $ 0.38 $ 0.32
======= =======
Diluted earnings per common share........................... $ 0.37 $ 0.31
======= =======
4. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
During the three months ended March 31, 2001 and 2000, the Company reduced
its federal income tax liability by approximately $949,000 and $539,000,
respectively, and recorded a corresponding increase to additional paid-in
capital representing the tax benefit related to the exercise of certain stock
options.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and
similar expressions are intended to identify such forward-looking statements.
The Company's actual results may differ materially from the results anticipated
in these forward-looking statements due to a variety of factors, including,
without limitation: (a) the effects of future economic conditions on the Company
and its customers; (b) governmental monetary and fiscal policies, as well as
legislative and regulatory changes; (c) the risks of changes in interest rates
on the level and composition of deposits, loan demand, and the values of loan
collateral, securities and interest rates protection agreements, as well as
interest rate risks; (d) the effects of competition from other commercial banks,
thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other mutual
funds and other financial institutions operating in the Company's market area
and elsewhere, including institutions operating locally, regionally, nationally
and internationally, together with such competitors offering banking products
and services by mail, telephone, computer and the internet; and (e) the failure
of assumptions underlying the establishment of reserves for loan losses and
estimations of values of collateral and various financial assets and
liabilities. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
OVERVIEW
On December 29, 2000, the Company and Citizens completed their merger,
which was accounted for as a pooling of interests. The merger agreement provided
for the exchange of 249.443 shares of the Company's Common Stock for each share
of Citizens Stock, resulting in the issuance of approximately 3.9 million shares
of Company Common Stock on a fully diluted basis.
In a related transaction, the Company, CBLP and Baytown Land I, Ltd., the
general partner of CBLP, entered into an agreement pursuant to which the Company
acquired the assets and assumed the liabilities of CBLP. CBLP's primary assets
and liabilities were the bank building located at 1300 Rollingbrook and the
related debt to third parties. In connection with this agreement, the Company
issued approximately 106,000 shares of the Company's Common Stock on a fully
diluted basis. The financial data preceding the merger date has been restated to
include the interests and operations of Citizens and CBLP.
Total assets at March 31, 2001 and December 31, 2000 were $3.83 billion and
$3.94 billion, respectively. Gross loans were $2.58 billion at March 31, 2001 an
increase of $66.4 million or 3% from 2.51 billion at December 31, 2000.
Shareholders' equity was $319.9 million and $298.0 million at March 31, 2001 and
December 31, 2000, respectively.
For the three months ended March 31, 2001, net income was $12.5 million
($0.37 per diluted share), compared to $10.2 million ($0.31 per diluted share)
for the same period in 2000, an increase of 23%. Return on average assets and
return on average common shareholders' equity for the three months ended March
31, 2001 was 1.32% and 16.63%, respectively.
9
11
RESULTS OF OPERATIONS
Interest Income
Interest income for the three months ended March 31, 2001 was $70.7
million, an increase of 10.0 million, or 16%, from the three months ended March
31, 2000. This increase is due to a $446.8 million increase in average earning
assets to $3.47 billion for the three months ended March 31, 2001, a 15%
increase from the same period last year.
Interest income on loans increased $10.2 million to $56.0 million for the
three months ended March 31, 2001. This was due to a $476.0 million increase in
average loans outstanding during the same period. The average yield on loans was
8.91% for the three months ended March 31, 2001, an increase of 2 basis points
when compared to the same period in 2000. Interest income on securities
decreased to $13.6 million, a $746,000 decrease from the three month period
ended March 31, 2000. This decrease was attributable to a $69.9 million decrease
in average securities outstanding, down 8% when compared to the three months
ended March 31, 2000.
Interest Expense
Interest expense on deposits and other borrowings was $31.9 million for the
three months ended March 31, 2001, compared to $26.1 million for the same period
in 2000. The increase in interest expense was attributable to a $384.8 million
increase in average interest-bearing liabilities for the three-month comparable
period. The average rate on interest bearing liabilities was 4.81% for the three
months ended March 31, 2001, an increase of 25 basis points rate when compared
to the same period in 2000.
Net Interest Income
Net interest income for the three months ended March 31, 2001 was $38.8
million compared to $34.6 million for the same period in 2000, an increase of
$4.1 million, or 12%. This increase is attributable primarily to a 15% growth in
average earnings assets. This growth was partially offset by an 8 basis point
decrease in the net interest margin.
During the first quarter of 2001, market interest rates declined due to
actions of the Federal Reserve aimed at stimulating the national economy. This
decline in interest rates has unfavorably impacted the Company's net interest
margin. While additional reductions in interest rates may be expected, the
Company believes that its ability to manage its interest rate sensitivity will
minimize the potential adverse impact on net interest income for the year 2001.
For the three months ended March 31, 2001, the net interest margin declined to
4.53% compared to 4.61% for the three months ended March 31, 2000. This decrease
resulted from an increase in the cost of funds of 25 basis points from 4.56% for
the three months ended March 31, 2000 to 4.81% for the three months ended March
31, 2001. This increase in the cost of funds was partially offset by an increase
in the yield on earnings assets of 18 basis points, from 8.09% for the three
months ended March 31, 2000 to 8.27% for the three months ended March 31, 2001.
10
12
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are daily average balances. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
-------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans............................... $2,548,076 $55,977 8.91% $2,072,059 $45,796 8.89%
Securities.......................... 835,349 13,593 6.60 905,248 14,339 6.37
Federal funds sold and other........ 82,075 1,126 5.56 41,354 569 5.53
---------- ------- ---- ---------- ------- ----
Total interest-earning assets.... 3,465,500 70,696 8.27% 3,018,661 60,704 8.09%
------- ---- ------- ----
Less allowance for loan losses........ (28,891) (23,097)
---------- ----------
Total earning assets, net of
allowance........................... 3,436,609 2,995,564
Nonearning assets..................... 422,094 298,008
---------- ----------
Total assets..................... $3,858,703 $3,293,572
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits... $1,368,608 13,286 3.94% $1,157,491 11,034 3.83%
Certificates of deposits............ 896,244 13,237 5.99 704,348 9,323 5.32
Repurchase agreements and borrowed
funds............................ 424,196 5,423 5.18 442,368 5,740 5.22
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities.................... 2,689,048 31,946 4.81% 2,304,207 26,097 4.56%
------- ---- ------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 828,507 729,520
Other liabilities................... 35,859 27,688
---------- ----------
Total liabilities................ 3,553,414 3,061,415
Shareholders' equity.................. 305,289 232,157
---------- ----------
Total liabilities and
shareholders' equity........... $3,858,703 $3,293,572
========== ==========
Net interest income................... $38,750 $34,607
======= =======
Net interest spread................... 3.46% 3.53%
==== ====
Net interest margin................... 4.53% 4.61%
==== ====
11
13
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances, the volatility of interest rates and
the change in number of days due to leap year. For purposes of this table,
changes attributable to both rate and volume which cannot be segregated have
been allocated.
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
2001 VS. 2000
--------------------------------------
INCREASE (DECREASE)
DUE TO
--------------------------------------
VOLUME RATE DAYS TOTAL
------- ------- ----- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans........................................ $10,557 $ 127 $(503) $10,181
Securities................................... (1,030) 442 (158) (746)
Federal funds sold and other................. 557 6 (6) 557
------- ------- ----- -------
Total increase (decrease) in interest
income................................ 10,084 575 (667) 9,992
------- ------- ----- -------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits............ 2,016 357 (121) 2,252
Certificates of deposits..................... 2,535 1,481 (102) 3,914
Repurchase agreements and borrowed funds..... (223) (31) (63) (317)
------- ------- ----- -------
Total increase (decrease) in interest
expense............................... 4,328 1,807 (286) 5,849
------- ------- ----- -------
Increase (decrease) in net interest income... $ 5,756 $(1,232) $(381) $ 4,143
======= ======= ===== =======
Provision for Loan Losses
The provision for loan losses was $1.8 million for the three months ended
March 31, 2001, compared to $1.6 million for the three months ended March 31,
2000. Although no assurance can be given, management believes that the present
allowance for loan losses is adequate considering loss experience, delinquency
trends and current economic conditions. Management regularly reviews the
Company's loan loss allowance as its loan portfolio grows and diversifies.
(See -- Financial Condition -- Loan Review and Allowance for Loan Losses.)
Noninterest Income
Noninterest income for the three months ended March 31, 2001 was $13.5
million, an increase of $3.1 or 30%, from $10.4 million during the comparable
period in 2000. The following table presents for the periods indicated the
composition of noninterest income.
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts......................... $ 5,684 $ 4,993
Investment services......................................... 1,693 1,388
Factoring fee income........................................ 1,144 872
Loan fee income............................................. 1,484 1,117
Bank-owned life insurance income............................ 920 456
Letters of credit fee income................................ 320 221
Gain on sale of securities, net............................. 17 1
Other income................................................ 2,202 1,378
------- -------
Total noninterest income............................... $13,464 $10,426
======= =======
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14
The largest component of noninterest income, service charges on deposit
accounts, was up $691,000, or 14% from the prior period. This resulted from an
increase in the number of deposit accounts serviced, which grew from 129,846 at
March 31, 2000 to 144,749 at March 31, 2001. For the three months ended March
31, 2001, earnings on bank-owned life insurance grew to $920,000, an increase of
$464,000 or 102% from $456,000 for the comparable period last year. This
increase is attributable to the purchase of additional bank-owned life insurance
early in the first quarter of 2001.
Additional areas of growth included investment services and factoring fee
income. Factoring fee income is derived from the financing of accounts
receivable. Gross accounts receivable purchased was $28.2 million at March 31,
2001, an increase of $9.4 million from $18.8 million at March 31, 2000.
Investment services income grew to $1.7 million for the three months ended March
31, 2001, an increase of $305,000 or 22% from $1.4 million for the comparable
period last year. This increase is attributable to the expanding international
and foreign exchange departments, as well as the continued strategic focus by
the Company to increase its competitive position in providing investment
services.
Other noninterest income increased $824,000, or 60%, to $2.2 million for
the three months ended March 31, 2001 compared to $1.4 million for the
comparable period last year. This increase was primarily attributable to an
increase in the gain on sales of loans to $720,000 for the three months ended
March 31, 2001, an increase of $590,000, or 454%, from $130,000 for the
comparable period last year. The principal balance of mortgage loans sold was
$21.6 million during the three months ended March 31, 2001 compared to $11.2
million during the three months ended March 31, 2000.
Noninterest Expenses
For the three months ended March 31, 2001, noninterest expenses totaled
$32.0 million, an increase of $4.0 million, or 14%, from $28.0 million during
2000. The increase in noninterest expenses was primarily due to salaries and
employee benefits and occupancy expenses. The efficiency ratio improved to
61.30% for the three months ended March 31, 2001 from 62.27% for the comparable
period in 2000.
Salaries and employee benefits for the three months ended March 31, 2001
was $18.8 million, an increase of $2.9 million, or 18%, from the three months
ended March 31, 2000. This increase was due primarily to hiring of additional
personnel required to accommodate the Company's growth. Total full-time
employees were 1,382 and 1,196 at March 31, 2001 and 2000, respectively.
Occupancy expense increased $812,000, or 19%, to $5.0 million for the three
months ended March 31, 2001. Major categories within occupancy expense are
building lease expense, depreciation expense, and maintenance contract expense.
Building lease expense increased to $1.5 million for the three months ended
March 31, 2001 from $1.0 million for the comparable period last year, an
increase of $476,000 or 46%. The Company continues to increase the rentable
square feet of the Galleria corporate location to accommodate the increases in
personnel. In addition, the Company leased 91,689 square feet for an operations
center in downtown Houston late in the prior year. Depreciation expense
increased $365,000, or 18%, to $2.4 million for the three months ended March 31,
2001. This increase was due primarily to depreciation on equipment provided to
new employees and expenses related to technology upgrades throughout the
Company. Maintenance contract expense for the three months ended March 31, 2001
was $624,000, a 17% or $91,000 increase from $533,000 for the same period last
year. The Company has purchased maintenance contracts for major operating
systems throughout the organization.
Income Taxes
Income tax expense includes the regular federal income tax at the statutory
rate, plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of nondeductible interest expense, and
the amount of other nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officers' salaries, less interest income from federal securities. For the three
months ended March 31, 2001, the provision for income taxes was $5.9 million, an
increase of $733,000, or 14%, from the $5.2 million provided for in the same
period in 2000.
13
15
FINANCIAL CONDITION
Loans Held for Investment
Loans held for investment were $2.51 billion at March 31, 2001, an increase
of $86 million or 4% from $2.43 billion at December 31, 2000.
The following table summarizes the loan portfolio of the Company by type of
loan as of March 31, 2001 and December 31, 2000:
MARCH 31, 2001 DECEMBER 31, 2000
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial................ $ 997,237 39.71% $ 954,912 39.37%
Real estate:
Construction and land development...... 679,639 27.06 641,128 26.43
1-4 family residential................. 342,775 13.65 335,934 13.85
Commercial owner occupied.............. 297,271 11.84 265,534 10.95
Farmland............................... 5,839 0.23 5,753 0.24
Other.................................. 23,398 0.93 31,861 1.31
Consumer................................. 165,182 6.58 190,376 7.85
---------- ------ ---------- ------
Gross loans held for investment.......... $2,511,341 100.00% $2,425,498 100.00%
========== ====== ========== ======
The primary lending focus of the Company is on small- and medium-sized
commercial, construction and land development, residential mortgage and consumer
loans. The Company offers a variety of commercial lending products including
term loans, lines of credit and equipment financing. A broad range of short- to
medium-term commercial loans, both collateralized and uncollateralized, are made
available to businesses for working capital (including inventory and
receivables), business expansion (including acquisitions of real estate and
improvements) and the purchase of equipment and machinery. The purpose of a
particular loan generally determines its structure.
Generally, the Company's commercial loans are underwritten in the greater
Houston metropolitan area on the basis of the borrower's ability to service such
debt from cash flow. As a general practice, the Company takes as collateral a
lien on any available real estate, equipment or other assets. Working capital
loans are primarily collateralized by short-term assets whereas term loans are
primarily collateralized by long-term assets.
A substantial portion of the Company's real estate loans consists of loans
collateralized by real estate and other assets of commercial customers.
Additionally, a portion of the Company's lending activity consists of the
origination of single-family residential mortgage loans collateralized by
owner-occupied properties located in the Company's primary market area. The
Company offers a variety of mortgage loan products which generally are amortized
over five to 30 years.
Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 90% of appraised value. The
Company requires mortgage title insurance and hazard insurance in the amount of
the loan. Although the contractual loan payment periods for single-family
residential real estate loans are generally for a 15 to 30 year period, such
loans often remain outstanding for significantly shorter periods than their
contractual terms.
The Company originates and purchases residential and commercial mortgage
loans to sell to investors with servicing rights retained. The Company also
provides residential and commercial construction financing to builders and
developers and acts as a broker in the origination of multi-family and
commercial real estate loans.
Residential construction financing to builders generally has been
originated in amounts of no more than 80% of appraised value. The Company
requires a mortgage title binder and builder's risk insurance in the
14
16
amount of the loan. The contractual loan payment periods for residential
construction loans are generally for a six to twelve month period.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 84 months and vary based
upon the nature of collateral and size of loan.
The contractual maturity ranges of the commercial and industrial and real
estate construction loan portfolio and the amount of such loans with fixed
interest rates and floating interest rates in each maturity range as of March
31, 2001 are summarized in the following table:
MARCH 31, 2001
-------------------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial............. $ 652,913 $315,134 $29,190 $ 997,237
Real estate construction and land
development......................... 402,734 254,677 22,228 679,639
---------- -------- ------- ----------
Total............................ $1,055,647 $569,811 $51,418 $1,676,876
========== ======== ======= ==========
Loans with a fixed interest rate...... $ 410,703 $155,771 $24,208 $ 590,682
Loans with a floating interest rate... 644,944 414,040 27,210 1,086,194
---------- -------- ------- ----------
Total............................ $1,055,647 $569,811 $51,418 $1,676,876
========== ======== ======= ==========
Loans Held for Sale
Loans held for sale of $66.5 million at March 31, 2001 decreased from $85.9
million at December 31, 2000 as a result of sales due to favorable market
conditions. These loans are carried at the lower of cost or market and typically
sold to investors within one year of origination.
Loan Review and Allowance for Loan Losses
The Company's loan review procedures include a Credit Quality Assurance
Process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors, an independent loan review department
staffed with OCC experienced personnel, low individual lending limits for
officers, Senior Loan Committee approval for large credit relationships and
quality loan documentation procedures. The Company also maintains a well
developed monitoring process for credit extensions in excess of $100,000. The
Company performs monthly and quarterly concentration analyses based on various
factors such as industries, collateral types, business lines, large credit
sizes, international investments and officer portfolio loads. The Company has
established underwriting guidelines to be followed by its officers. The Company
also monitors its delinquency levels for any negative or adverse trends. There
can be no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.
Historically, the Houston metropolitan area has been affected by the state
of the energy business, but since the mid 1980's the economic impact has been
reduced by a combination of increased industry diversification and less reliance
on debt to finance expansion. When energy prices fluctuate, it is the Company's
practice to review and adjust underwriting standards with respect to companies
affected by oil and gas price volatility, and to continuously monitor existing
credit exposure to companies which are impacted by this price volatility.
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Based on an evaluation of the loan
portfolio, management presents a quarterly analysis of the allowance for loan
losses to the Board of Directors, indicating any changes in the allowance since
the last review and any
15
17
recommendations as to adjustments in the allowance. In making its evaluation,
management considers, among other things, growth in the loan portfolio, the
diversification by industry of the Company's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio of
current economic indicators and their probable impact on borrowers, the amount
of charge-offs for the period, the amount of nonperforming loans and related
collateral security and the evaluation of its loan portfolio by the loan review
function. Charge-offs occur when loans are deemed to be uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. The Company then charges to operations a provision for loan
losses determined on an annualized basis to maintain the allowance for loan
losses at an adequate level determined according to the foregoing methodology.
Management believes that the allowance for loan losses at March 31, 2001 is
adequate to cover losses inherent in the portfolio as of such date. There can be
no assurance, however, that the Company will not sustain losses in future
periods, which could be greater than the size of the allowance at March 31,
2001.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning balance................ $28,150 $22,436
Provision charged against operations........................ 1,750 7,053
Charge-offs................................................. (989) (2,093)
Recoveries.................................................. 156 754
------- -------
Allowance for loan losses, ending balance................... $29,067 $28,150
======= =======
Allowance to period-end loans............................... 1.16% 1.16%
Net charge-offs to average loans............................ 0.14% 0.06%
Allowance to period-end nonperforming loans................. 397.20% 297.82%
The following table describes the allocation for loan losses among various
categories of loans and certain other information for the dates indicated.
Portions of the allowance for loan losses are allocated to cover the estimated
losses inherent in particular risk categories of loans. The allocation of the
allowance for loan losses is based upon the Company's loss experience over a
period of years and is adjusted for subjective factors such as economic trends,
performance trends, portfolio age and concentrations of credit. The allocation
is made for
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18
analytical purposes and is not necessarily indicative of the categories in which
future loan losses may occur. The total allowance is available to absorb losses
from any segment of loans.
MARCH 31, 2001 DECEMBER 31, 2000
--------------------- ---------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------- ----------- ------- -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses applicable to:
Commercial and industrial........................... $12,427 39.71% $12,219 39.37%
Real estate:
Construction and land development................. 6,038 27.06 5,733 26.43
1-4 family residential............................ 3,338 13.65 3,294 13.85
Commercial owner occupied......................... 3,085 11.84 2,676 10.95
Farmland.......................................... 40 0.23 40 0.24
Other............................................. 997 0.93 1,253 1.31
Consumer............................................ 3,142 6.58 2,935 7.85
------- ------ ------- ------
Total allowance for loan losses..................... $29,067 100.00% $28,150 100.00%
======= ====== ======= ======
Nonperforming Assets and Impaired Loans
The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory. All
loans past due 90 days are placed on nonaccrual status, unless the loan is both
well collateralized and in the process of collection. Cash payments received
while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection.
Nonperforming assets were $8.5 million at March 31, 2001 compared with $9.9
million at December 31, 2000. This resulted in a ratio of nonperforming assets
to loans plus other real estate of 0.34% and 0.41% at March 31, 2001 and
December 31, 2000, respectively. Nonaccrual loans, the largest component of
nonperforming assets, were $6.3 million at March 31, 2001, a decrease of $2.0
million from $8.3 million at December 31, 2000. This decrease is primarily due
to the reclassification of a $1.1 million loan secured by two houses and real
estate. One of these houses was sold during the quarter and one is under
contract at March 31, 2001. The real estate has been foreclosed and is
classified as other real estate and foreclosed property.
The following table presents information regarding nonperforming assets as
of the dates indicated:
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans............................................ $6,336 $8,345
Accruing loans 90 or more days past due..................... 982 1,107
Other real estate and foreclosed property................... 1,222 454
------ ------
Total non-performing assets....................... $8,540 $9,906
====== ======
Nonperforming assets to total loans and other real estate... 0.34% 0.41%
The Company regularly updates appraisals on loans collateralized by real
estate, particularly those categorized as nonperforming loans and potential
problem loans. In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible writedowns or appropriate additions to
the allowance for loan losses.
A loan is considered impaired when, based upon current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due according to the contractual terms
of the loan agreement. The Company's impaired loans were approximately $8.8
million and $10.8 million at March 31, 2001 and December 31, 2000, respectively.
The largest component of impaired loans at March 31, 2001 and December 31, 2000
is a secured relationship which is expected to be a long term
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workout. The balance outstanding to this borrower was $5.4 million and $5.5
million at March 31, 2001 and December 31, 2000, respectively. The average
recorded investment in impaired loans during the three months ended March 31,
2001 and the year ended December 31, 2000 was $9.8 million and $9.3 million,
respectively. The total required allowance for loan losses related to these
loans was $875,000 and $1.0 million for each reported period, respectively.
Interest income on impaired loans of $275,000 and $1.1 million was recognized
for cash payments received during the three months ended March 31, 2001 and the
year ended December 31, 2000, respectively.
Securities
At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held to maturity, trading or available for sale.
At each reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities classified as held to maturity are stated at cost
increased by accretion of discounts and reduced by amortization of premiums,
both computed by the interest method only if management has the positive intent
and ability to hold those securities to maturity. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading and measured at fair value in the financial statements with
unrealized gains and losses included in earnings. Securities not classified as
either held to maturity or trading are classified as available for sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, as a component of accumulated other comprehensive
income (loss) until realized. Gains and losses on sales of securities are
determined using the specific-identification method. The Company has classified
all securities as available for sale at March 31, 2001 which allows the Company
to manage its investment portfolio more effectively and to enhance the average
yield on the portfolio.
The amortized cost and approximate fair value of securities classified as
available for sale is as follows:
MARCH 31, 2001
---------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAIN LOSS VALUE
--------- ------ ------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE:
U.S. Government securities...................... $121,383 $1,927 $ (114) $123,196
Mortgage-backed securities...................... 602,108 7,227 (2,826) 606,509
Federal Reserve Bank stock...................... 3,949 -- -- 3,949
Federal Home Loan Bank stock.................... 18,477 -- -- 18,477
Other securities................................ 44,261 709 (15) 44,955
-------- ------ ------- --------
TOTAL SECURITIES AVAILABLE FOR SALE........ $790,178 $9,863 $(2,955) $797,086
======== ====== ======= ========
DECEMBER 31, 2000
---------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAIN LOSS VALUE
--------- ------ ------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE:
U.S. Government securities...................... $169,069 $1,080 $ (819) $169,330
Mortgage-backed securities...................... 618,523 2,088 (7,395) 613,216
Federal Reserve Bank stock...................... 3,949 -- -- 3,949
Federal Home Loan Bank stock.................... 17,972 -- -- 17,972
Other securities................................ 43,411 335 (49) 43,697
-------- ------ ------- --------
TOTAL SECURITIES AVAILABLE FOR SALE........ $852,924 $3,503 $(8,263) $848,164
======== ====== ======= ========
Securities totaled $797.1 million at March 31, 2001, a decrease of $51.1
million from $848.2 million at December 31, 2000. The yield on the securities
portfolio for the three months ended March 31, 2001 was 6.60% while the yield
was 6.37% for the three months ended March 31, 2000.
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20
The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortgage-backed securities at
March 31, 2001 were agency issued collateral mortgage obligations with a book
value of $253.5 million and a fair value of $255.5 million.
At March 31, 2001, $466.0 million of the mortgage-backed securities held by
the Company had final maturities of more than 10 years. At March 31, 2001,
approximately $100.4 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase.
In connection with the Citizens merger, the Company transferred all of
Citizens' held to maturity debt securities to the available for sale category in
2000. The amortized cost of these securities at the time of transfer was $55.8
million and the unrealized gain was $267,000 ($174,000 net of income taxes).
The following table summarizes the contractual maturity of investments
(including securities, federal funds sold, and interest-bearing deposits) and
their weighted average yields at March 31, 2001. The yield on the securities
portfolio is based on average historical cost balances and does not give effect
to changes in fair value that are reflected as a separate component of other
comprehensive income.
MARCH 31, 2001
------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
----------------- ----------------- ----------------- -----------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED
COST YIELD COST YIELD COST YIELD COST YIELD TOTAL YIELD
--------- ----- --------- ----- --------- ----- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)
U.S. Government
securities............. $ 32,946 6.23% $ 83,952 6.32% $ 4,485 6.18% $ -- -- % $121,383 6.29%
Mortgage-backed
securities............. 4,910 4.93 57,430 6.09 73,741 6.46 466,027 6.45 602,108 6.41
Federal Reserve Bank
stock.................. 3,949 6.00 -- -- -- -- -- -- 3,949 6.00
Federal Home Loan Bank
stock.................. 18,477 6.60 -- -- -- -- -- -- 18,477 6.60
Other securities......... 7,880 5.06 17,242 6.12 8,268 4.94 10,871 7.49 44,261 6.05
Federal funds sold....... 64,808 5.67 -- -- -- -- -- -- 64,808 5.67
Interest-bearing
deposits............... 7,709 6.52 -- -- -- -- -- -- 7,709 6.52
-------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Total investments.... $140,679 5.92% $158,624 6.21% $86,494 6.30% $476,898 6.48% $862,695 6.32%
======== ==== ======== ==== ======= ==== ======== ==== ======== ====
Other Assets
Other assets were $168.8 million at March 31, 2001, an increase of $51.0
million from $117.8 million at December 31, 2000. This increase is attributable
to the purchase of $50 million of additional bank-owned life insurance in the
first quarter of 2001. Significant components within other assets at March 31,
2001 include the cash value of bank-owned life insurance of $79.1 million and
accounts receivable purchased of $28.2 million.
Deposits
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings, NOW
accounts, money market and time accounts. The Company relies primarily on
customer service, advertising and comparative pricing policies to attract and
retain these deposits. As of March 31, 2001, the Company had less than one
percent of its deposits classified as brokered funds and does not anticipate any
significant increase. Deposits provide the primary source of funding for the
Company's lending and investment activities, and the interest paid for deposits
must be managed carefully to control the level of interest expense.
The Company's ratio of average demand deposits to average total deposits
for the periods ended March 31, 2001 and December 31, 2000 was 28.77% and
29.50%, respectively.
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21
The average daily balances and weighted average rates paid on deposits for
the three months ended March 31, 2001 and the year ended December 31, 2000, are
presented below:
MARCH 31, 2001 DECEMBER 31, 2000
-------------------- --------------------
AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ----
(DOLLARS IN THOUSANDS)
NOW accounts........................................ $ 61,373 0.93% $ 58,093 1.09%
Regular savings..................................... 76,577 2.20 74,380 2.28
Premium Yield....................................... 828,028 4.80 659,979 5.25
Money market savings................................ 402,630 2.96 425,414 3.16
CD's less than $100,000............................. 311,391 5.75 289,183 5.32
CD's $100,000 and over.............................. 466,460 6.21 464,470 6.17
IRA's, QRP's and other.............................. 118,393 5.73 75,394 5.66
---------- ---- ---------- ----
Total interest-bearing deposits................ 2,264,852 4.75% $2,046,913 4.82%
==== ---------- ====
Noninterest-bearing deposits........................ 828,507 774,111
---------- ----------
Total deposits................................. $3,093,359 $2,821,024
========== ==========
The following table sets forth the maturity of the Company's time deposits
that are $100,000 or greater as of the dates indicated:
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
(DOLLARS IN THOUSANDS)
3 months or less....................................... $213,476 $265,232
Between 3 months and 6 months.......................... 79,662 124,144
Between 6 months and 1 year............................ 80,184 61,774
Over 1 year............................................ 51,130 55,479
-------- --------
Total time deposits $100,000 and over............. $424,452 $506,629
======== ========
Borrowings
Securities sold under repurchase agreements and other borrowings,
consisting of federal funds purchased treasury, tax and loan deposits and other
bank borrowings, generally represent borrowings with maturities ranging from one
to thirty days. Information relating to these borrowings is summarized as
follows:
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase agreements:
Average................................................ $238,016 $209,816
Period-end............................................. 224,083 211,800
Maximum month-end balance during period................ 246,189 241,834
Interest rate:
Average................................................ 4.69% 4.69%
Period-end............................................. 4.71% 4.89%
Other borrowings:
Average................................................ $186,180 $205,213
Period-end............................................. 155,647 305,961
Maximum month-end balance during period................ 376,509 380,121
Interest rate:
Average................................................ 5.82% 6.39%
Period-end............................................. 5.45% 6.83%
Securities sold under repurchase agreements are maintained in safekeeping
by correspondent banks.
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22
Liquidity and Capital Resources
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. For the three months ended March 31, 2001, the
Company's liquidity needs have primarily been met by growth in core deposits.
The cash and federal funds sold position, supplemented by amortizing securities
and loan portfolios, have generally created an adequate liquidity position.
The Company's risk-based capital ratios including Leverage Capital, Tier I
Risk-Based Capital and the Total Risk-Based Capital Ratio were 8.22%, 10.31% and
11.27%, respectively, at March 31, 2001.
Other Matters
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, was
issued by the Financial Accounting Standards Board to establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires that an entity recognize those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The Company adopted SFAS No. 133 on
January 1, 2001. The impact of the adoption was not material to the Company's
consolidated financial position, results of operations or cash flows as the
Company does not engage in significant derivative activity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURERS ABOUT MARKET RISK
There have been no material changes since December 31, 2000. See the
Company's Annual Report on Form 10-K, "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Interest Rate Sensitivity and Liquidity."
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits:
3.1 Articles of Incorporation of the Company, Restated as of May 1,
2001 (incorporated by reference to Exhibit 4.1 to the Company's
Form S-8 Registration Statement No. 333-60190).
3.2 Bylaws of the Company, Restated as of December 31, 1996
(incorporated by reference to Exhibit 3.2 to the Company's Form S-1
Registration Statement No. 333-16509).
+10.1 Non-Employee Director Stock Plan (incorporated by reference to
Exhibit 4.3 to the Company's Form S-8 Registration Statement No.
333-60190).
+10.2 Form of Stock Conversion Election Form under Non-Employee Director
Stock Plan (incorporated by reference to Exhibit 4.4 to the
Company's Form S-8 Registration Statement No. 333-60190).
+10.3 Restricted Stock Plan (incorporated by reference to Appendix B to
the Company's Proxy Statement dated March 16, 2001 for its 2001
Annual Meeting of Shareholders).
+10.4 Form of Restricted Stock Agreement under the Restricted Stock Plan
(incorporated by reference to Exhibit 4.6 to the Company's Form S-8
Registration Statement No. 333-60190).
+10.5 Employment Agreement between the Company and John H. Echols
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed January 2, 2001).
*15.1 Awareness Letter of PricewaterhouseCoopers LLP.
b.) Reports on Form 8-K:
Two reports on Form 8-K were filed by the Company during the three months
ended March 31, 2001:
i.) A Current Report on Form 8-K dated December 29, 2000 was filed
on January 2, 2001; Item 2 and Item 7(c).
ii.) A Current Report on Form 8-K dated January 18, 2001 was filed
on January 19, 2001; Item 7(c).
---------------
* Filed herewith
+ Management contract.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PAUL B. MURPHY, JR. Director, President and Chief May 11, 2001
------------------------------------------------ Executive Officer
PAUL B. MURPHY, JR. (Principal Executive Officer)
/s/ DAVID C. FARRIES Executive Vice President, May 11, 2001
------------------------------------------------ Treasurer and Secretary
DAVID C. FARRIES (Principal Financial Officer)
/s/ R. JOHN McWHORTER Senior Vice President and Controller May 11, 2001
------------------------------------------------ (Principal Accounting Officer)
R. JOHN MCWHORTER
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
15.1 Awareness Letter of PricewaterhouseCoopers LLP.
24