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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 SEPTEMBER 30, 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 32,913,038 shares of the Registrant's Common Stock outstanding
as of the close of business on October 29, 2001.
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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants......................... 2
Condensed Consolidated Balance Sheet as of September 30,
2001 and December 31, 2000
(unaudited)............................................ 3
Condensed Consolidated Statement of Income for the Three
and Nine Months Ended September 30, 2001 and 2000
(unaudited)............................................ 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Nine Months Ended
September 30, 2001 (unaudited)......................... 5
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000
(unaudited)............................................ 6
Notes to Condensed Consolidated Financial Statements...... 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........................................ 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 25
Item 2. Changes in Securities and Use of Proceeds.......... 25
Item 3. Defaults upon Senior Securities.................... 25
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 25
Item 5. Other Information.................................. 25
Item 6. Exhibits and Reports on Form 8-K................... 25
Signatures.................................................. 26
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
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
September 30, 2001, the related condensed consolidated statements of income for
the three- and nine-month periods ended September 30, 2001 and 2000, the
condensed consolidated statement of changes in shareholders' equity for the
nine-month period ended September 30, 2001 and the condensed consolidated
statement of cash flows for the nine-month periods ended September 30, 2001 and
2000. 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 have 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 balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
October 15, 2001
2
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Cash and due from banks..................................... $ 180,344 $ 331,965
Federal funds sold and other cash equivalents............... 48,885 79,341
---------- ----------
Total cash and cash equivalents......................... 229,229 411,306
Securities -- available for sale............................ 942,073 848,164
Loans held for sale......................................... 88,677 85,939
Loans held for investment................................... 2,645,977 2,425,498
Allowance for loan losses................................... (31,142) (28,150)
Premises and equipment, net................................. 57,316 52,462
Accrued interest receivable................................. 22,951 27,334
Other assets................................................ 154,830 117,789
---------- ----------
Total assets............................................ $4,109,911 $3,940,342
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing............................. $ 865,499 $ 892,296
Demand -- interest-bearing................................ 29,682 62,773
Money market accounts..................................... 1,402,839 1,154,808
Savings................................................... 82,851 76,715
Time, $100 and over....................................... 581,032 506,629
Other time................................................ 365,226 400,649
---------- ----------
Total deposits.......................................... 3,327,129 3,093,870
Securities sold under repurchase agreements................. 273,518 211,800
Other borrowings............................................ 126,982 305,961
Accrued interest payable.................................... 3,599 5,505
Other liabilities........................................... 21,407 23,883
---------- ----------
Total liabilities....................................... 3,752,635 3,641,019
---------- ----------
Minority interest in consolidated subsidiary................ 1,429 1,313
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value, 150,000,000 shares
authorized, 32,911,438 issued and 32,910,406 outstanding
at September 30, 2001 and 75,000,000 shares authorized,
32,705,909 issued and 32,704,877 outstanding at December
31, 2000................................................ 32,911 32,706
Additional paid-in capital................................ 73,288 69,735
Retained earnings......................................... 237,451 198,720
Accumulated other comprehensive income (loss)............. 12,241 (3,107)
Treasury stock, at cost -- 1,032 shares................... (44) (44)
---------- ----------
Total shareholders' equity.............................. 355,847 298,010
---------- ----------
Total liabilities and shareholders' equity.............. $4,109,911 $3,940,342
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
2001 2000 2001 2000
------- ------- -------- --------
Interest income:
Loans........................................... $50,938 $56,008 $158,747 $152,770
Securities...................................... 13,256 14,607 39,690 43,380
Federal funds sold and other.................... 366 746 2,246 1,934
------- ------- -------- --------
Total interest income........................ 64,560 71,361 200,683 198,084
Interest expense on deposits and other
borrowings...................................... 23,786 32,906 82,640 88,134
------- ------- -------- --------
Net interest income.......................... 40,774 38,455 118,043 109,950
Provision for loan losses......................... 2,000 1,791 5,500 5,248
------- ------- -------- --------
Net interest income after provision for loan
losses..................................... 38,774 36,664 112,543 104,702
------- ------- -------- --------
Noninterest income:
Service charges on deposit accounts............. 7,784 4,930 19,564 14,892
Investment services............................. 2,046 1,414 5,441 4,328
Other fee income................................ 2,750 2,122 8,102 6,479
Other operating income.......................... 2,350 2,335 9,292 5,947
Gain (loss) on sale of securities, net.......... 8 (3) 33 (5)
------- ------- -------- --------
Total noninterest income..................... 14,938 10,798 42,432 31,641
------- ------- -------- --------
Noninterest expenses:
Salaries and employee benefits.................. 19,466 17,162 57,749 49,408
Occupancy expense............................... 5,624 4,429 15,694 12,825
Other operating expenses........................ 8,528 7,377 24,498 23,062
------- ------- -------- --------
Total noninterest expenses................... 33,618 28,968 97,941 85,295
------- ------- -------- --------
Income before income taxes and minority
interest................................... 20,094 18,494 57,034 51,048
Provision for income taxes........................ 6,460 6,192 18,294 17,148
------- ------- -------- --------
Income before minority interest.............. 13,634 12,302 38,740 33,900
Minority interest................................. (38) 21 9 103
------- ------- -------- --------
Net income................................... $13,672 $12,281 $ 38,731 $ 33,797
======= ======= ======== ========
Earnings per common share
Basic........................................... $ 0.42 $ 0.37 $ 1.18 $ 1.04
======= ======= ======== ========
Diluted......................................... $ 0.40 $ 0.36 $ 1.14 $ 1.01
======= ======= ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
------------------- PAID-IN RETAINED INCOME TREASURY SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS (LOSS) STOCK EQUITY
---------- ------- ---------- -------- ------------- -------- -------------
BALANCE AT DECEMBER 31, 2000........... 32,705,909 $32,706 $69,735 $198,720 $(3,107) $(44) $298,010
Exercise of stock options............ 205,529 205 3,408 3,613
Deferred compensation amortization... 145 145
Comprehensive income:
Net income for the nine months
ended September 30, 2001......... 38,731 38,731
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $8,526......... 15,348 15,348
--------
Total comprehensive income......... 54,079
---------- ------- ------- -------- ------- ---- --------
BALANCE AT SEPTEMBER 30, 2001.......... 32,911,438 $32,911 $73,288 $237,451 $12,241 $(44) $355,847
========== ======= ======= ======== ======= ==== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
-------- ---------
Cash flows from operating activities:
Net income................................................ $ 38,731 $ 33,797
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 5,500 5,248
Depreciation............................................ 7,692 6,086
Realized (gain) loss on securities available for sale,
net................................................... (33) 5
Amortization............................................ 2,391 1,579
Minority interest in net income of consolidated
subsidiary............................................ 9 103
Gain on sale of loans, net.............................. (2,228) (632)
Dividends on Federal Home Loan Bank stock............... (711) (751)
Origination of loans held for sale and mortgage
servicing rights...................................... (102,159) (69,055)
Proceeds from sales of loans............................ 99,840 45,246
(Increase) decrease in accrued interest receivable and
other assets.......................................... 10,153 (30,445)
Increase (decrease) in accrued interest payable and
other liabilities..................................... (2,540) 15,901
Other, net.............................................. (254) (72)
-------- ---------
Net cash provided by operating activities.......... 56,391 7,010
-------- ---------
Cash flows from investing activities:
Proceeds from maturity and call of securities available
for sale................................................ 113,757 4,000
Proceeds from maturity of securities held to maturity..... -- 6,755
Principal paydowns of mortgage-backed securities available
for sale................................................ 113,662 77,999
Proceeds from sale of securities available for sale....... 51,989 295,518
Purchase of securities available for sale................. (368,217) (362,199)
Purchase of securities held to maturity................... -- (10,368)
Purchase of Federal Reserve Bank stock.................... (845) (801)
Proceeds from redemption of Federal Home Loan Bank
stock................................................... 10,126 --
Net increase in loans receivable.......................... (214,203) (356,241)
Purchase of Bank-owned life insurance policies............ (50,000) --
Purchase of premises and equipment........................ (13,200) (11,729)
Proceeds from sale of premises and equipment.............. 1,006 566
Purchase of mortgage servicing rights..................... (312) (49)
-------- ---------
Net cash used in investing activities.............. (356,237) (356,549)
-------- ---------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing demand
deposits................................................ (26,797) 94,304
Net increase in time deposits............................. 38,980 268,382
Net increase in other interest-bearing deposits........... 221,076 110,676
Net increase in securities sold under repurchase
agreements.............................................. 61,718 11,796
Net decrease in other short-term borrowings............... (178,732) (126,759)
Payments on long-term borrowings.......................... (247) (3,962)
Net proceeds from exercise of stock options............... 1,771 3,280
Purchase of treasury stock................................ -- (117)
Payment of dividends on common stock...................... -- (2,343)
-------- ---------
Net cash provided by financing activities.......... 117,769 355,257
-------- ---------
Net increase (decrease) in cash and cash equivalents........ (182,077) 5,718
Cash and cash equivalents at beginning of period............ 411,306 214,074
-------- ---------
Cash and cash equivalents at end of period.................. $229,229 $ 219,792
======== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Southwest Bancorporation of Texas, Inc. (the "Company") and its direct and
indirect wholly-owned subsidiaries, Southwest Holding Delaware, Inc. (the
"Delaware Company"), Southwest Bank of Texas National Association (the "Bank"),
and Mitchell Mortgage Company, LLC ("Mitchell"). 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
December 2000 merger with Citizens Bankers, Inc. ("Citizens") and acquisition of
all of the assets and liabilities of Citizens Bankers Limited Partnership
("CBLP"), both of which were accounted for as a pooling of interests, the
historical financial data has been restated to include the accounts and
operations of Citizens and CBLP for all periods prior to the merger date. 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
September 30, 2001 and December 31, 2000, consolidated net income for the three
and nine month periods ended September 30, 2001 and 2000, consolidated cash
flows for the nine month periods ended September 30, 2001 and 2000 and
consolidated changes in shareholders' equity for the nine month period ended
September 30, 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 September 30, 2001 and for the three months and nine
months then ended, because that report is not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of the Act.
New Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standards Board approved
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 amends APB Opinion No. 16, Business Combinations, to prohibit use of the
pooling-of-interests (pooling) method of accounting for business combinations
initiated after the issuance date of the final Statement. SFAS No. 142 amends
APB Opinion No. 17, Intangible Assets, by stating that goodwill will no longer
be amortized, but will be tested for impairment in a manner different from how
other assets are tested for impairment. SFAS No. 142 establishes a new method of
testing goodwill for impairment by requiring that goodwill be separately tested
for impairment using a fair value approach rather than an undiscounted cash flow
approach.
The provisions of SFAS No. 141 and SFAS No. 142 will be effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 must be adopted at
the beginning of a fiscal year. The Company is currently evaluating the impact
of the adoption of these Statements.
7
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Net income.................................. $13,672 $12,281 $38,731 $33,797
Net change in unrealized appreciation on
securities available for sale, net of
tax....................................... 9,496 4,255 15,348 657
------- ------- ------- -------
Total comprehensive income.................. $23,168 $16,536 $54,079 $34,454
======= ======= ======= =======
3. EARNINGS PER COMMON SHARE
Earnings per common share is computed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Net income.................................. $13,672 $12,281 $38,731 $33,797
Divided by average common shares and common
share equivalents:
Average common shares..................... 32,886 32,523 32,833 32,212
Average common shares issuable under the
stock option plan...................... 1,197 1,268 1,269 1,130
------- ------- ------- -------
Total average common shares and common
share equivalents...................... 34,083 33,791 34,102 33,342
======= ======= ======= =======
Basic earnings per common share............. $ 0.42 $ 0.37 $ 1.18 $ 1.04
======= ======= ======= =======
Diluted earnings per common share........... $ 0.40 $ 0.36 $ 1.14 $ 1.01
======= ======= ======= =======
4. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES
During the nine months ended September 30, 2001 and 2000, the Company
reduced its federal income tax liability by approximately $1.8 million and $4.3
million, respectively, and recorded a corresponding increase to additional
paid-in capital representing the tax benefit related to the exercise of certain
stock options.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and
similar expressions are intended to identify such forward-looking statements.
The Company's actual results may differ materially from the results anticipated
in these forward-looking statements due to a variety of factors, including,
without limitation: (a) the effects of future economic conditions on the Company
and its customers; (b) governmental monetary and fiscal policies, as well as
legislative and regulatory changes; (c) the risks of changes in interest rates
on the level and composition of deposits, loan demand, and the values of loan
collateral, securities and interest rate protection agreements, as well as
interest rate risks; (d) the effects of competition from other commercial banks,
thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other mutual
funds and other financial institutions operating in the Company's market area
and elsewhere, including institutions operating locally, regionally, nationally
and internationally, together with such competitors offering banking products
and services by mail, telephone, computer and the internet; and (e) the failure
of assumptions underlying the establishment of reserves for loan losses and
estimations of values of collateral and various financial assets and
liabilities. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
OVERVIEW
On December 29, 2000, the Company and Citizens Bankers, Inc. ("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 the Company's Common Stock on a fully
diluted basis.
In a related transaction, the Company, Citizens Bankers Limited Partnership
("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 September 30, 2001 and December 31, 2000 were $4.11 billion
and $3.94 billion, respectively. Gross loans were $2.73 billion at September 30,
2001, an increase of $223.2 million or 9% from $2.51 billion at December 31,
2000. Shareholders' equity was $355.8 million and $298.0 million at September
30, 2001 and December 31, 2000, respectively.
For the nine months ended September 30, 2001, net income was $38.7 million
($1.14 per diluted share) compared to $33.8 million ($1.01 per diluted share)
for the same period in 2000, an increase of 15%. For the three months ended
September 30, 2001, net income was $13.7 million ($0.40 per diluted share)
compared to $12.3 million ($0.36 per diluted share) for the same period in 2000,
an increase of 11%. Return on average assets and return on average common
shareholders' equity for the three months ended September 30, 2001 was 1.34% and
15.96%, respectively, as compared to 1.35% and 18.54% for the three months ended
September 30, 2000.
9
RESULTS OF OPERATIONS
Interest Income
Interest income for the three months ended September 30, 2001 was $64.6
million, a decrease of $6.8 million, or 10%, from the three months ended
September 30, 2000. This decrease in interest income is due to a decrease in the
average yield on interest-earning assets to 7.01% for the three months ended
September 30, 2001, a decrease of 151 basis points when compared to the same
period in 2000. This decrease is partially offset by a $318.4 million increase
in average earning assets to $3.65 billion for the three months ended September
30, 2001, a 10% increase from the same period last year. For the nine months
ended September 30, 2001, interest income was $200.7 million, a $2.6 million, or
1%, increase from the same period a year ago. This increase in interest income
is due to a $351.9 million increase in average earning assets to $3.53 billion
for the nine months ended September 30, 2001, an 11% increase from the same
period last year.
Interest income on loans decreased $5.1 million to $50.9 million for the
three months ended September 30, 2001. This decrease was due to a 184 basis
point decrease in the average yield on loans to 7.55% for the three months ended
September 30, 2001, compared to 9.39% for the same period last year. This
decrease is partially offset by a $304.2 million increase in average loans
outstanding to $2.68 billion for the three months ended September 30, 2001, a
13% increase from the same period a year ago. Interest income on securities
decreased to $13.3 million, a $1.4 million decrease from the three month period
ended September 30, 2000. This decrease was attributable to a 65 basis point
decrease in the average yield on securities to 5.69% for the three months ended
September 30, 2001, compared to 6.34% for the same period last year.
For the nine months ended September 30, 2001, interest income on loans
increased 4% to $158.7 million, up from $152.8 million for the same period last
year. This was due to a $378.5 million increase in average loans outstanding
during the same period. The average yield on loans was 8.16% for the nine months
ended September 30, 2001, a decrease of 102 basis points when compared to the
same period in 2000. Interest income on securities decreased to $39.7 million, a
decrease of $3.7 million, or 9%, from the nine month period ended September 30,
2000. This decrease was attributable to a $50.5 million decrease in average
securities outstanding, down 6% when compared to the nine months ended September
30, 2000. In addition, the average yield on securities decreased 19 basis points
to 6.15% for the nine months ended September 30, 2001 compared to 6.34% for the
same period in 2000.
Interest Expense
Interest expense on deposits and other borrowings for the three months
ended September 30, 2001 was $23.8 million, a decrease of $9.1 million, or 28%,
from the three months ended September 30, 2000. This decrease in interest
expense was attributable to a decrease in the average rate on interest-bearing
liabilities to 3.34% for the period, a decrease of 181 basis points when
compared to the same period in 2000. This decrease is partially offset by a
$289.0 million increase in average interest-bearing liabilities to $2.83 billion
for the three months ended September 30, 2001, an increase of 11% from the same
period last year.
Interest expense on deposits and other borrowings for the nine months ended
September 30, 2001 was $82.6 million, a decrease of $5.5 million, or 6%, from
the nine months ended September 30, 2000. This decrease was due to an 85 basis
point decrease in the average rate on interest-bearing liabilities to 4.01% for
the nine months ended September 30, 2001, compared to 4.86% for the same period
last year. This decrease is partially offset by a $332.4 million increase in
average interest-bearing liabilities to $2.75 billion for the three months ended
September 30, 2001, a 14% increase from the same period a year ago.
Net Interest Income
Net interest income was $40.8 million for the three months ended September
30, 2001, compared with $38.5 million for the same period in 2000, an increase
of 6%. For the nine months ended September 30, 2001, net interest income
increased 7% from the same period in 2000 to $118.0 million. The increase in net
interest income during the three and nine months ended September 30, 2001 is
attributable to growth in average
10
interest-earning assets, primarily loans, partially offset by decreases in the
net interest margin of 16 basis points and 15 basis points, respectively.
During the first nine months 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 September 30, 2001, the net interest margin
declined to 4.43% compared to 4.59% for the three months ended September 30,
2000. This decrease resulted from a decrease in the yield on interest-earning
assets of 151 basis points from 8.52% for the three months ended September 30,
2000 to 7.01% for the three months ended September 30, 2001. This decrease in
the yield on interest-earning assets was partially offset by a decrease in the
cost of funds of 181 basis points, from 5.15% for the three months ended
September 30, 2000 to 3.34% for the three months ended September 30, 2001. For
the nine months ended September 30, 2001, the net interest margin declined to
4.47% compared to 4.62% for the nine months ended September 30, 2000. This
decrease resulted from a decrease in the yield on interest-earning assets of 72
basis points from 8.32% for the nine months ended September 30, 2000 to 7.60%
for the nine months ended September 30, 2001. This decrease in the yield on
interest-earning assets was partially offset by a decrease in the cost of funds
of 85 basis points, from 4.86% for the nine months ended September 30, 2000 to
4.01% for the nine months ended September 30, 2001.
11
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are daily average balances. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 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.......................... $2,676,845 $50,938 7.55% $2,372,628 $56,008 9.39%
Securities..................... 924,501 13,256 5.69 916,547 14,607 6.34
Federal funds sold and other... 50,826 366 2.86 44,566 746 6.66
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets.................... 3,652,172 64,560 7.01% 3,333,741 71,361 8.52%
------- ---- ------- ----
Less allowance for loan losses... (31,431) (25,915)
---------- ----------
Total interest-earning assets,
net of allowance............... 3,620,741 3,307,826
Noninterest-earning assets....... 417,962 311,060
---------- ----------
Total assets................ $4,038,703 $3,618,886
========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Money market and savings
deposits.................... $1,509,293 9,747 2.56% $1,206,342 12,748 4.20%
Certificates of deposit........ 918,749 10,941 4.72 921,296 14,096 6.09
Repurchase agreements and
borrowed funds.............. 400,818 3,098 3.07 412,225 6,062 5.85
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities............... 2,828,860 23,786 3.34% 2,539,863 32,906 5.15%
------- ---- ------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.................... 841,680 780,179
Other liabilities.............. 28,219 35,386
---------- ----------
Total liabilities........... 3,698,759 3,355,428
Shareholders' equity............. 339,944 263,458
---------- ----------
Total liabilities and
shareholders' equity...... $4,038,703 $3,618,886
========== ==========
Net interest income.............. $40,774 $38,455
======= =======
Net interest spread.............. 3.67% 3.37%
==== ====
Net interest margin.............. 4.43% 4.59%
==== ====
12
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 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............................. $2,601,558 $158,747 8.16% $2,223,015 $152,770 9.18%
Securities........................ 863,043 39,690 6.15 913,576 43,380 6.34
Federal funds sold and other...... 65,841 2,246 4.56 41,992 1,934 6.15
---------- -------- ---- ---------- -------- ----
Total interest-earning
assets....................... 3,530,442 200,683 7.60% 3,178,583 198,084 8.32%
-------- ---- -------- ----
Less allowance for loan losses...... (30,126) (24,526)
---------- ----------
Total interest-earning assets, net
of allowance...................... 3,500,316 3,154,057
Noninterest-earning assets.......... 422,025 289,315
---------- ----------
Total assets................... $3,922,341 $3,443,372
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits....................... $1,436,632 34,182 3.18% $1,189,478 36,077 4.05%
Certificates of deposit........... 893,292 35,781 5.36 798,036 34,172 5.72
Repurchase agreements and borrowed
funds.......................... 423,690 12,677 4.00 433,674 17,885 5.51
---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities.................. 2,753,614 82,640 4.01% 2,421,188 88,134 4.86%
-------- ---- -------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits....................... 812,275 744,386
Other liabilities................. 32,784 30,257
---------- ----------
Total liabilities.............. 3,598,673 3,195,831
Shareholders' equity................ 323,668 247,541
---------- ----------
Total liabilities and
shareholders' equity......... $3,922,341 $3,443,372
========== ==========
Net interest income................. $118,043 $109,950
======== ========
Net interest spread................. 3.59% 3.46%
==== ====
Net interest margin................. 4.47% 4.62%
==== ====
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ------------------------------------
2001 VS. 2000 2001 VS. 2000
--------------------------- ------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- ------------------------------------
VOLUME RATE TOTAL VOLUME RATE DAYS TOTAL
------ -------- ------- ------- -------- ----- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans............................ $7,354 $(12,424) $(5,070) $26,408 $(19,873) $(558) $ 5,977
Securities....................... 167 (1,518) (1,351) (2,279) (1,253) (158) (3,690)
Federal funds sold and other..... 107 (487) (380) 1,103 (784) (7) 312
------ -------- ------- ------- -------- ----- -------
Total increase (decrease) in
interest income........... 7,628 (14,429) (6,801) 25,232 (21,910) (723) 2,599
------ -------- ------- ------- -------- ----- -------
INTEREST-BEARING LIABILITIES:
Money market and savings
deposits....................... 3,245 (6,246) (3,001) 7,588 (9,351) (132) (1,895)
Certificates of deposit.......... (39) (3,116) (3,155) 4,169 (2,435) (125) 1,609
Repurchase agreements and
borrowed funds................. (152) (2,812) (2,964) (363) (4,780) (65) (5,208)
------ -------- ------- ------- -------- ----- -------
Total increase (decrease) in
interest expense.......... 3,054 (12,174) (9,120) 11,394 (16,566) (322) (5,494)
------ -------- ------- ------- -------- ----- -------
Increase (decrease) in net
interest income................ $4,574 $ (2,255) $ 2,319 $13,838 $ (5,344) $(401) $ 8,093
====== ======== ======= ======= ======== ===== =======
Provision for Loan Losses
The provision for loan losses was $2.0 million for the three months ended
September 30, 2001 as compared to $1.8 million for the three months ended
September 30, 2000. The provision for loan losses was $5.5 million for the nine
months ended September 30, 2001 as compared to $5.2 million for the nine months
ended September 30, 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 September 30, 2001 was $14.9
million, an increase of $4.1 million, or 38%, from $10.8 million during the
comparable period in 2000. Noninterest income for the nine months ended
September 30, 2001 was $42.4 million, an increase of $10.8 million, or 34%, from
$31.6 million during the comparable period in 2000. The following table presents
for the periods indicated the composition of noninterest income.
14
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts......... $ 7,784 $ 4,930 $19,564 $14,892
Investment services......................... 2,046 1,414 5,441 4,328
Factoring fee income........................ 1,082 1,058 3,428 2,885
Loan fee income............................. 1,018 1,252 2,777 3,312
Bank-owned life insurance income............ 1,198 405 3,288 1,254
Letters of credit fee income................ 330 213 958 683
Gain on sale of loans, net.................. 432 215 2,228 632
Gain (loss) on sale of securities, net...... 8 (3) 33 (5)
Other income................................ 1,040 1,314 4,715 3,660
------- ------- ------- -------
Total noninterest income............... $14,938 $10,798 $42,432 $31,641
======= ======= ======= =======
The largest component of noninterest income, service charges on deposit
accounts, was $7.8 million for the three months ended September 30, 2001, an
increase of $2.9 million, or 58%, from $4.9 million for the same period last
year. Service charges on deposit accounts were $19.6 million for the nine months
ended September 30, 2001, an increase of $4.7 million, or 31%, from $14.9
million for the same period last year. This resulted primarily from an increase
in the number of deposit accounts serviced, which grew from 139,172 at September
30, 2000 to 150,972 at September 30, 2001, and from fee income generated on new
products offered to the Company's depositors.
Earnings on bank-owned life insurance was $1.2 million for the three months
ended September 30, 2001, an increase of $793,000, or 196%, from $405,000 for
the same period last year. Earnings on bank-owned life insurance was $3.3
million for the nine months ended September 30, 2001, an increase of $2.0
million, or 162%, from $1.3 million for the same period last year. This increase
is attributable to the purchase of additional bank-owned life insurance early in
the first quarter of 2001.
Gain on sale of loans was $432,000 for the three months ended September 30,
2001, an increase of $217,000 or 101%, from $215,000 for the same period last
year. Gain on sale of loans was $2.2 million for the nine months ended September
30, 2001, an increase of $1.6 million, or 253%, from $632,000 for the same
period last year. The principal balance of mortgage loans sold was $26.6 million
during the three months ended September 30, 2001 compared to $11.3 million
during the three months ended September 30, 2000. The principal balance of
mortgage loans sold for the nine months ended September 30, 2001 was $97.6
million compared to $34.1 million for the comparable period last year.
Additional areas of growth included factoring fee income and investment
services income. Factoring fee income is derived from the financing of accounts
receivable. Average gross accounts receivable purchased was $23.3 million and
$25.9 million for the three and nine months ended September 30, 2001,
respectively, compared to $23.9 million and $21.3 million for the comparable
periods last year. The increase in investment services income 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.
Noninterest Expenses
For the three months ended September 30, 2001, noninterest expenses totaled
$33.6 million, an increase of $4.6 million, or 16%, from $29.0 million during
2000. For the nine months ended September 30, 2001, noninterest expenses totaled
$97.9 million, an increase of $12.6 million, or 15%, from the same period in
2000. The increase in noninterest expenses was primarily due to salaries and
employee benefits and occupancy expenses. The efficiency ratio was 60.35% for
the three months ended September 30, 2001 compared with 58.81% for the same
period last year. For the nine months ended September 30, 2001, the efficiency
ratio was 61.04% compared with 60.24% for the same period last year.
15
Salaries and employee benefits for the three months ended September 30,
2001 was $19.5 million, an increase of $2.3 million, or 13%, from the three
months ended September 30, 2000. Salaries and employee benefits was $57.7
million for the nine months ended September 30, 2001, an increase of $8.3
million, or 17%, from $49.4 for the same period last year. This increase was due
primarily to hiring of additional personnel required to accommodate the
Company's growth. Total full-time employees were 1,329 and 1,272 at September
30, 2001 and 2000, respectively.
Occupancy expense for the three months ended September 30, 2001 was $5.6
million, an increase of $1.2 million, or 27%, from the three months ended
September 30, 2000. Occupancy expense was $15.7 million for the nine months
ended September 30, 2001, an increase of $2.9 million, or 22%, from $12.8
million for the same period last year. Major categories within occupancy expense
are building lease expense and depreciation expense. Building lease expense
increased to $1.6 million for the three months ended September 30, 2001 from
$1.1 million for the comparable period last year, an increase of $515,000 or
47%. For the nine months ended September 30, 2001, building lease expense was
$4.6 million, an increase of $1.4 million, or 44%, from $3.2 million for the
same period last year. The Company leased 91,689 square feet for an operations
center in downtown Houston late in the prior year. Depreciation expense
increased $679,000, or 33%, to $2.8 million for the three months ended September
30, 2001 as compared to $2.1 million for the same period last year. For the nine
months ended September 30, 2001, depreciation expense was $7.7 million, an
increase of $1.6 million, or 26%, from $6.1 million for the same period last
year. This increase was due primarily to depreciation on equipment provided to
new employees and expenses related to technology upgrades throughout the
Company. In addition, the Company recorded $112,000 and $269,000 of depreciation
expense related to the leasehold improvements at the new operations center
during the three and nine months ended September 30, 2001, respectively.
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 September 30, 2001, the provision for income taxes was $6.5
million, an increase of $268,000, or 4%, from the $6.2 million provided for the
same period in 2000. For the nine months ended September 30, 2001, income tax
expense was $18.3 million, an increase of $1.1 million, or 7%, from the $17.1
million provided for the same period in 2000. The Company's effective tax rate
was 32% for the three and nine months ended September 30, 2001. The effective
tax rate was 34% for the three and nine months ended September 30, 2000. The
reduced rate is primarily due to an increase in income earned on the Company's
bank-owned life insurance and other tax exempt securities.
16
FINANCIAL CONDITION
Loans Held for Investment
Loans held for investment were $2.65 billion at September 30, 2001, an
increase of $220.5 million, or 9%, from $2.43 billion at December 31, 2000.
The following table summarizes the loan portfolio of the Company by type of
loan as of September 30, 2001 and December 31, 2000:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial................ $1,029,016 38.89% $ 954,912 39.37%
Real estate:
Construction and land development...... 720,604 27.23 641,128 26.43
1-4 family residential................. 351,499 13.28 335,934 13.85
Commercial owner occupied.............. 305,989 11.57 265,534 10.95
Farmland............................... 4,733 0.18 5,753 0.24
Other.................................. 25,073 0.95 31,861 1.31
Consumer................................. 209,063 7.90 190,376 7.85
---------- ------ ---------- ------
Loans held for investment................ $2,645,977 100.00% $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
17
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 the loan.
The contractual maturity ranges of the commercial and industrial and real
estate construction and land development loan portfolio and the amount of such
loans with fixed interest rates and floating interest rates in each maturity
range as of September 30, 2001 are summarized in the following table:
SEPTEMBER 30, 2001
-------------------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial............. $ 678,447 $313,621 $36,948 $1,029,016
Real estate construction and land
development......................... 425,758 272,580 22,266 720,604
---------- -------- ------- ----------
Total............................ $1,104,205 $586,201 $59,214 $1,749,620
========== ======== ======= ==========
Loans with a fixed interest rate...... $ 440,114 $174,883 $32,592 $ 647,589
Loans with a floating interest rate... 664,091 411,318 26,622 1,102,031
---------- -------- ------- ----------
Total............................ $1,104,205 $586,201 $59,214 $1,749,620
========== ======== ======= ==========
Loans Held for Sale
Loans held for sale of $88.7 million at September 30, 2001 increased from
$85.9 million at December 31, 2000. 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, in part, with OCC experienced personnel, low individual lending limits
for officers, Senior Loan Committee approval for large credit relationships and
quality loan documentation procedures. The Company also maintains a well
developed monitoring process for credit extensions in excess of $100,000. The
Company performs monthly and quarterly concentration analyses based on various
factors such as industries, collateral types, business lines, large credit
sizes, international investments and officer portfolio loads. The Company has
established underwriting guidelines to be followed by its officers. The Company
also monitors its delinquency levels for any negative or adverse trends. There
can be no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credits due to
general economic conditions.
Historically, the Houston metropolitan area has been affected by the state
of the energy business, but since the mid 1980's the economic impact has been
reduced by a combination of increased industry diversification and less reliance
on debt to finance expansion. When energy prices fluctuate, it is the Company's
practice to review and adjust underwriting standards with respect to companies
affected by oil and gas price volatility, and to continuously monitor existing
credit exposure to companies which are impacted by this price volatility.
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Based on an evaluation of the loan
portfolio, management presents a quarterly analysis of the allowance for loan
losses to the Board of Directors, indicating any changes in the allowance since
the last review and any
18
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 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 quarterly basis to adjust the allowance for loan losses
for changes determined according to the foregoing methodology.
Management believes that the allowance for loan losses at September 30,
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
September 30, 2001.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, 2001 2000
------------------ ------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning balance................ $28,150 $22,436
Provision charged against operations........................ 5,500 7,053
Charge-offs................................................. (3,229) (2,093)
Recoveries.................................................. 721 754
------- -------
Allowance for loan losses, ending balance................... $31,142 $28,150
======= =======
Allowance to period-end loans............................... 1.18% 1.16%
Net charge-offs to average loans............................ 0.13% 0.06%
Allowance to period-end nonperforming loans................. 236.77% 297.82%
The following table reflects the distribution of the allowance for loan
losses among various categories of loans 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
19
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.
SEPTEMBER 30, 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........................... $13,434 38.89% $12,219 39.37%
Real estate:
Construction and land development................. 8,016 27.23 5,733 26.43
1-4 family residential............................ 2,664 13.28 3,294 13.85
Commercial owner occupied......................... 2,920 11.57 2,676 10.95
Farmland.......................................... -- 0.18 40 0.24
Other............................................. 1,092 0.95 1,253 1.31
Consumer............................................ 3,016 7.90 2,935 7.85
------- ------ ------- ------
Total allowance for loan losses..................... $31,142 100.00% $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 $14.3 million at September 30, 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 0.54% and 0.41% at September 30, 2001
and December 31, 2000, respectively. Nonaccrual loans, the largest component of
nonperforming assets, were $12.1 million at September 30, 2001, an increase of
$3.7 million from $8.3 million at December 31, 2000. This increase relates
primarily to three credits that are newly classified as nonaccrual loans. Two of
these credits are approximately $2.25 million each. One of these is viewed as a
long-term workout, while the other is expected to return to performing status in
the next few quarters. The other significant credit should also be resolved
within the next few quarters.
The following table presents information regarding nonperforming assets as
of the dates indicated:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans............................................ $12,073 $8,345
Accruing loans 90 or more days past due..................... 1,080 1,107
Other real estate and foreclosed property................... 1,149 454
------- ------
Total nonperforming assets............................. $14,302 $9,906
======= ======
Nonperforming assets to total loans and other real estate... 0.54% 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 $12.6
million and $10.8 million at September 30, 2001 and December 31, 2000,
respectively. The balance of impaired loans included in nonperforming assets was
$12.1 million and $8.0 million at September 30, 2001 and December 31, 2000,
respectively. The largest component of impaired loans at September 30, 2001 and
December 31, 2000 is a secured relationship which is expected to be a long term
workout. The balance outstanding to this borrower
20
was $3.4 million and $5.5 million at September 30, 2001 and December 31, 2000,
respectively. The average recorded investment in impaired loans during the nine
months ended September 30, 2001 and the year ended December 31, 2000 was $11.7
million and $9.3 million, respectively. The total required allowance for loan
losses related to these loans was $739,000 and $1.0 million for each reported
period, respectively. Interest income on impaired loans of $347,000 and $737,000
was recognized for cash payments received during the nine months ended September
30, 2001 and September 30, 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 September 30, 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:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
---------------------------------------- ---------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ----------------- FAIR AMORTIZED ---------------- FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ------- ------- -------- --------- ------ ------- --------
(DOLLARS IN THOUSANDS)
U.S. Government
securities................ $ 78,079 $ 1,810 $ -- $ 79,889 $169,069 $1,080 $ (819) $169,330
Mortgage-backed
securities................ 696,585 16,373 (1,149) 711,809 618,523 2,088 (7,395) 613,216
Municipal securities........ 77,866 1,754 (54) 79,566 28,414 148 (27) 28,535
Federal Reserve Bank
stock..................... 4,219 -- -- 4,219 3,949 -- -- 3,949
Federal Home Loan Bank
stock..................... 7,296 -- -- 7,296 17,972 -- -- 17,972
Other securities............ 58,914 384 (4) 59,294 14,997 187 (22) 15,162
-------- ------- ------- -------- -------- ------ ------- --------
Total securities
available for sale.... $922,959 $20,321 $(1,207) $942,073 $852,924 $3,503 $(8,263) $848,164
======== ======= ======= ======== ======== ====== ======= ========
Securities totaled $942.1 million at September 30, 2001, an increase of
$93.9 million from $848.2 million at December 31, 2000. The yield on the
securities portfolio for the nine months ended September 30, 2001 was 6.15%
while the yield was 6.34% for the nine months ended September 30, 2000.
The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortgage-backed securities at
September 30, 2001 were agency issued collateral mortgage obligations with a
book value of $316.4 million and a fair value of $324.8 million.
At September 30, 2001, $575.3 million of the mortgage-backed securities
held by the Company had final maturities of more than 10 years. At September 30,
2001, approximately $66.1 million of the Company's mortgage-backed securities
earned interest at floating rates and repriced within one year, and accordingly
were less susceptible to declines in value should interest rates increase.
21
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 September 30, 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 component of other
comprehensive income.
SEPTEMBER 30, 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............. $ 31,811 6.20% $29,340 6.80% $ 16,928 5.39% $ -- --% $ 78,079 6.25%
Mortgage-backed
securities............. 2,139 6.14 36,081 6.45 83,073 6.12 575,292 6.18 696,585 6.19
Municipal securities..... 4,999 5.14 9,818 4.64 7,941 4.48 55,108 4.90 77,866 4.84
Federal Reserve Bank
stock.................. 4,219 6.00 -- -- -- -- -- -- 4,219 6.00
Federal Home Loan Bank
stock.................. 7,296 3.50 -- -- -- -- -- -- 7,296 3.50
Other securities......... 49,985 2.48 6,276 7.09 2,354 5.88 299 6.02 58,914 3.13
Federal funds sold....... 46,466 1.37 -- -- -- -- -- -- 46,466 1.37
Interest-bearing
deposits............... 2,419 3.22 -- -- -- -- -- -- 2,419 3.22
-------- ---- ------- ---- -------- ---- -------- ---- -------- ----
Total investments.... $149,334 3.23% $81,515 6.41% $110,296 5.88% $630,699 6.07% $971,844 5.64%
======== ==== ======= ==== ======== ==== ======== ==== ======== ====
Other Assets
Other assets were $154.8 million at September 30, 2001, an increase of
$37.0 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 include the cash value of bank owned life insurance of $81.4 million and
accounts receivable purchased of $27.0 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 competitive pricing policies to attract and
retain these deposits. As of September 30, 2001, the Company had less than 1% 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 noninterest-bearing demand deposits to
average total deposits for the periods ended September 30, 2001 and December 31,
2000, was 28% and 30%, respectively.
22
The average daily balances and weighted average rates paid on deposits for
the nine months ended September 30, 2001 and the year ended December 31, 2000,
are presented below:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
--------------------- ---------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
BALANCE RATE BALANCE RATE
----------- ---- ----------- ----
(DOLLARS IN THOUSANDS)
NOW accounts........................................ $ 72,123 2.35% $ 58,093 1.09%
Regular savings..................................... 80,608 1.79 74,380 2.28
Premium yield....................................... 851,927 3.84 659,979 5.25
Money market savings................................ 431,974 2.27 425,414 3.16
CD's less than $100,000............................. 305,446 5.48 289,183 5.32
CD's $100,000 and over.............................. 511,777 5.30 464,470 6.17
IRA's, QRP's and other.............................. 76,069 5.26 75,394 5.66
---------- ---- ---------- ----
Total interest-bearing deposits................ 2,329,924 4.01% 2,046,913 4.82%
==== ====
Noninterest-bearing deposits........................ 812,275 774,111
---------- ----------
Total deposits................................. $3,142,199 $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:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)
3 months or less............................................ $358,679 $265,232
Between 3 months and 6 months............................... 129,240 124,144
Between 6 months and 1 year................................. 57,336 61,774
Over 1 year................................................. 35,777 55,479
-------- --------
Total time deposits $100,000 and over.................. $581,032 $506,629
======== ========
Borrowings
Securities sold under repurchase agreements and other borrowings generally
represent borrowings with maturities ranging from one to thirty days. Other
borrowings consist of federal funds purchased, treasury, tax and loan deposits
and other bank borrowings. Information relating to these borrowings for the nine
months ended September 30, 2001 and the year ended December 31, 2000 is
summarized as follows:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase agreements:
Average............................................. $257,503 $209,816
Period-end.......................................... 273,518 211,800
Maximum month-end balance during period............. 273,518 241,834
Interest rate:
Average............................................. 3.63% 4.69%
Period-end.......................................... 2.35% 4.89%
Other borrowings:
Average............................................. $166,187 $205,213
Period-end.......................................... 126,982 305,961
Maximum month-end balance during period............. 376,509 380,121
Interest rate:
Average............................................. 4.58% 6.39%
Period-end.......................................... 3.59% 6.83%
23
Securities sold under repurchase agreements are maintained in safekeeping
by correspondent banks.
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 nine months ended September 30, 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 loans, have generally created an adequate liquidity position.
The Company's risk-based capital ratios including Leverage Capital, Tier 1
Risk-Based Capital and the Total Risk-Based Capital Ratio were 8.55%, 10.48% and
11.45%, respectively, at September 30, 2001.
Other Matters
On June 29, 2001, the Financial Accounting Standards Board approved
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 amends APB Opinion No. 16, Business Combinations, to prohibit use of the
pooling-of-interest (pooling) method of accounting for business combinations
initiated after the issuance date of the final Statement. SFAS No. 142 amends
APB Opinion No. 17, Intangible Assets, by stating that goodwill will no longer
be amortized, but will be tested for impairment in a manner different from how
other assets are tested for impairment. SFAS No. 142 establishes a new method of
testing goodwill for impairment by requiring that goodwill be separately tested
for impairment using a fair value approach rather than an undiscounted cash flow
approach.
The provisions of SFAS No. 141 and SFAS No. 142 will be effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 must be adopted at
the beginning of a fiscal year. The Company is currently evaluating the impact
of the adoption of these Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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."
24
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits:
*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 September 30, 2001:
i.) A Current Report on Form 8-K dated July 19, 2001 was filed on July
19, 2001: Item 5 and Item 7(c).
ii.) A Current Report on Form 8-K dated September 14, 2001 was filed on
September 17, 2001: Item 5 and Item 7(c).
---------------
* Filed herewith
25
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PAUL B. MURPHY, JR. Director, President and Chief November 6, 2001
------------------------------------------------ Executive Officer
PAUL B. MURPHY, JR. (Principal Executive Officer)
/s/ DAVID C. FARRIES Executive Vice President, November 6, 2001
------------------------------------------------ Treasurer and Secretary
DAVID C. FARRIES (Principal Financial Officer)
/s/ R. JOHN MCWHORTER Senior Vice President and Controller November 6, 2001
------------------------------------------------ (Principal Accounting Officer)
R. JOHN MCWHORTER
26
INDEX TO EXHIBITS
*15.1 Awareness Letter of PricewaterhouseCoopers LLP.