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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 JUNE 30, 2002
[ ] 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 33,671,007 shares of the Registrant's Common Stock outstanding
as of the close of business on August 1, 2002.
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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 June 30, 2002
and December 31, 2001
(unaudited)............................................ 3
Condensed Consolidated Statement of Income for the Three
and Six Months Ended June 30, 2002 and 2001
(unaudited)............................................ 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Six Months Ended June 30,
2002 (unaudited)....................................... 5
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2002 and 2001 (unaudited)........ 6
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 29
Item 2. Changes in Securities and Use of Proceeds.......... 29
Item 3. Defaults upon Senior Securities.................... 29
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 29
Item 5. Other Information.................................. 29
Item 6. Exhibits and Reports on Form 8-K................... 29
Signatures.................................................. 31
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
June 30, 2002, the related condensed consolidated statements of income for each
of the three-month and six-month periods ended June 30, 2002 and 2001, the
condensed consolidated statement of changes in shareholders' equity for the
six-month period ended June 30, 2002 and the condensed consolidated statement of
cash flows for the six-month periods ended June 30, 2002 and 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, 2001, 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 25, 2002 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, 2001, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
July 16, 2002
2
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------ --------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE AMOUNTS)
ASSETS
Cash and due from banks..................................... $ 182,352 $ 272,823
Federal funds sold and other cash equivalents............... 95,404 72,633
---------- ----------
Total cash and cash equivalents........................ 277,756 345,456
Securities available for sale............................... 1,162,966 1,068,315
Loans held for sale......................................... 70,577 87,024
Loans held for investment................................... 2,813,133 2,672,458
Allowance for loan losses................................... (33,025) (31,390)
Premises and equipment, net................................. 87,313 59,924
Accrued interest receivable................................. 18,694 20,706
Other assets................................................ 151,113 178,663
---------- ----------
Total assets........................................... $4,548,527 $4,401,156
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing............................. $1,042,127 $ 987,752
Demand -- interest-bearing................................ 29,806 38,373
Money market accounts..................................... 1,429,539 1,403,796
Savings................................................... 96,792 86,237
Time, $100 and over....................................... 632,062 554,120
Other time................................................ 353,156 358,355
---------- ----------
Total deposits......................................... 3,583,482 3,428,633
Securities sold under repurchase agreements................. 267,852 358,401
Other borrowings............................................ 263,616 229,578
Accrued interest payable.................................... 2,092 2,562
Other liabilities........................................... 19,517 18,840
---------- ----------
Total liabilities...................................... 4,136,559 4,038,014
---------- ----------
Minority interest in consolidated subsidiary................ 1,461 1,408
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value, 150,000,000 shares
authorized; 33,632,316 issued and outstanding at June
30, 2002 and 32,924,098 issued and outstanding at
December 31, 2001...................................... 33,632 32,924
Additional paid-in capital................................ 83,110 73,388
Retained earnings......................................... 280,279 251,552
Accumulated other comprehensive income.................... 13,486 3,870
---------- ----------
Total shareholders' equity............................. 410,507 361,734
---------- ----------
Total liabilities and shareholders' equity............. $4,548,527 $4,401,156
========== ==========
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
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income:
Loans.............................................. $44,767 $51,832 $ 88,149 $107,809
Securities......................................... 14,629 12,841 29,008 26,434
Federal funds sold and other....................... 186 754 377 1,880
------- ------- -------- --------
Total interest income........................... 59,582 65,427 117,534 136,123
------- ------- -------- --------
Interest expense:
Deposits........................................... 12,174 22,752 24,867 49,275
Other borrowings................................... 2,503 4,156 5,300 9,579
------- ------- -------- --------
Total interest expense.......................... 14,677 26,908 30,167 58,854
------- ------- -------- --------
Net interest income............................. 44,905 38,519 87,367 77,269
Provision for loan losses............................ 3,250 1,750 5,750 3,500
------- ------- -------- --------
Net interest income after provision for loan
losses........................................ 41,655 36,769 81,617 73,769
------- ------- -------- --------
Noninterest income:
Service charges on deposit accounts................ 9,466 6,096 18,159 11,780
Investment services................................ 2,395 1,702 4,812 3,395
Other fee income................................... 2,968 2,488 5,774 5,352
Other operating income............................. 1,837 2,660 3,537 5,146
Gain on sale of loans, net......................... 1,008 1,076 1,586 1,796
Gain on sale of securities, net.................... 1 8 2 25
------- ------- -------- --------
Total noninterest income........................ 17,675 14,030 33,870 27,494
------- ------- -------- --------
Noninterest expenses:
Salaries and employee benefits..................... 21,487 19,496 42,460 38,283
Occupancy expense.................................. 5,631 5,083 11,116 10,070
Other operating expenses........................... 10,109 7,745 19,850 15,970
------- ------- -------- --------
Total noninterest expenses...................... 37,227 32,324 73,426 64,323
------- ------- -------- --------
Income before income taxes and minority
interest...................................... 22,103 18,475 42,061 36,940
Provision for income taxes........................... 6,897 5,914 13,285 11,834
------- ------- -------- --------
Income before minority interest................. 15,206 12,561 28,776 25,106
Minority interest.................................... 24 17 49 47
------- ------- -------- --------
Net income...................................... $15,182 $12,544 $ 28,727 $ 25,059
======= ======= ======== ========
Earnings per common share:
Basic........................................... $ 0.46 $ 0.38 $ 0.87 $ 0.76
======= ======= ======== ========
Diluted......................................... $ 0.44 $ 0.37 $ 0.84 $ 0.73
======= ======= ======== ========
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
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS INCOME EQUITY
---------- ------- ---------- -------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
BALANCE, DECEMBER 31, 2001............ 32,924,098 $32,924 $73,388 $251,552 $ 3,870 $361,734
Exercise of stock options........... 558,883 559 9,708 10,267
Issuance of restricted common
stock............................ 149,335 149 (149) --
Deferred compensation
amortization..................... 163 163
Comprehensive income:
Net income for the six months
ended June 30, 2002............ 28,727 28,727
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $5,299....... 9,616 9,616
--------
Total comprehensive income....... 38,343
---------- ------- ------- -------- ------- --------
BALANCE, JUNE 30, 2002................ 33,632,316 $33,632 $83,110 $280,279 $13,486 $410,507
========== ======= ======= ======== ======= ========
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
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
2002 2001
--------- ----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 28,727 $ 25,059
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 5,750 3,500
Depreciation............................................ 4,308 3,751
Realized gain on securities available for sale, net..... (2) (25)
Amortization and accretion of securities' premiums and
discounts, net......................................... 1,740 (266)
Amortization of mortgage servicing rights............... 1,671 1,352
Amortization of computer software....................... 1,722 1,189
Other amortization...................................... 163 183
Minority interest in net income of consolidated
subsidiary............................................. 49 47
Gain on sale of loans, net.............................. (1,586) (1,796)
Origination of loans held for sale and mortgage
servicing rights....................................... (78,172) (68,144)
Proceeds from sales of loans............................ 95,087 72,773
Income tax benefit from exercise of stock options....... 4,604 1,370
Decrease in accrued interest receivable, prepaid
expenses and other assets.............................. 24,812 10,985
Increase (decrease) in accrued interest payable and
other liabilities...................................... 207 (8,076)
Other, net.............................................. 245 (302)
-------- ---------
Net cash provided by operating activities.......... 89,325 41,600
-------- ---------
Cash flows from investing activities:
Proceeds from maturity and call of securities available
for sale................................................ 20,117 99,762
Principal paydowns of mortgage-backed securities available
for sale................................................ 175,885 65,614
Proceeds from sale of securities available for sale....... -- 25,920
Purchase of securities available for sale................. (270,174) (150,784)
Purchase of Federal Reserve Bank stock.................... (118) --
Proceeds from redemption of Federal Home Loan Bank
stock................................................... 5,699 10,126
Purchase of Federal Home Loan Bank stock.................. (12,630) --
Net increase in loans held for investment................. (145,722) (122,573)
Purchase of Bank-owned life insurance policies............ -- (50,000)
Purchase of premises and equipment........................ (34,461) (10,727)
Proceeds from sale of premises and equipment.............. 801 984
Purchase of mortgage servicing rights..................... (423) (315)
-------- ---------
Net cash used in investing activities.............. (261,026) (131,993)
-------- ---------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing demand
deposits................................................ 54,375 (17,168)
Net increase in time deposits............................. 72,743 2,176
Net increase in other interest-bearing deposits........... 27,731 171,118
Net increase (decrease) in securities sold under
repurchase agreements................................... (90,549) 19,868
Net increase (decrease) in other short-term borrowings.... 34,215 (204,498)
Payments on long-term borrowings.......................... (177) (163)
Net proceeds from exercise of stock options............... 5,663 1,389
-------- ---------
Net cash provided by (used in) financing
activities........................................ 104,001 (27,278)
-------- ---------
Net decrease in cash and cash equivalents................... (67,700) (117,671)
Cash and cash equivalents at beginning of period............ 345,456 411,306
-------- ---------
Cash and cash equivalents at end of period.................. $277,756 $ 293,635
======== =========
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
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited 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"), Mitchell Mortgage Company, LLC ("Mitchell"), Fairview, Inc., SWBT
Securities, Inc. and SWBT Insurance Agency, Inc. The consolidated financial
statements also include the accounts of First National Bank of Bay City, a 58%
owned subsidiary of the Delaware Company. 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 for a fair statement of the
Company's consolidated financial position at June 30, 2002 and December 31,
2001, consolidated net income for the three and six months ended June 30, 2002
and 2001, consolidated cash flows for the six months ended June 30, 2002 and
2001 and the consolidated changes in shareholders' equity for the six months
ended June 30, 2002. 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, 2001.
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 June 30, 2001 and require the use of purchase accounting.
Goodwill generated from purchase business combinations consummated prior to
the issuance of SFAS No. 142 was amortized on a straight-line basis over 20
years. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside a business combination and the recognition
and measurement of goodwill and other intangible assets subsequent to
acquisition. Under the new standard, goodwill and intangible assets deemed to
have indefinite lives are no longer amortized, but instead are tested at least
annually for impairment. The standard was adopted by the Company on January 1,
2002 and the impact of adoption was immaterial.
Reclassifications
Certain previously reported amounts have been reclassified to conform to
the 2002 financial statement presentation. These reclassifications had no effect
on net income or shareholders' equity.
2. COMPREHENSIVE INCOME
Comprehensive income consists of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2002 2001 2002 2001
-------- -------- ------- -------
Net income....................................... $15,182 $12,544 $28,727 $25,059
Net change in unrealized appreciation
(depreciation) on securities available for
sale, net of tax............................... 12,430 (1,726) 9,616 5,852
------- ------- ------- -------
Total comprehensive income....................... $27,612 $10,818 $38,343 $30,911
======= ======= ======= =======
7
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EARNINGS PER COMMON SHARE
Earnings per common share is computed as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2002 2001 2002 2001
-------- -------- ------- -------
Net income..................................... $15,182 $12,544 $28,727 $25,059
======= ======= ======= =======
Divided by average common shares and common
share equivalents:
Average common shares........................ 33,345 32,838 33,152 32,807
Average common shares issuable under the
stock option plans........................ 1,067 1,199 1,096 1,293
------- ------- ------- -------
Total average common shares and common share
equivalents............................... 34,412 34,037 34,248 34,100
======= ======= ======= =======
Basic earnings per common share................ $ 0.46 $ 0.38 $ 0.87 $ 0.76
======= ======= ======= =======
Diluted earnings per common share.............. $ 0.44 $ 0.37 $ 0.84 $ 0.73
======= ======= ======= =======
Stock options outstanding of 87 and 93 for the three months ended June 30,
2002 and 2001, respectively, and 103 and 87 for the six months ended June 30,
2002 and 2001, respectively, have not been included in diluted earnings per
share because to do so would have been antidilutive for the periods presented.
Stock options are antidilutive when the exercise price is higher than the
current market price of the Company's common stock.
4. SEGMENT INFORMATION
The Company has two operating segments: the bank and the mortgage company.
Each segment is managed separately because each business requires different
marketing strategies and each offers different products and services.
The Company evaluates each segment's performance based on the revenue and
expenses from its operations, excluding non-recurring items. Intersegment
financing arrangements are accounted for at current market rates as if they were
with third parties.
Summarized financial information by operating segment for the three and six
months ended June 30, 2002 and 2001 follows:
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------- ---------------------------------------------------
BANK MORTGAGE ELIMINATIONS CONSOLIDATED BANK MORTGAGE ELIMINATIONS CONSOLIDATED
---------- -------- ------------ ------------ ---------- -------- ------------ ------------
Interest income....... $ 57,229 $ 3,982 $ (1,629) $ 59,582 $ 63,127 $ 4,959 $ (2,659) $ 65,427
Interest expense...... 14,677 1,629 (1,629) 14,677 26,908 2,659 (2,659) 26,908
---------- -------- --------- ---------- ---------- -------- --------- ----------
Net interest income... 42,552 2,353 -- 44,905 36,219 2,300 -- 38,519
Provision for loan
losses.............. 3,168 82 -- 3,250 1,864 (114) -- 1,750
Noninterest income.... 16,041 1,634 -- 17,675 11,947 2,083 -- 14,030
Noninterest expense... 34,885 2,342 -- 37,227 30,225 2,099 -- 32,324
---------- -------- --------- ---------- ---------- -------- --------- ----------
Income before income
taxes and minority
interest............ $ 20,540 $ 1,563 $ -- $ 22,103 $ 16,077 $ 2,398 $ -- $ 18,475
========== ======== ========= ========== ========== ======== ========= ==========
8
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------- ---------------------------------------------------
BANK MORTGAGE ELIMINATIONS CONSOLIDATED BANK MORTGAGE ELIMINATIONS CONSOLIDATED
---------- -------- ------------ ------------ ---------- -------- ------------ ------------
Interest income....... $ 112,633 $ 8,102 $ (3,201) $ 117,534 $ 131,708 $ 10,405 $ (5,990) $ 136,123
Interest expense...... 30,167 3,201 (3,201) 30,167 58,854 5,990 (5,990) 58,854
---------- -------- --------- ---------- ---------- -------- --------- ----------
Net interest income... 82,466 4,901 -- 87,367 72,854 4,415 -- 77,269
Provision for loan
losses.............. 5,586 164 -- 5,750 3,342 158 -- 3,500
Noninterest income.... 30,898 2,972 -- 33,870 23,642 3,852 -- 27,494
Noninterest expense... 68,799 4,627 -- 73,426 60,155 4,168 -- 64,323
---------- -------- --------- ---------- ---------- -------- --------- ----------
Income before income
taxes and minority
interest............ $ 38,979 $ 3,082 $ -- $ 42,061 $ 32,999 $ 3,941 $ -- $ 36,940
========== ======== ========= ========== ========== ======== ========= ==========
Total assets.......... $4,524,452 $259,379 $(235,304) $4,548,527 $3,921,246 $270,204 $(254,029) $3,937,421
========== ======== ========= ========== ========== ======== ========= ==========
Intersegment interest was paid to the Bank by the mortgage company in the
amount of $1,629 and $2,659 for the three months ended June 30, 2002 and 2001,
respectively. For the six months ended June 30, 2002 and 2001, intersegment
interest was $3,201 and $5,990, respectively. Advances from the Bank to the
mortgage company of $235,304 and $254,029 were eliminated in consolidation at
June 30, 2002 and 2001, respectively.
9
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
Total assets at June 30, 2002 and December 31, 2001 were $4.55 billion and
$4.40 billion, respectively. Gross loans were $2.88 billion at June 30, 2002, an
increase of $124.2 million, or 5%, from $2.76 billion at December 31, 2001.
Shareholders' equity was $410.5 million and $361.7 million at June 30, 2002 and
December 31, 2001, respectively.
For the six months ended June 30, 2002, net income was $28.7 million ($0.84
per diluted share) compared to $25.1 million ($0.73 per diluted share) for the
same period in 2001, an increase of 15%. For the three months ended June 30,
2002, net income was $15.2 million ($0.44 per diluted share) compared to $12.5
million ($0.37 per diluted share) for the same period in 2001, an increase of
21%. Return on average assets and return on average common shareholders' equity
for the three months ended June 30, 2002 was 1.39% and 15.60%, respectively, as
compared to 1.30% and 15.56% for the three months ended June 30, 2001. For the
six months ended June 30, 2002, return on average assets and return on average
common shareholders' equity was 1.33% and 15.20%, respectively, as compared to
1.31% and 16.02% for the six months ended June 30, 2001. Return on average
assets is calculated by dividing annualized net income by the daily average of
total assets. Return on average common shareholders' equity is calculated by
dividing annualized net income by the daily average of common shareholders'
equity.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income for the three months ended June 30, 2002 was $59.6 million,
a decrease of $5.8 million, or 9%, from the three months ended June 30, 2001.
This decrease in interest income is due to a decrease in the average yield on
interest-earning assets to 6.01% for the three months ended June 30, 2002, a
decrease of 156 basis points when compared to the same period in 2001. This
decrease is partially offset by a $510.1 million increase in average
interest-earning assets to $3.98 billion for the three months ended June 30,
2002, a 15% increase from the same period last year. For the six months ended
June 30, 2002, interest income
10
was $117.5 million, an $18.6 million, or 14%, decrease from the same period a
year ago. This decrease in interest income is due to a decrease in the average
yield on interest-earning assets to 6.02% for the six months ended June 30,
2002, a decrease of 189 basis points when compared to the same period in 2001.
This decrease is partially offset by a $467.8 million increase in average
interest-earning assets to $3.94 billion for the six months ended June 30, 2002,
a 13% increase from the same period last year.
Interest income on loans decreased $7.1 million to $44.8 million for the
three months ended June 30, 2002. This decrease was due to a 174 basis point
decrease in the average yield on loans to 6.32% for the three months ended June
30, 2002, compared to 8.06% for the same period last year. This decrease is
partially offset by a $263.7 million increase in average loans outstanding to
$2.84 billion for the three months ended June 30, 2002, a 10% increase from the
same period a year ago.
For the six months ended June 30, 2002, interest income on loans decreased
18% to $88.1 million, down from $107.8 million for the same period last year.
This decrease was due to a 215 basis point decrease in the average yield on
loans to 6.33% for the six months ended June 30, 2002, compared to 8.48% for the
same period last year. This decrease is partially offset by a $244.5 million
increase in average loans outstanding to $2.81 billion for the six months ended
June 30, 2002, a 10% increase from the same period a year ago.
INTEREST EXPENSE
Interest expense on deposits and other borrowings for the three months
ended June 30, 2002 was $14.7 million, a decrease of $12.2 million, or 45%, from
the three months ended June 30, 2001. This decrease in interest expense was
attributable to a decrease in the average rate on interest-bearing liabilities
to 1.96% for the period, a decrease of 201 basis points when compared to the
same period in 2001. This decrease is partially offset by a $281.9 million
increase in average interest-bearing liabilities to $3.00 billion for the three
months ended June 30, 2002, an increase of 10% from the same period last year.
Interest expense on deposits and other borrowings for the six months ended
June 30, 2002 was $30.2 million, a decrease of $28.7 million, or 49%, from the
six months ended June 30, 2001. This decrease in interest expense was
attributable to a decrease in the average rate on interest-bearing liabilities
to 2.01% for the period, a decrease of 236 basis points when compared to the
same period in 2001. This decrease is partially offset by a $306.4 million
increase in average interest-bearing liabilities to $3.02 billion for the six
months ended June 30, 2002, an increase of 11% from the same period last year.
NET INTEREST INCOME
Net interest income for the three months ended June 30, 2002 was $44.9
million compared to $38.5 million in 2001, an increase of $6.4 million, or 17%.
Growth in average interest-earning assets, primarily loans and securities, was
$510.1 million, or 15%, while yields decreased 156 basis points to 6.01%. Yields
decreased throughout 2001 as the Bank's prime lending rate decreased. The impact
of the growth in average interest-earning assets was partially offset by a
$281.9 million, or 10%, increase in average interest-bearing liabilities, offset
by a decrease in the rate paid on interest-bearing liabilities of 201 basis
points to 1.96% in 2002.
For the six months ended June 30, 2002, net interest income was $87.4
million compared to $77.3 million in 2001, an increase of $10.1 million, or 13%.
Growth in average interest-earning assets, primarily loans and securities, was
$467.8 million, or 13%, while yields decreased 189 basis points to 6.02%. The
impact of the growth in average interest-earning assets was partially offset by
a $306.4 million, or 11%, increase in average interest-bearing liabilities,
offset by a decrease in the rate paid on interest-bearing liabilities of 236
basis points to 2.01% in 2002.
For the three months ended June 30, 2002, the net interest margin increased
to 4.53% compared to 4.45% for the three months ended June 30, 2001. This
increase resulted from a decrease in the cost of funds of 201 basis points from
3.97% for the three months ended June 30, 2001 to 1.96% for the three months
ended June 30, 2002. This decrease in the cost of funds was partially offset by
a decrease in the yield on interest-earning assets of 156 basis points, from
7.57% for the three months ended June 30, 2001 to 6.01% for the three
11
months ended June 30, 2002. For the six months ended June 30, 2002, the net
interest margin declined to 4.48% compared to 4.49% for the six months ended
June 30, 2001. This decrease resulted from a decrease in the yield on
interest-earning assets of 189 basis points from 7.91% for the six months ended
June 30, 2001 to 6.02% for the six months ended June 30, 2002. This decrease in
the yield on interest-earning assets was partially offset by a decrease in the
cost of funds of 236 basis points, from 4.37% for the six months ended June 30,
2001 to 2.01% for the six months ended June 30, 2002.
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. The yield on the
securities portfolio is based on average historical cost balances and does give
effect to changes in fair value that are reflected as a component of
consolidated shareholders' equity.
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
2002 2001
-------------------------------- --------------------------------
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.......................... $2,841,618 $44,767 6.32% $2,577,869 $51,832 8.06%
Securities..................... 1,089,573 14,629 5.39 823,346 12,841 6.26
Federal funds sold and other... 47,671 186 1.56 67,566 754 4.48
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets................. 3,978,862 59,582 6.01% 3,468,781 65,427 7.57%
---------- ------- ---- ---------- ------- ----
Less allowance for loan losses... (33,142) (30,134)
---------- ----------
3,945,720 3,438,647
Noninterest-earning assets....... 424,419 430,644
---------- ----------
Total assets.............. $4,370,139 $3,869,291
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits.................... $1,493,217 5,161 1.39% $1,430,439 11,150 3.13%
Certificates of deposit........ 929,548 7,013 3.03 864,802 11,602 5.38
Repurchase agreements and
borrowed funds.............. 575,363 2,503 1.74 420,976 4,156 3.96
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities............ 2,998,128 14,677 1.96% 2,716,217 26,908 3.97%
---------- ------- ---- ---------- ------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.................... 954,006 794,470
Other liabilities.............. 27,560 35,163
---------- ----------
Total liabilities......... 3,979,694 3,545,850
---------- ----------
Shareholders' equity............. 390,445 323,441
---------- ----------
Total liabilities and
shareholder's equity... $4,370,139 $3,869,291
========== ==========
Net interest income.............. $44,905 $38,519
======= =======
Net interest spread.............. 4.05% 3.60%
==== ====
Net interest margin.............. 4.53% 4.45%
==== ====
12
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
2002 2001
-------------------------------- --------------------------------
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............................. $2,807,782 $ 88,149 6.33% $2,563,291 $107,809 8.48%
Securities........................ 1,081,950 29,008 5.41 831,804 26,434 6.41
Federal funds sold and other...... 46,650 377 1.63 73,473 1,880 5.16
---------- -------- ---- ---------- -------- ----
Total interest-earning
assets....................... 3,936,382 117,534 6.02% 3,468,568 136,123 7.91%
---------- -------- ---- ---------- -------- ----
Less allowance for loan losses...... (32,824) (29,462)
---------- ----------
3,903,558 3,439,106
Noninterest-earning assets.......... 453,874 424,089
---------- ----------
Total assets................... $4,357,432 $3,863,195
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits....................... $1,490,339 10,325 1.40% $1,399,698 24,435 3.52%
Certificates of deposits.......... 923,749 14,542 3.17 880,352 24,840 5.69
Repurchase agreements and borrowed
funds.......................... 607,675 5,300 1.76 435,315 9,579 4.44
---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities.................. 3,021,763 30,167 2.01% 2,715,365 58,854 4.37%
---------- -------- ---- ---------- -------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits....................... 929,278 797,332
Other liabilities................. 25,265 35,103
---------- ----------
Total liabilities.............. 3,976,306 3,547,800
Shareholders' equity................ 381,126 315,395
---------- ----------
Total liabilities and
shareholders' equity......... $4,357,432 $3,863,195
========== ==========
Net interest income................. $ 87,367 $ 77,269
======== ========
Net interest spread................. 4.01% 3.54%
==== ====
Net interest margin................. 4.48% 4.49%
==== ====
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 and the volatility of interest rates.
For purposes of this table, changes attributable to both rate and volume which
cannot be segregated have been allocated.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
2002 VS. 2001 2002 VS. 2001
---------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans............................ $5,303 $(12,368) $ (7,065) $10,283 $(29,943) $(19,660)
Securities....................... 4,152 (2,364) 1,788 7,949 (5,375) 2,574
Federal funds sold and other..... (222) (346) (568) (686) (817) (1,503)
------ -------- -------- ------- -------- --------
Total increase (decrease) in
interest income............. 9,233 (15,078) (5,845) 17,546 (36,135) (18,589)
------ -------- -------- ------- -------- --------
INTEREST-BEARING LIABILITIES:
Money market and savings
deposits....................... 489 (6,478) (5,989) 1,582 (15,692) (14,110)
Certificates of deposit.......... 869 (5,458) (4,589) 1,224 (11,522) (10,298)
Repurchase agreements and
borrowed funds................. 1,524 (3,177) (1,653) 3,793 (8,072) (4,279)
------ -------- -------- ------- -------- --------
Total increase (decrease) in
interest expense............ 2,882 (15,113) (12,231) 6,599 (35,286) (28,687)
------ -------- -------- ------- -------- --------
Increase (decrease) in net
interest income................ $6,351 $ 35 $ 6,386 $10,947 $ (849) $ 10,098
====== ======== ======== ======= ======== ========
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The loan
loss provision for each period is dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's market area. Periodic fluctuations in the provision
for loan losses result from management's assessment of the adequacy of the
allowance for loan losses. Although no assurance can be given, management
believes that the present allowance for loan losses is adequate; however, actual
loan losses may vary from current estimates.
For the quarter ended June 30, 2002, the methodology used to determine the
provision for loan losses was unchanged from the prior period. The composition
of the Company's loan portfolio remained relatively unchanged from December 31,
2001 and there was no material change in the lending programs or terms during
the quarter.
The provision for loan losses was $3.3 million for the three months ended
June 30, 2002, as compared to $1.8 million for the three months ended June 30,
2001. The provision for loan losses was $5.8 million for the six months ended
June 30, 2002, as compared to $3.5 million for the six months ended June 30,
2001. The increase in the provision for loan losses corresponds to the increase
in net charge-offs during the current year, in both absolute and relative terms.
Net charge-offs were $2.7 million for the three months ended June 30, 2002, as
compared to $227,000 for the three months ended June 30, 2001. Of the $2.7
million in net charge-offs for the period, $2.3 million is related to three
commercial credits. Net charge-offs to average loans was 0.40% for the three
months ended June 30, 2002, as compared to 0.04% for the three months ended June
30, 2001. For the six months ended June 30, 2002, net charge-offs were $4.1
million, as compared to $1.1 million for the same period last year. Net
charge-offs to average loans was 0.30% for the six months ended June 30,
14
2002, as compared to 0.09% for the six months ended June 30, 2001.
In addition to the increase in net charge-offs, changes in general economic
factors were considered when determining the amount of the provision for loan
losses. Some of the factors include the slowing of the national and
international economies, the turbulent performance of the stock market, and the
increase in the local unemployment rate in the current year.
While the Company recognizes that the economic slowdown may adversely
impact its borrowers' financial performance and ultimately their ability to
repay their loans, management continues to be cautiously optimistic about the
key credit indicators from the Company's loan portfolio. While the Company has
experienced an increase in net charge-offs in the current year as a result of
the factors noted above, its net charge-offs to average loans has been below the
average of banks insured by the Federal Deposit Insurance Corporation. (See
"-- Financial Condition -- Loan Review and Allowance for Loan Losses.")
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 2002 was $17.7
million, an increase of $3.7 million, or 26%, from $14.0 million during the
comparable period in 2001. Noninterest income for the six months ended June 30,
2002 was $33.9 million, an increase of $6.4 million, or 23%, from $27.5 million
during the comparable period in 2001. The following table shows the breakout of
noninterest income between the bank and the mortgage company for the periods
indicated.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------- -----------------------------
2002 2001 2002
----------------------------- ----------------------------- -----------------------------
BANK MORTGAGE COMBINED BANK MORTGAGE COMBINED BANK MORTGAGE COMBINED
------- -------- -------- ------- -------- -------- ------- -------- --------
Service charges on
deposit accounts.... $ 9,466 $ -- $ 9,466 $ 6,096 $ -- $ 6,096 $18,159 $ -- $18,159
Investment
services............ 2,395 -- 2,395 1,702 -- 1,702 4,812 -- 4,812
Factoring fee
income.............. 1,087 -- 1,087 1,202 -- 1,202 2,307 -- 2,307
Loan fee income...... 302 852 1,154 241 672 913 647 1,402 2,049
Bank-owned life
insurance income.... 1,207 -- 1,207 1,170 -- 1,170 2,395 -- 2,395
Letters of credit fee
income.............. 363 -- 363 308 -- 308 703 -- 703
Gain on sale of
loans, net.......... 467 541 1,008 -- 1,076 1,076 467 1,119 1,586
Gain on sale of
securities, net..... 1 -- 1 8 -- 8 2 -- 2
Other income......... 753 241 994 1,220 335 1,555 1,406 451 1,857
------- ------ ------- ------- ------ ------- ------- ------ -------
Total noninterest
income............ $16,041 $1,634 $17,675 $11,947 $2,083 $14,030 $30,898 $2,972 $33,870
======= ====== ======= ======= ====== ======= ======= ====== =======
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001
-----------------------------
BANK MORTGAGE COMBINED
------- -------- --------
Service charges on
deposit accounts.... $11,780 $ -- $11,780
Investment
services............ 3,395 -- 3,395
Factoring fee
income.............. 2,346 -- 2,346
Loan fee income...... 510 1,249 1,759
Bank-owned life
insurance income.... 2,090 -- 2,090
Letters of credit fee
income.............. 628 -- 628
Gain on sale of
loans, net.......... -- 1,796 1,796
Gain on sale of
securities, net..... 25 -- 25
Other income......... 2,868 807 3,675
------- ------ -------
Total noninterest
income............ $23,642 $3,852 $27,494
======= ====== =======
Banking Segment. The largest component of noninterest income is service
charges on deposit accounts, which were $9.5 million for the three months ended
June 30, 2002, an increase of $3.4 million, or 55%, from $6.1 million for the
same period last year. Service charges on deposit accounts were $18.2 million
for the six months ended June 30, 2002, an increase of $6.4 million, or 54%,
from $11.8 million for the same period last year. Several factors contributed to
this growth. First, the Bank's treasury management group continues to grow, with
service charges from commercial analysis up $1.2 million, or 39%, for the three
months ended June 30, 2002 when compared to the same period last year. For the
six months ended June 30, 2002, such charges were $9.4 million, an increase of
$2.9 million, or 46%, from $6.4 for the six
15
months ended June 30, 2001. This success at winning new business results from
the Company's ability to design custom cost-effective cash management solutions
for middle market and large corporate customers. Second, net NSF charges on
deposit accounts were $4.2 million for the three months ended June 30, 2002, an
increase of $1.7 million, or 69%, from $2.5 million for the same period last
year. Net NSF charges on deposit accounts were $7.3 million for the six months
ended June 30, 2002, an increase of $2.7 million, or 60%, from $2.7 million for
the same period last year. This increase in NSF charges is primarily due to net
fee income on a new deposit product. Additionally, the total number of deposit
accounts grew from 147,136 at June 30, 2001 to 158,057 at June 30, 2002.
Investment services income was $2.4 million for the three months ended June
30, 2002 compared to $1.7 million for the same period last year, an increase of
$693,000, or 41%. For the six months ended June 30, 2002, investment services
income was $4.8 million, an increase of $1.4 million, or 42%, from $3.4 million
for the six months ended June 30, 2001. The increase in investment services
income is attributable to increased investment sales to commercial and retail
customers and to the expanding foreign exchange department, as well as the
addition of several experienced calling officers and an increase in referrals
from the Company's growing customer base.
Gain on sale of loans was $467,000 for the three and six months ended June
30, 2002. This gain represents the premium for the sale of the Bank's credit
card portfolio. There were no such transactions in the prior year.
Other income was $753,000 for the three months ended June 30, 2002, a
decrease of $467,000, or 38%, from the same period last year. For the six months
ended June 30, 2002, other income was $1.4 million, a decrease of $1.5 million,
or 51%, from $2.9 million for the six months ended June 30, 2001. This decrease
is partially due to a gain recorded on the sale of Bank assets in the prior year
and to a decrease in income from unconsolidated subsidiaries.
Mortgage Segment. Gain on sale of loans was $541,000 for the three months
ended June 30, 2002, a decrease of $535,000, or 50%, from the same period last
year. For the six months ended June 30, 2002, gain on sale of loans was $1.1
million, a decrease of $677,000, or 38%, from $1.8 million for the six months
ended June 30, 2001. This decrease in the gain on sale of loans is attributable
to a reduction in the spread between the rates the mortgage company is offering
and market rates.
Other income was $241,000 for the three months ended June 30, 2002, a
decrease of $94,000, or 28%, from the same period last year. For the six months
ended June 30, 2002, other income was $451,000, a decrease of $356,000, or 44%,
from $807,000 for the six months ended June 30, 2001. This decrease is the
result of a decrease in loan servicing income in the current year as compared to
the same period last year. Capitalized mortgage servicing costs are expensed as
the underlying loans are paid off. Long term mortgage rates increased early in
the first quarter of 2002. They subsequently declined, ending the first quarter
at December 31, 2001 levels. During the second quarter of 2002, long term
mortgage rates have continued to decline. When mortgage rates began to rise,
borrowers may have believed that interest rates had reached their lowest level.
This resulted in significant refinance activity in the first quarter of 2002.
Such activity slowed in the second quarter of the year.
NONINTEREST EXPENSES
For the three months ended June 30, 2002, noninterest expenses totaled
$37.2 million, an increase of $4.9 million, or 15%, from $32.3 million during
2001. For the six months ended June 30, 2002, noninterest expenses totaled $73.4
million, an increase of $9.1 million, or 14%, from the same period in 2001. The
increase in noninterest expenses was primarily due to salaries and employee
benefits and other operating expenses. The efficiency ratio is calculated by
dividing total noninterest expenses by net interest income plus noninterest
income, excluding net security gains (losses). An increase in the efficiency
ratio indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The efficiency ratio was 59.49% for the three months
ended June 30, 2002 compared with 61.52% for the same period last year. For the
six months ended June 30, 2002, the efficiency ratio was 60.57% compared with
61.41% for the same period last year. The decrease in the efficiency ratio in
16
2002 is primarily a result of the increase in noninterest income discussed in
"-- Results of Operations -- Noninterest Income" above.
Salaries and employee benefits for the three months ended June 30, 2002 was
$21.5 million, an increase of $2.0 million, or 10%, from the three months ended
June 30, 2001. Salaries and employee benefits was $42.5 million for the six
months ended June 30, 2002, an increase of $4.2 million, or 11%, from $38.3 for
the same period last year. This increase was due primarily to hiring of
additional personnel required to accommodate the Company's growth. Total end of
period employees were 1,462 and 1,371 at June 30, 2002 and 2001, respectively.
Other operating expenses for the three months ended June 30, 2002 were
$10.1 million, an increase of $2.4 million, or 31%, from the three months ended
June 30, 2001. Other operating expenses were $19.9 million for the six months
ended June 30, 2002, an increase of $3.9 million, or 24%, from $16.0 million for
the same period last year. Major categories within other operating expenses are
professional expenses, computer software amortization expense, and losses on
accounts. Professional expenses increased to $2.2 million for the three months
ended June 30, 2002 from $1.4 million for the comparable period last year, an
increase of $816,000, or 57%. For the six months ended June 30, 2002,
professional expenses were $4.1 million, an increase of $882,000, or 28%, from
$3.2 million for the same period last year. This increase is primarily due to an
increase in consulting fees. Computer software amortization expense increased to
$879,000 for the three months ended June 30, 2002 from $624,000 for the
comparable period last year, an increase of $255,000, or 41%. For the six months
ended June 30, 2002, computer software amortization expense was $1.7 million, an
increase of $533,000, or 45%, from $1.2 million for the same period last year.
This increase is due to amortization of new software related to technology
upgrades throughout the Company. Losses on deposit accounts increased to
$849,000 for the three months ended June 30, 2002 from $359,000 for the
comparable period last year, an increase of $490,000, or 136%. For the six
months ended June 30, 2002, losses on deposit accounts were $1.9 million, an
increase of $565,000, or 44%, from $1.3 million for the same period last year.
This increase is primarily due to charge-offs of deposit accounts related to a
new deposit product. In addition, the Company charged off $150,000 in the second
quarter of 2002 related to a kiting.
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 June 30, 2002, the provision for income taxes was $6.9 million, an
increase of $983,000, or 17%, from the $5.9 million provided for the same period
in 2001. For the six months ended June 30, 2002, income tax expense was $13.3
million, an increase of $1.5 million, or 12%, from the $11.8 million provided
for the same period in 2001. The Company's effective tax rate was 32% for the
three months ended June 30, 2002 and 2001. For the six months ended June 30,
2002 and 2001, the Company's effective tax rate was 31% and 32%, respectively.
FINANCIAL CONDITION
LOANS HELD FOR INVESTMENT
Loans held for investment were $2.81 billion at June 30, 2002, an increase
of $140.7 million, or 5%, from $2.67 billion at December 31, 2001.
17
The following table summarizes the loan portfolio of the Company by type of
loan as of June 30, 2002 and December 31, 2001:
JUNE 30, 2002 DECEMBER 31, 2001
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial................... $1,096,682 38.98% $1,084,114 40.56%
Real estate:
Construction and land development......... 638,080 22.68 698,423 26.13
1-4 family residential.................... 435,029 15.46 344,133 12.88
Commercial owner occupied................. 458,320 16.31 320,336 11.99
Farmland.................................. 6,442 0.23 4,854 0.18
Other..................................... 38,670 1.37 25,884 0.97
Consumer.................................... 139,910 4.97 194,714 7.29
---------- ------ ---------- ------
Total loans held for investment........ $2,813,133 100.00% $2,672,458 100.00%
========== ====== ========== ======
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 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 and personal guarantees of company owners or project
sponsors. 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, other assets and personal guarantees of company
owners or project sponsors 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 are typically
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 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 collateral-
18
ized 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 funded
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 June 30, 2002 are summarized in the following table:
JUNE 30, 2002
-------------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial............... $ 705,349 $331,248 $60,085 $1,096,682
Real estate construction and land
development........................... 404,513 215,440 18,127 638,080
---------- -------- ------- ----------
Total............................ $1,109,862 $546,688 $78,212 $1,734,762
========== ======== ======= ==========
Loans with a fixed interest rate........ $ 443,064 $124,953 $38,063 $ 606,080
Loans with a floating interest rate..... 666,798 421,735 40,149 1,128,682
---------- -------- ------- ----------
Total............................ $1,109,862 $546,688 $78,212 $1,734,762
========== ======== ======= ==========
LOANS HELD FOR SALE
Loans held for sale of $70.6 million at June 30, 2002 decreased from $87.0
million at December 31, 2001. These loans are carried at the lower of cost or
market and are typically sold to investors within one year of origination. The
market value of these loans is impacted by changes in current interest rates. An
increase in interest rates would result in a decrease in the market value of
these loans while a decrease in interest rates would result in an increase in
the market value of these loans. The business of originating and selling loans
is conducted by the Company's mortgage segment.
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, a 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 a quality
control process for loan documentation. The Company also maintains a monitoring
process for credit extensions in excess of $100,000. The Company performs
quarterly concentration analyses based on various factors such as industries,
collateral types, business lines, large credit sizes, international credit
exposure 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. The Company continues to
invest in its loan portfolio monitoring system to enhance its risk management
capabilities.
The Company's loan portfolio is well diversified by industry type but is
generally concentrated in the eight county region defined as its primary market
area. Historically, the Houston metropolitan area has been affected both
positively and negatively by conditions in the energy industry. It is estimated
that approximately 32% of economic activity currently is related to the upstream
energy industry, down from 69% in 1981. Since the mid 1980's, the economic
impact of changes in the energy industry has been lessened due to the
diversification of the Houston economy driven by growth in such economic
entities as the Texas Medical Center, the Port of Houston, the Johnson Space
Center, among others, and government infrastructure spending to support the
population and job growth in the Houston area. As a result, the economy of the
Company's primary market area has become increasingly affected by changes in the
national and international economies.
19
The Company monitors changes in the level of energy prices, real estate
values, borrower collateral, and the level of local, regional, national, and
international economic activity. Recently, several major employers in the
Houston market have either experienced financial difficulties or reductions in
employment due to changes in the energy trading markets, corporate
consolidations, or political events affecting the global economy. While
significant, these factors, however, have resulted in a net reduction of only
sixty-seven hundred jobs as of June 30, 2002, or 0.3% of the total employment
base of 2.1 million in the Company's primary market area. As of June 30, 2002,
other than $2.3 million in charge-offs related to three commercial credits,
these events have had no material effect on the Company's loan portfolio. There
can be no assurance, however, the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the loan portfolio.
The allowance is increased by provisions charged against current earnings and
reduced by net charge-offs. Loans are charged off when they are deemed to be
uncollectible; recoveries are generally recorded only when cash payments are
received. Based on an evaluation of the loan portfolio, management presents a
quarterly analysis of the allowance for loan losses to a committee of the Board
of Directors, indicating any changes in the allowance since the last review and
any recommendations as to adjustments in the allowance. In making its
evaluations, management considers both quantitative and qualitative risk factors
in establishing an allowance for loan losses that it considers to be appropriate
at each reporting period. Quantitative factors include historical charge-off
experience, delinquency and past due trends, changes in collateral values,
changes in energy prices, changes in the level of borrower covenant violations,
the level of nonperforming loans and other real estate, changes in the risk
classification of credits, growth in the loan portfolio, the results of
regulatory and internal loan review examinations, and changes in the loan
portfolio's composition by both industry and by borrower.
Qualitative factors include an evaluation of the economic factors affecting
the Company's primary market area, changes in the type and complexity of credit
extensions, the experience levels of its lending and loan review staff, new
lending products, the age of the loan portfolio, and other factors.
In order to determine the adequacy of the allowance for loan losses,
management performs periodic reviews of the loan portfolio, either individually
or in pools. Generally, commercial and real estate loans are reviewed
individually and consumer and single family residential loans are evaluated in
pools.
A general allowance is established based upon (i) the historical loss
experience by loan type; (ii) management's internal grading of the loans
resulting in an allowance ranging from 2.5% to 5.0% of the outstanding principal
balance of the adversely graded loans; and (iii) certain subjective factors such
as economic trends, performance trends, portfolio age and concentrations of
credit. In addition, specific allowances may be established for loans which
management believes require greater reserves than those allocated based on the
above methodology. Future changes in economic conditions, circumstances, or
other factors could cause management to increase or decrease the allowance for
loan losses as necessary.
Management believes that the allowance for loan losses at June 30, 2002 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 June 30, 2002.
20
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning balance................ $31,390 $28,150
Provision charged against operations........................ 5,750 7,500
Charge-offs:
Commercial and industrial................................. (3,762) (3,663)
Real estate:
Construction and land development...................... (108) (65)
1-4 family residential................................. (57) (171)
Commercial owner occupied.............................. (7) --
Farmland............................................... -- --
Other.................................................. (64) (94)
Consumer.................................................. (469) (1,037)
------- -------
Total charge-offs........................................... (4,467) (5,030)
------- -------
Recoveries:
Commercial and industrial................................. 190 265
Real estate:
Construction and land development...................... -- --
1-4 family residential................................. -- 59
Commercial owner occupied.............................. -- --
Farmland............................................... -- --
Other.................................................. -- 51
Consumer.................................................. 162 395
------- -------
Total recoveries............................................ 352 770
------- -------
Net charge-offs............................................. (4,115) (4,260)
------- -------
Allowance for loan losses, ending balance................... $33,025 $31,390
======= =======
Allowance to period-end loans............................... 1.17% 1.17%
Net charge-offs to average loans............................ 0.30% 0.17%
Allowance to period-end nonperforming loans................. 249.04% 237.82%
21
The following table reflects the distribution of the allowance for loan
losses among various categories of loans for the dates indicated. The Company
has allocated portions of its general allowance for loan losses to cover the
estimated losses inherent in particular risk categories of loans. This
allocation is made for 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.
JUNE 30, 2002 DECEMBER 31, 2001
--------------------- ---------------------
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.................. $13,007 38.98% $13,554 40.56%
Real estate:
Construction and land development........ 6,768 22.68 7,395 26.13
1-4 family residential................... 3,604 15.46 2,695 12.88
Commercial owner occupied................ 5,082 16.31 3,397 11.99
Farmland................................. 53 0.23 34 0.18
Other.................................... 1,529 1.37 1,110 0.97
Consumer................................... 2,982 4.97 3,205 7.29
------- ------ ------- ------
Total allowance for loan losses............ $33,025 100.00% $31,390 100.00%
======= ====== ======= ======
NONPERFORMING ASSETS AND IMPAIRED LOANS
Nonperforming assets, which include nonaccrual loans, accruing loans 90 or
more days past due, restructured loans, and other real estate and foreclosed
property, were $14.1 million at June 30, 2002 compared with $14.2 million at
December 31, 2001. This resulted in a ratio of nonperforming assets to loans and
other real estate of 0.50% and 0.53% at June 30, 2002 and December 31, 2001,
respectively. Nonaccrual loans, the largest component of nonperforming assets,
were $11.7 million at June 30, 2002, an increase of $705,000 from $11.0 million
at December 31, 2001.
The following table presents information regarding nonperforming assets as
of the dates indicated:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans............................................ $11,725 $11,020
Accruing loans 90 or more days past due..................... 1,536 2,179
Other real estate and foreclosed property................... 818 1,037
------- -------
Total nonperforming assets........................... $14,079 $14,236
======= =======
Nonperforming assets to total loans and other real estate... 0.50% 0.53%
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Loans are designated as nonaccrual when reasonable doubt
exists as to the full collection of interest and principal. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of interest and principal is probable. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest. Gross interest income
on nonaccrual loans that would have been recorded had these loans been
performing as agreed was $394,000 for the six months ended June 30, 2002.
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
22
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, based on current information and events, if
management believes that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. A loan is not considered impaired during a period of delay
in payment if the Company expects to collect all amounts due, including interest
past due. An insignificant delay (up to 90 days) or insignificant shortfall in
the amount of payment does not constitute an impairment. The measurement of
impaired loans whose relationship balance meets an established threshold is
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the loan's observable market price or based on
the fair value of the collateral if the loan is collateral-dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
an impairment is recognized through the provision for loan losses. All
nonaccrual loans and accruing loans 90 or more days past due are considered
impaired at June 30, 2002.
The following is a summary of loans considered to be impaired:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(DOLLARS IN THOUSANDS)
Impaired loans with no valuation reserve.................... $ 6,614 $ 510
Impaired loans with a valuation reserve..................... 13,939 19,728
------- -------
Total recorded investment in impaired loans............ $20,553 $20,238
======= =======
Valuation allowance related to impaired loans............... $ 1,799 $ 3,749
======= =======
The average recorded investment in impaired loans during the six months
ended June 30, 2002 and the year ended December 31, 2001 was $20.4 million and
$15.5 million, respectively. Interest income on impaired loans of $206,000 and
$425,000 was recognized for cash payments received during the six months ended
June 30, 2002 and the year ended December 31, 2001, 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 June 30, 2002.
23
The amortized cost and approximate fair value of securities classified as
available for sale is as follows:
JUNE 30, 2002 DECEMBER 31, 2001
------------------------------------------- -------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ----------------- AMORTIZED -----------------
COST GAIN LOSS FAIR VALUE COST GAIN LOSS FAIR VALUE
---------- -------- ------ ---------- ---------- ------- ------- ----------
(DOLLARS IN THOUSANDS)
U.S. Government securities... $ 100,630 $ 2,121 $ (2) $ 102,749 $ 50,860 $ 1,294 $ (17) $ 52,137
Mortgage-backed securities... 852,624 16,917 (95) 869,446 872,974 8,571 (2,825) 878,720
Municipal securities......... 92,701 1,856 (143) 94,414 85,047 252 (1,524) 83,775
Federal Reserve Bank stock... 4,348 -- -- 4,348 4,230 -- -- 4,230
Federal Home Loan Bank
stock...................... 15,123 -- -- 15,123 7,939 -- -- 7,939
Other securities............. 76,529 357 -- 76,886 41,169 356 (11) 41,514
---------- ------- ----- ---------- ---------- ------- ------- ----------
TOTAL SECURITIES
AVAILABLE FOR SALE..... $1,141,955 $21,251 $(240) $1,162,966 $1,062,219 $10,473 $(4,377) $1,068,315
========== ======= ===== ========== ========== ======= ======= ==========
Securities totaled $1.16 billion at June 30, 2002, an increase of $94.7
million from $1.07 billion at December 31, 2001. The yield on the securities
portfolio for the six months ended June 30, 2002 was 5.41% while the yield was
6.41% for the six months ended June 30, 2001.
The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortgage-backed securities at
June 30, 2002 were agency issued collateral mortgage obligations with a book
value of $417.0 million and a fair value of $424.0 million.
At June 30, 2002, $570.1 million of the mortgage-backed securities held by
the Company had final maturities of more than 10 years. At June 30, 2002,
approximately $37.1 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.
The following table summarizes the contractual maturity of investments and
their weighted average yields at June 30, 2002. 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.
JUNE 30, 2002
--------------------------------------------------------------------------------------------------
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............... $ 4,607 5.80% $ 81,693 5.17% $ 14,330 5.25% $ -- --% $ 100,630 5.21%
Mortgage-backed
securities............... 2,556 5.37 24,421 6.18 255,581 5.30 570,066 5.77 852,624 5.64
Municipal securities....... 1,286 4.48 9,488 4.50 8,533 4.53 73,394 4.88 92,701 4.80
Federal Reserve Bank
stock.................... 4,348 6.00 -- -- -- -- -- -- 4,348 6.00
Federal Home Loan Bank
stock.................... 15,123 3.00 -- -- -- -- -- -- 15,123 3.00
Other securities........... 70,393 2.04 4,105 6.80 1,852 4.23 179 3.52 76,529 2.35
Federal funds sold......... 65,280 1.00 -- -- -- -- -- -- 65,280 1.00
Securities purchased under
resale agreements........ 20,000 1.62 -- -- -- -- -- -- 20,000 1.62
Interest-bearing
deposits................. 10,124 1.41 -- -- -- -- -- -- 10,124 1.41
-------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
Total investments...... $193,717 1.93% $119,707 5.38% $280,296 5.27% $643,639 5.67% $1,237,359 4.96%
======== ==== ======== ==== ======== ==== ======== ==== ========== ====
OTHER ASSETS
Other assets were $151.1 million at June 30, 2002, a decrease of $27.6
million from $178.7 million at December 31, 2001. This decrease is primarily
attributable to decreases in factored receivables. Factored
24
receivables result from providing operating funds to businesses by converting
their accounts receivable to cash. Factored receivables were $25.8 million at
June 30, 2002, a decrease of $29.4 million from $55.2 million at December 31,
2001. This decrease is due to the seasonal nature of some of the factoring
company's customers.
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,
interest-bearing demand, 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 June 30, 2002, the Company had less
than four percent of its deposits classified as brokered funds. 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 June 30, 2002 and December 31, 2001, was 29% and 28%,
respectively.
The average daily balances and weighted average rates paid on deposits for
the six months ended June 30, 2002 and the year ended December 31, 2001, are
presented below:
JUNE 30, 2002 DECEMBER 31, 2001
----------------- -----------------
AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ----
(DOLLARS IN THOUSANDS)
Interest-bearing demand......................... $ 33,515 0.25% $ 62,510 0.50%
Regular savings................................. 92,112 1.00 81,799 1.58
Premium yield................................... 805,547 1.73 851,951 3.41
Money market savings............................ 559,165 1.05 461,433 2.21
CD's less than $100,000......................... 287,427 3.88 302,885 5.25
CD's $100,000 and over.......................... 560,487 2.71 522,601 4.82
IRA's, QRP's and other.......................... 75,835 3.92 76,336 5.07
---------- ---- ---------- ----
Total interest-bearing deposits............... 2,414,088 2.08% 2,359,515 3.64%
==== ====
Noninterest-bearing deposits.................... 929,278 836,366
---------- ----------
Total deposits................................ $3,343,366 $3,195,881
========== ==========
The following table sets forth the maturity of the Company's time deposits
that are $100,000 or greater as of the dates indicated:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(DOLLARS IN THOUSANDS)
3 months or less............................................ $429,361 $348,782
Between 3 months and 6 months............................... 83,040 81,457
Between 6 months and 1 year................................. 51,078 75,461
Over 1 year................................................. 68,583 48,420
-------- --------
Total time deposits, $100,000 and over.................... $632,062 $554,120
======== ========
25
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 is
summarized as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase agreements:
Average................................................... $286,611 $270,656
Period-end................................................ 267,852 358,401
Maximum month-end balance during period................... 323,815 358,401
Interest rate:
Average................................................... 1.50% 3.17%
Period-end................................................ 1.52% 2.03%
Long-term borrowings:
Average................................................... $ 7,307 $ 7,565
Period-end................................................ 7,233 7,410
Maximum month-end balance during period................... 7,381 7,717
Interest rate:
Average................................................... 7.02% 7.00%
Period-end................................................ 6.94% 6.96%
Short-term borrowings
Average................................................... $313,757 $157,630
Period-end................................................ 256,383 222,168
Maximum month-end balance during period................... 501,736 368,792
Interest rate:
Average................................................... 1.86% 3.93%
Period-end................................................ 1.93% 2.12%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves maintaining sufficient cash levels to fund
operations and to meet the requirements of borrowers, depositors, and creditors.
Higher levels of liquidity bear higher corresponding costs, measured in terms of
lower yields on short-term, more liquid earning assets, and higher interest
expense involved in extending liability maturities. Liquid assets include cash
and cash equivalents, loans and securities maturing within one year, and money
market instruments. In addition, the Company holds securities maturing after one
year, which can be sold to meet liquidity needs.
The Company relies primarily on customer deposits, securities sold under
agreement to repurchase and shareholders' equity to fund interest-earning
assets. The Federal Home Loan Bank ("FHLB") is also a major source of liquidity
for the Bank. The FHLB allows member banks to borrow against their eligible
loans to satisfy liquidity requirements.
Maintaining a relatively stable funding base, which is achieved by
diversifying funding sources, competitively pricing deposit products, and
extending the contractual maturity of liabilities, reduces the Company's
exposure to roll over risk on deposits and limits reliance on volatile
short-term purchased funds. Short-term funding needs arise from declines in
deposits or other funding sources, funding of loan commitments and requests for
new loans. The Company's strategy is to fund assets to the maximum extent
possible with core deposits that provide a sizable source of relatively stable
and low-cost funds. Average core
26
deposits funded approximately 71% of total interest-earning assets for the six
months ended June 30, 2002 and 74% for the same period in 2001.
Management believes the Company has sufficient liquidity to meet all
reasonable borrower, depositor, and creditor needs in the present economic
environment. In addition, the Bank has access to the FHLB for borrowing
purposes. The Company has not received any recommendations from regulatory
authorities that would materially affect liquidity, capital resources or
operations.
The Company's risk-based capital ratios including Leverage Capital, Tier 1
Risk-Based Capital and the Total Risk-Based Capital Ratio were 9.03%, 10.70% and
11.64%, respectively, at June 30, 2002.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of the Company's financial statements. Certain accounting
policies involve significant judgments and assumptions by management which have
a material impact on the carrying value of assets and liabilities; management
considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical experience
and other factors, which are believed to be reasonable under the circumstances.
Because of the nature of the judgments and assumptions made by management,
actual results could differ from these judgments and estimates which could have
a material impact on the carrying values of assets and liabilities and the
results of operations of the Company. The Company believes the allowance for
loan losses is a critical accounting policy that requires the most significant
judgments and estimates used in the preparation of its condensed consolidated
financial statements. In estimating the allowance for loan losses, management
utilizes historical experience as well as other factors including the effect of
changes in the local real estate market on collateral values, the effect on the
loan portfolio of current economic indicators and their probable impact on
borrowers and increase or decreases in nonperforming and impaired loans. Changes
in these factors may cause management's estimate of the allowance to increase or
decrease and result in adjustments to the Company's provision for loan losses.
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-interests (pooling) method of accounting for business combinations
initiated after June 30, 2001 and require the use of purchase accounting.
Goodwill generated from purchase business combinations consummated prior to
the issuance of SFAS No. 142 was amortized on a straight-line basis over 20
years. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside a business combination and the recognition
and measurement of goodwill and other intangible assets subsequent to
acquisition. Under the new standard, goodwill and intangible assets deemed to
have indefinite lives are no longer amortized, but instead are tested at least
annually for impairment. The standard was adopted by the Company on January 1,
2002 and the impact of adoption was immaterial.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2001. 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."
-------------------------
With respect to the unaudited financial information of Southwest
Bancorporation of Texas, Inc. for the three and six month periods ended June 30,
2002 and 2001, included in this Form 10-Q, PricewaterhouseCoopers LLP reported
that they have applied limited procedures in accordance with professional
27
standards for a review of such information. However, their separate report dated
July 16, 2002 appearing herein, states that they did not audit and they do not
express an opinion on that unaudited financial information. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied.
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 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.
28
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
(a) The Company's Annual Meeting of Shareholders (the "Annual Meeting")
was held on April 17, 2002.
(b) The following Class III directors were elected for a three-year term
at the Annual Meeting: John W. Johnson, Walter E. Johnson, Wilhelmina
E. Robertson, Lane Ward and Paul W. Hobby, Jr. The following Class I
and II directors also continued in office after the Annual Meeting:
John B. Brock, III, Ernest H. Cockrell, John H. Echols, J. David
Heaney, Fred R. Lummis, Paul B. Murphy, Jr., Andres Palandjoglou,
Adolph A. Pfeffer, Jr., Stanley D. Stearns, Jr. and Duncan W. Stewart.
No votes were cast against any of the Directors. The votes cast for
and withheld for each director were as follows:
DIRECTOR FOR WITHHELD
-------- ---------- --------
John W. Johnson....................................... 27,288,460 318,880
Walter E. Johnson..................................... 27,280,510 326,830
Wilhelmina E. Robertson............................... 27,289,792 317,548
Lane Ward............................................. 27,282,262 325,078
Paul W. Hobby, Jr. ................................... 27,289,794 317,546
(c) At the Annual Meeting, the Company approved the Company's 1996 Stock
Option Plan, as amended to increase the number of shares of Common
Stock issuable thereunder from 3,000,000 shares to 4,500,000 shares. A
total of 24,942,773 votes were cast in favor of the amendment and
2,615,156 votes against the amendment and there were 49,411 votes
abstaining.
(d) At the Annual Meeting, the Company also ratified the selection of
PricewaterhouseCoopers LLP, as the Company's independent auditors for
the year ending December 31, 2002. A total of 27,131,619 votes were
cast in favor of such proposal with 471,643 votes cast against the
proposal and 4,078 votes abstaining from voting on the proposal.
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).
29
*+10.1 1996 Stock Option Plan, Amended and Restated as of June 4,
2002.
*+10.2 Change in Control Agreement between the Company and Paul B.
Murphy, Jr., Amended and Restated as of June 4, 2002.
*15.1 Awareness Letter of PricewaterhouseCoopers LLP.
(b) Reports on Form 8-K:
One report on Form 8-K was filed by the Company during the three
months ended June 30, 2002:
(i) A Current Report on Form 8-K dated April 15, 2002 was filed on
April 17, 2002; Item 5 and Item 7(c).
---------------
* Filed herewith
+ Management contract
30
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 August 7, 2002
------------------------------------------------ Executive Officer
PAUL B. MURPHY, JR. (Principal Executive Officer)
/s/ RANDALL E. MEYER Executive Vice President, August 7, 2002
------------------------------------------------ and Chief Financial Officer
RANDALL E. MEYER (Principal Financial Officer)
/s/ R. JOHN MCWHORTER Senior Vice President and Controller August 7, 2002
------------------------------------------------ (Principal Accounting Officer)
R. JOHN MCWHORTER
31
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
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 1996 Stock Option Plan, Amended and Restated as of June 4,
2002.
*+10.2 Change in Control Agreement between the Company and Paul B.
Murphy, Jr., Amended and Restated as of June 4, 2002.
*15.1 Awareness Letter of PricewaterhouseCoopers LLP.
---------------
* Filed herewith
+ Management contract