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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $1.00 par value
(TITLE OF CLASS)
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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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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There were 28,063,483 shares of the Registrant's Common Stock outstanding
as of the close of business on February 16, 2000. The aggregate market value of
the Registrant's Common Stock held by non-affiliates was approximately $484
million (based upon the closing price of $17.25 on February 16, 2000, as
reported on the NASDAQ National Market System).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the 2000 Annual
Meeting of Shareholders, which will be filed within 120 days after December 31,
1999, are incorporated by reference into Part III of this Report.
================================================================================
PART I
ITEM 1. BUSINESS
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
Southwest Bancorporation of Texas, Inc. (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
and technological changes, including "Year 2000" data systems compliance
issues, are more difficult or expensive than anticipated. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements.
THE COMPANY
The Company was incorporated as a business corporation under the laws of
the State of Texas on March 28, 1996, for the purpose of serving as a bank
holding company for Southwest Bank of Texas National Association (the "Bank").
The holding company formation was consummated and the Company acquired all of
the outstanding shares of capital stock of the Bank as of the close of business
on June 30, 1996. Based upon total assets as of December 31, 1999, the Company
ranks as the largest independent bank holding company headquartered in the
metropolitan Houston area. The Company's headquarters are located at 4400 Post
Oak Parkway, Houston, Texas 77027, and its telephone number is (713) 235-8800.
The Company provides an array of sophisticated products typically found
only in major regional banks. These services are provided to middle market
businesses in the metropolitan Houston area through twenty-six full service
banking facilities. Each banking office has seasoned management with significant
lending experience who exercises substantial autonomy over credit and pricing
decisions, subject to loan committee approval for larger credits. This
decentralized management approach, coupled with the continuity of service by the
same staff members, enables the Company to develop long-term customer
relationships, maintain high quality service and provide quick responses to
customer needs. The Company believes that its emphasis on local relationship
banking, together with its conservative approach to lending and resultant strong
asset quality, are important factors in the success and the growth of the
Company.
The Company seeks credit risks of good quality within its target market
that exhibit good historical trends, stable cash flows and secondary sources of
repayment from tangible collateral. The Company extends credit for the purpose
of obtaining and continuing long term relationships. Lenders are provided with
detailed underwriting policies for all types of credit risks accepted by the
Company and must obtain
1
appropriate approvals for credit extensions in excess of conservatively assigned
individuals' lending limits. The Company also maintains strict documentation
requirements and extensive credit quality assurance practices in order to
identify credit portfolio weaknesses as early as possible so any exposures that
are discovered might be reduced.
The Company has a three-part strategy for growth. First, the Company will
continue to actively target the "middle market" and private banking customers
in Houston for loan and deposit opportunities as it has successfully done for
the past ten years. The "middle market" is generally characterized by
privately owned companies having annual revenues ranging from $1 million to $250
million and borrowings ranging from $50,000 to $10 million, but primarily in the
$150,000 to $5 million range. Typical middle market customers seek a
relationship with a local independent bank that is sensitive to their needs and
understands their business philosophy. These customers desire a long-term
relationship with a decision-making loan officer who is responsive and
experienced and has ready access to a bank's senior management. In implementing
this part of its strategy, the Company continues to explore opportunities (i) to
solidify its existing customer relationships and build new customer
relationships by providing new services required by its middle market customers
and (ii) to expand its base of services in the professional and executive market
to meet the demands of that sector.
Second, the Company intends to establish branches in areas that
demographically complement its existing or targeted customer base. As other
local banks are acquired by out-of-state organizations, the Company believes
that the establishment of branches will better meet the needs of customers in
many Houston area neighborhoods who feel disenfranchised by larger regional or
national organizations.
Third, the Company may pursue selected acquisitions of other financial
institutions. The Company intends to conduct thorough studies and reviews of any
possible acquisition candidates to assure that they are consistent with the
Company's existing goals, both from an economic and strategic perspective. The
Company believes market and regulatory factors may present opportunities for the
Company to acquire other financial institutions.
THE BANK
The Bank provides a complete range of retail and commercial banking
services that compete directly with major regional banks. Loans consist of
commercial loans to middle market businesses, loans to individuals, commercial
real estate loans, residential mortgages and construction loans. The Bank also
originates and purchases residential and commercial mortgage loans to sell to
investors with servicing rights retained. The Bank also promotes 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. In
addition, the Bank offers a broad array of fee income products including
merchant card services, letters of credit, accounts receivable finance,
customized cash management services, brokerage and mutual funds and drive-in
banking services.
The Bank maintains a staff of professional treasury management marketing
officers who consult with middle market companies to design custom
cost-effective cash management systems. The Bank offers a full product line of
cash concentration, disbursement and automated information reporting services
and a full suite of internet products comparable to those offered by any major
regional bank. Through the Bank's continued investment in new technology and
people, the Bank has been able to attract some of Houston's largest middle
market companies to utilize the Bank's treasury management products. The Bank
has also been able to attract new loan customers through use of the Bank's
treasury management products, such as an image-based lock box service and
controlled disbursement and sweep products, which allow borrowers to minimize
interest expense and convert excess operating funds into interest income.
Through the use of an interactive terminal or personal computer, the Bank's
NetStar system provides customers with instant access to all bank account
information with multiple intraday updates. The Bank makes business
communication more efficient through Electronic Data Interchange ("EDI"),
which is an inter-organizational computer-to-computer exchange of business
documentation in a standard computer-processable format. Through the use of EDI
and electronic payments, the Bank can provide the customer with a paperless
funds
2
management system. Positive Pay, a service under which the Bank only pays checks
listed on a legitimate "company issue" file, is another product which helps
prevent check fraud. The Bank's average commercial customer uses five treasury
management services. Because these services help customers improve their
treasury operations and achieve new efficiencies in cash management, they are
extremely useful in building and maintaining long-term relationships.
The Bank has a retail presence in 26 locations throughout the Houston
metropolitan area. Such locations are emerging as an important source of bank
funding and fee income. Retail products consist of both traditional deposit
accounts such as checking, savings, money market accounts and certificates of
deposit, and a wide array of consumer loan and electronic banking alternatives.
The Bank is putting a strong emphasis on the cultivation of retail market
opportunities and on its retail staff to help expand and deepen customer
relationships.
The Bank maintains a strong community orientation by, among other things,
supporting active participation of all employees in local charitable, civic,
school and church activities. Each banking office also appoints selected
customers to a business development board that assists in introducing
prospective customers to the Bank and in developing or modifying products and
services to better meet customer needs.
COMPETITION
The banking business is highly competitive, and the profitability of the
Company will depend principally upon the Company's ability to compete in its
market area. The Company competes with other commercial and savings banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking firms, asset-based
non-bank lenders and certain other non-financial institutions, including certain
governmental organizations which may offer subsidized financing at lower rates
than those offered by the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing technology and
customer service, including local office decision-making on loans, establishing
long-term customer relationships and building customer loyalty, and by providing
products and services designed to address the specific needs of its customers.
The success of the Company is also highly dependent on the economic
strength of the Company's general market area. Significant deterioration in the
local economy or economic problems in the greater Houston area could
substantially impact the Company's performance. In addition, the enactment of
the Gramm-Leach-Bliley Act (see discussion below) which breaks down many
barriers between the banking, securities and insurance industries, may
significantly affect the competitive environment in which the Company operates.
EMPLOYEES
As of December 31, 1999, the Company had 934 full-time employees, 323 of
whom were officers of the Bank. The Company provides medical and hospitalization
insurance to its full-time employees. The Company has also provided most of its
employees with the benefit of Common Stock ownership through the Company's
contributions to a 401(k) plan, in which 690 of its employees are currently
participating. The Company considers its relations with its employees to be
excellent.
SUPERVISION AND REGULATION
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of the Company and the Bank. The
following description of references herein to applicable statutes and
regulations, which are not intended to be complete descriptions of these
provisions or their effects on the Company or the Bank, are brief summaries and
are qualified in their entirety by reference to such statutes and regulations.
THE BANK
As a national banking association, the Bank is principally supervised,
examined and regulated by the Office of the Comptroller of the Currency (the
"OCC"). The OCC regularly examines such areas as capital
3
adequacy, reserves, loan portfolio, investments and management practices. The
Bank must also furnish quarterly and annual reports to the OCC, and the OCC may
exercise cease and desist and other enforcement powers over the Bank if its
actions represent unsafe or unsound practices or violations of law. Since the
deposits of the Bank are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation (the "FDIC"), the Bank is also subject
to regulation and supervision by the FDIC. Because the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") regulates the Company,
the Federal Reserve Board has supervisory authority which affects the Bank.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. The Bank is
subject to certain federal statutes limiting transactions with the Company and
its nonbanking affiliates. Section 23A of the Federal Reserve Act affects loans
or other credit extensions to, asset purchases from and investments in
affiliates of the Bank. Such transactions with the Company or any of its
nonbanking subsidiaries are limited in amount to ten percent of the Bank's
capital and surplus and, with respect to the Company and all of its nonbanking
subsidiaries together, to an aggregate of twenty percent of the Bank's capital
and surplus. Furthermore, such loans and extensions of credit, as well as
certain other transactions, are required to be secured in specified amounts.
In addition, Section 23B of the Federal Reserve Act requires that certain
transactions between the Bank, including its subsidiaries, and its affiliates
must be on terms substantially the same, or at least as favorable to the Bank or
its subsidiaries, as those prevailing at the time for comparable transactions
with or involving other nonaffiliated persons. In the absence of such comparable
transactions, any transaction between the Bank and its affiliates must be on
terms and under circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated persons. The Bank is also
subject to certain prohibitions against any advertising that indicates the Bank
is responsible for the obligations of its affiliates. The Bank does not have any
nonbanking affiliates as of the date of this Annual Report.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O now apply to
all insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such loans can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the OCC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
INTEREST RATE LIMITS. Interest rate limitations for the Bank are primarily
governed by the National Bank Act which generally defers to the laws of the
state where the bank is located. Under the laws of the State of Texas, the
maximum annual interest rate that may be charged on most loans made by the Bank
is based on doubling the average auction rate, to the nearest 0.25%, for 26 week
United States Treasury Bills, as computed by the Office of the Consumer Credit
Commissioner of the State of Texas. However, the maximum rate does not decline
below 18% or rise above 24% (except for loans in excess of $250,000 that are
made for business, commercial, investment or other similar purposes in which
case the maximum annual rate may not rise above 28%, rather than 24%). On fixed
rate closed-end loans, the maximum non-usurious rate is to be determined at the
time the rate is contracted, while on floating rate and open-end loans (such as
credit cards), the rate varies over the term of the indebtedness. State usury
laws (but not late charge limitations) have been preempted by federal law for
loans secured by a first lien on residential real property.
EXAMINATIONS. The OCC periodically examines and evaluates national banks.
Based upon such an evaluation, the OCC may revalue the assets of a national bank
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets. Onsite
examinations are to be conducted every 12 months, except that certain well
capitalized banks may be examined every 18 months. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") authorizes the OCC to assess
the institution for its costs of conducting the examinations.
PROMPT CORRECTIVE ACTION. In addition to the capital adequacy guidelines,
FDICIA requires the OCC to take "prompt corrective action" with respect to any
national bank which does not meet specified
4
minimum capital requirements. The applicable regulations establish five capital
levels, ranging from "well capitalized" to "critically undercapitalized,"
which authorize, and in certain cases require, the OCC to take certain specified
supervisory action. Under regulations implemented under FDICIA, a national bank
is considered well capitalized if it has a total risk-based capital ratio of
10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a
leverage ratio of 5.0% or greater, and it is not subject to an order, written
agreement, capital directive, or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure. A national bank is
considered adequately capitalized if it has a total risk-based capital ratio of
8.0% or greater, a Tier 1 risk-based capital ratio of at least 4.0% and a
leverage capital ratio of 4.0% or greater (or a leverage ratio of 3.0% or
greater if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines), and the
institution does not meet the definition of an undercapitalized institution. A
national bank is considered undercapitalized if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is
less than 4.0%, or a leverage ratio that is less than 4.0% (or a leverage ratio
that is less than 3.0% if the institution is rated composite 1 in its most
recent report of examination, subject to appropriate federal banking agency
guidelines). A significantly undercapitalized institution is one which has a
total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0%, or a leverage ratio that is less than
3.0%. A critically undercapitalized institution is one which has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Under
certain circumstances, a well capitalized, adequately capitalized or
undercapitalized institution may be treated as if the institution were in the
next lower capital category.
With certain exceptions, national banks will be prohibited from making
capital distributions or paying management fees to a holding company if the
payment of such distributions or fees will cause them to become
undercapitalized. Furthermore, undercapitalized national banks will be required
to file capital restoration plans with the OCC. Such a plan will not be accepted
unless, among other things, the banking institutions's holding company
guarantees the plan up to a certain specified amount. Any such guarantee from a
depository institution's holding company is entitled to a priority of payment in
bankruptcy. Undercapitalized national banks also will be subject to restrictions
on growth, acquisitions, branching and engaging in new lines of business unless
they have an approved capital plan that permits otherwise. The OCC also may,
among other things, require an undercapitalized national bank to issue shares or
obligations, which could be voting stock, to recapitalize the institution or,
under certain circumstances, to divest itself of any subsidiary.
The OCC is authorized by FDICIA to take various enforcement actions against
any significantly undercapitalized national bank and any national bank that
fails to submit an acceptable capital restoration plan or fails to implement a
plan accepted by the OCC. These powers include, among other things, requiring
the institution to be recapitalized, prohibiting asset growth, restricting
interest rates paid, requiring primary approval of capital distributions by any
bank holding company which controls the institution, requiring divestiture by
the institution of its subsidiaries or by the holding company of the institution
itself, requiring new election of directors, and requiring the dismissal of
directors and officers.
Significantly and critically undercapitalized national banks may be subject
to more extensive control and supervision. The OCC may prohibit any such
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of a
national bank becoming critically undercapitalized, the OCC must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued viability.
As of December 31, 1999, the Bank met the capital requirements of an
"adequately-capitalized" institution.
DIVIDENDS. There are certain statutory limitations on the payment of
dividends by national banks. Without approval of the OCC, dividends may not be
paid by the Bank in an amount in any calendar year which exceeds the Bank's
total net profits for that year, plus its retained profits for the preceding two
years,
5
less any required transfers to capital surplus. In addition, a national bank may
not pay dividends in excess of total retained profits, including current year's
earnings after deducting bad debts in excess of reserves for losses. In some
cases, the OCC may find a dividend payment that meets these statutory
requirements to be an unsafe or unsound practice. Under FDICIA, the Bank cannot
pay a dividend if it will cause the Bank to be "undercapitalized."
DEPOSIT INSURANCE. The deposits of the Bank are insured by the FDIC
through the BIF to the extent provided by law. Under the FDIC's risk-based
insurance system, BIF-insured institutions are currently assessed premiums of
between zero and twenty seven cents per $100 of eligible deposits, depending
upon the institution's capital position and other supervisory factors. Congress
recently enacted legislation that, among other things, provides for assessments
against BIF-insured institutions that will be used to pay certain Financing
Corporation ("FICO") obligations. In addition to any BIF insurance
assessments, BIF-insured banks are expected to make payments for the FICO
obligations equal to $0.01296 per $100 of eligible deposits each year during
1997 through 1999, and an estimated $0.024 per $100 of eligible deposits
thereafter.
CONSERVATOR AND RECEIVERSHIP POWERS. FDICIA significantly expanded the
authority of the federal banking regulators to place depository institutions
into conservatorship or receivership to include, among other things, appointment
of the FDIC as conservator or receiver of an undercapitalized institution under
certain circumstances. In the event the Bank is placed into conservatorship or
receivership, the FDIC is required, subject to certain exceptions, to choose the
method for resolving the institution that is least costly to the BIF, such as
liquidation.
BROKERED DEPOSIT RESTRICTIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA generally limit institutions
which are not well capitalized from accepting brokered deposits. In general,
undercapitalized institutions may not solicit, accept or renew brokered
deposits. Adequately capitalized institutions may not solicit, accept or renew
brokered deposits unless they obtain a waiver from the FDIC. Even in that event,
they may not pay an effective yield of more than 75 basis points over the
effective yield paid on deposits of comparable size and maturity in the
institution's normal market area for deposits accepted from within that area, or
the national rate paid on deposits of comparable size and maturity for deposits
accepted from outside the institution's normal market area.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Community Reinvestment
Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others.
These laws and regulations mandate certain disclosure requirements and regulate
the manner in which financial institutions must deal with customers when taking
deposits or making loans to such customers. The Bank must comply with the
applicable provisions of these consumer protection laws and regulations as part
of their ongoing customer relations.
THE COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956 (the "BHCA"), and is subject to supervision and regulation
by the Federal Reserve Board. The BHCA and other Federal laws subject bank
holding companies to particular restrictions on the types of activities in which
they may engage, and to a range of supervisory requirements and activities,
including regulatory enforcement actions for violations of laws and regulations.
As a bank holding company, the Company's activities and those of its banking and
nonbanking subsidiaries have in the past been limited to the business of banking
and activities closely related or incidental to banking. Under new banking
legislation (see discussion of Gramm-Leach-Bliley Act below), however, national
banks will have broadened authority, subject to limitations on investment, to
engage in activities that are financial in nature (other than insurance
6
underwriting, merchant or insurance portfolio investment, real estate
development and real estate investment) through subsidiaries if the bank is well
capitalized, well managed and has at least a satisfactory rating under the
Community Reinvestment Act.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of the Bank, the claims of depositors and other general or
subordinated creditors of the Bank are entitled to a priority of payment over
the claims of holders of any obligation of the institution to its shareholders,
including any depository institution holding company (such as the Company) or
any shareholder or creditor thereof.
SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. For example, the Federal
Reserve Board's Regulation Y requires a holding company to give the Federal
Reserve Board prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10%
or more of the company's consolidated net worth. The Federal Reserve Board may
oppose the transaction if it believes that the transaction would constitute an
unsafe or unsound practice or would violate any law or regulation. As another
example, a holding company could not impair its subsidiary bank's soundness by
causing it to make funds available to nonbanking subsidiaries or their customers
if the Federal Reserve Board believed it not prudent to do so.
FIRREA expanded the Federal Reserve Board's authority to prohibit
activities of bank holding companies and their nonbanking subsidiaries which
represent unsafe and unsound banking practices or which constitute violations of
laws or regulations. Notably, FIRREA increased the amount of civil money
penalties which the Federal Reserve Board can assess for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1,000,000 for each day the activity continues. FIRREA also expanded the scope
of individuals and entities against which such penalties may be assessed.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
ANNUAL REPORTING; EXAMINATIONS. The Company is required to file an annual
report with the Federal Reserve Board, and such additional information as the
Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve
Board may examine a bank holding company or any of its subsidiaries, and charge
the company for the cost of such an examination.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets and
certain off-balance sheet assets such as letters of credit are assigned
different risk weights, based generally on the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements).
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital divided
by its total consolidated average assets. Bank holding companies must maintain a
minimum leverage ratio of at least 3.0%, although most organizations are
expected to maintain leverage ratios that are 100 to 200 basis points above this
minimum ratio.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements
7
for a particular banking organization that are higher than the minimum ratios
when circumstances warrant. Federal Reserve Board guidelines also provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets. In
addition, the regulations of the Federal Reserve Board provide that
concentration of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, are
important factors to be taken into account by regulatory agencies in assessing
an organization's overall capital adequacy.
The Federal Reserve Board recently adopted amendments to its risk-based
capital regulations to provide for the consideration of interest rate risk in
the agencies' determination of a banking institution's capital adequacy.
GRAMM-LEACH-BLILEY ACT
Traditionally, the activities of bank holding companies have been limited
to the business of banking and activities closely related or incidental to
banking. On November 12, 1999, however, the Gramm-Leach-Bliley Act was signed
into law which will, effective March 11, 2000, relax the previous limitations
and permit bank holding companies to engage in a broader range of financial
activities. Specifically, bank holding companies may elect to become financial
holding companies which may affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. Among the
activities that will be deemed "financial in nature" are, in addition to
traditional lending activities, securities underwriting, dealing in or making a
market in securities; sponsoring mutual funds and investment companies,
insurance underwriting and agency activities, merchant banking activities, and
activities which the Federal Reserve Board considers to be closely related to
banking. A bank holding company may become a financial holding company under the
new statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company that falls out of compliance with such requirement
may be required to cease engaging in certain activities. Any bank holding
company which does not elect to become a financial holding company remains
subject to the current restrictions of the Bank Holding Company Act.
Under the new legislation, the Federal Reserve Board serves as the primary
"umbrella" regulator of financial holding companies with supervisory authority
over each parent company and limited authority over its subsidiaries. The
primary regulator of each subsidiary of a financial holding company will depend
on the type of activity conducted by the subsidiary. For example, broker-dealer
subsidiaries will be regulated largely by securities regulators and insurance
subsidiaries will be regulated largely by insurance authorities.
Implementing regulations under the Gramm-Leach-Bliley Act have not yet been
promulgated and the Company cannot predict the full sweep of the new legislation
and has not yet determined whether it will ever elect to become a financial
holding company.
ENFORCEMENT POWERS OF THE FEDERAL BANKING AGENCIES
The Federal Reserve Board and the OCC have broad enforcement powers,
including the power to terminate deposit insurance, impose substantial fines and
other civil and criminal penalties and appoint a conservator or receiver.
Failure to comply with applicable laws, regulations and supervisory agreements
could subject the Company or the Bank, as well as officers, directors and other
institution-affiliated parties of these organizations, to administrative
sanctions and potentially substantial civil money penalties. In addition to the
grounds discussed above under " -- The Bank -- Prompt Corrective Action," the
appropriate federal banking agency may appoint the FDIC as conservator or
receiver for a banking institution (or the FDIC may appoint itself, under
certain circumstances) if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or materially
fails to implement an accepted capital restoration plan.
8
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. FDICIA requires
bank regulators to take "prompt corrective action" to resolve problems
associated with insured depository institutions whose capital declines below
certain levels. In the event an institution becomes "undercapitalized," it
must submit a capital restoration plan. The capital restoration plan will not be
accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary's compliance with the
capital restoration plan. Under FDICIA, the aggregate liability of all companies
controlling an undercapitalized bank is limited to the lesser of 5% of the
institution's assets at the time it became undercapitalized or the amount
necessary to cause the institution to be "adequately capitalized." The
guarantee and limit on liability expire after the regulators notify the
institution that it has remained adequately capitalized for each of four
consecutive calendar quarters. FDICIA grants greater powers to the bank
regulators in situations where an institution becomes "significantly" or
"critically" undercapitalized or fails to submit a capital restoration plan.
For example, a bank holding company controlling such an institution can be
required to obtain prior Federal Reserve Board approval of proposed dividends,
or might be required to consent to a consolidation or to divest the troubled
institution or other affiliates. At December 31, 1999, the Bank met the
requirements of an "adequately capitalized" institution and, therefore, these
requirements presently do not apply to the Company.
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or direct or
indirect ownership or control of more than 5% of any class of voting shares of
any bank.
The Federal Reserve Board will allow the acquisition by a bank holding
company of an interest in any bank located in another state only if the laws of
the state in which the target bank is located expressly authorize such
acquisition. Texas law permits, in certain circumstances, out-of-state bank
holding companies to acquire banks and bank holding companies in Texas.
EXPANDING ENFORCEMENT AUTHORITY
One of the major effects of FDICIA was the increased ability of banking
regulators to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve Board and FDIC have extensive authority to police
unsafe or unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC may
terminate the deposit insurance of any institution which it determines has
engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties, issue cease and desist or removal orders, seek injunctions, and
publicly disclose such actions.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Company and its subsidiaries
cannot be predicted.
9
ITEM 2. PROPERTIES
FACILITIES
The Company currently maintains twenty-six locations, sixteen of which are
leased. The following table sets forth specific information on each branch, each
of which offers full service banking. The Company's headquarters are located at
4400 Post Oak Parkway, in a 28-story office tower in the Galleria area.
BRANCH DEPOSITS
AT
BRANCH SQ. FT. LOCATION DECEMBER 31, 1999
- ---------------------------------------- --------- ------------------------------------ -----------------
(IN THOUSANDS)
Galleria/Corporate...................... 149,294 4400 Post Oak Parkway $ 974,365
Downtown -- 1100 Louisiana.............. 10,124 1100 Louisiana 81,996
Northwest Crossing...................... 6,558 Hwy 290 at Tidwell 281,686
Memorial City........................... 3,554 899 Frostwood 20,588
12 Greenway Plaza....................... 2,669 12 Greenway Plaza 48,568
Medical Center.......................... 2,437 6602 Fannin 15,824
Downtown -- Two Houston Center.......... 2,219 909 Fannin 66,666
Hempstead............................... 17,000 12130 Hempstead Hwy 116,759
Tanglewood.............................. 5,625 5791 Woodway 72,544
Pasadena................................ 4,900 4207 Fairmont Parkway 25,901
Memorial West........................... 1,700 14803 Memorial 5,807
Spring.................................. 6,300 2000 Spring Cypress Road 34,358
Bell Tower.............................. 4,500 1330 Wirt Road 21,021
Kingwood................................ 5,500 29805 Loop 494 36,237
Porter.................................. 2,450 23741 Highway 59, Suite 2 9,329
North Port.............................. 5,000 9191 North Loop East 21,323
Sugar Land.............................. 4,000 14965 Southwest Freeway 22,790
Greenspoint............................. 3,797 Sam Houston at Ronan Road 14,041
3 Greenway Plaza........................ 2,549 3 Greenway Plaza, Suite C118 1,158
Rosenberg............................... 45,000 3400 Avenue H 145,077
East Bernard............................ 1,500 9212 Hwy 60 17,586
Needville............................... 2,500 3328 School Street 37,043
Bissonnet............................... 1,520 10881 Bissonnet 14,520
Katy.................................... 2,800 919 Avenue C 11,402
Missouri City........................... 8,446 5819 Hwy 6 23,540
The Woodlands.......................... 3,600 10077 Grogan's Mill Road, Suite 300 52,625
-----------------
$ 2,172,754
=================
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is currently involved in any material
legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this Annual Report to a vote of the Company's security holders.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the NASDAQ Stock Market on
January 28, 1997, and is quoted in such Market under the symbol "SWBT". The
Company's Common Stock was not publicly traded, nor was there an established
market therefor, prior to January 28, 1997. On February 16, 2000, there were
approximately 1,162 holders of record of the Company's Common Stock.
No cash dividends have ever been paid by the Company on its Common Stock,
and the Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company's principal source of funds to pay
cash dividends on its Common Stock would be cash dividends from the Bank. There
are certain statutory limitations on the payment of dividends by national banks.
Without approval of the OCC, dividends in any calendar year may not exceed the
Bank's total net profits for that year, plus its retained profits for the
preceding two years, less any required transfers to capital surplus or to a fund
for the retirement of any preferred stock. In addition, a dividend may not be
paid in excess of a bank's cumulative net profits after deducting bad debts in
excess of the allowance for loan losses. As of December 31, 1999, approximately
$70.1 million was available for payment of dividends by the Bank to the Company
under these restrictions without regulatory approval. See "Item 1.
Business -- Supervision and Regulation."
The following table presents the range of high and low sale prices reported
on the NASDAQ during the year ended December 31, 1999.
1999 1998
------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------ ----- ------ ----- --------- --------- ------ ---------
Common stock sale price:
High............................... $20 $18 7/16 $18 5/8 $18 3/16 $18 1/2 $19 1/4 $21 19/32 $19 7/8
Low................................ 16 1/8 16 1/8 12 3/8 11 7/8 10 12 3/4 16 1/4 15
RECENT SALES OF UNREGISTERED SECURITIES
On June 21, 1999, the Company issued 307,323 shares of Common Stock to The
Woodlands Land Development Company, L.P. ("Woodlands") pursuant to the
exercise by Woodlands on June 17, 1999 of its right to exchange its 49% equity
interest in Mitchell Mortgage Company L.L.C. ("Mitchell") for shares of
Company Common Stock. As a result of the exchange, Mitchell became a
wholly-owned subsidiary of the Bank effective June 30, 1999. No underwriter was
involved, and the issuance of those shares of Company Common Stock was not
registered under the Securities Act of 1933 in reliance upon the exemption
provided by Section 4(2) thereof. The Company is entitled to rely upon Section
4(2) in connection with this transaction because it was a privately negotiated
transaction with a single accredited investor.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in this Annual Report, and the information
contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected historical consolidated
financial data as of the end of and for each of the five years in the period
ended December 31, 1999 are derived from the Company's Consolidated Financial
Statements which have been audited by independent public accountants. Historical
results have been restated to reflect the operations of Fort Bend Holding Corp.
prior to April 1, 1999, the date on which it was merged into the Company in a
transaction accounted for as a pooling of interests.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income.................. $ 186,223 $ 161,747 $ 130,895 $ 97,189 $ 78,233
Interest expense................. 79,241 70,973 58,055 43,675 35,533
--------- --------- --------- --------- ---------
Net interest income.......... 106,982 90,774 72,840 53,514 42,700
Provision for loan losses........ 6,060 4,053 3,982 2,414 1,244
--------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses..................... 100,922 86,721 68,858 51,100 41,456
Noninterest income............... 27,011 22,482 16,769 10,123 6,526
Noninterest expenses............. 85,836 70,828 56,264 41,498 31,134
--------- --------- --------- --------- ---------
Income before income taxes... 42,097 38,375 29,363 19,725 16,848
Provision for income taxes....... 15,266 13,541 10,167 6,831 5,832
Minority interest................ (19) 373 373 58 --
--------- --------- --------- --------- ---------
Net income before preferred stock
dividend....................... 26,850 24,461 18,823 12,836 11,016
Preferred stock dividend......... -- -- 36 457 50
--------- --------- --------- --------- ---------
Net income available to common
shareholders................... $ 26,850 $ 24,461 $ 18,787 $ 12,379 $ 10,966
========= ========= ========= ========= =========
PER SHARE DATA:
Basic earnings per common
share(1)....................... $ 0.97 $ 0.95 $ 0.77 $ 0.58 $ 0.53
Diluted earnings per common
share(1)....................... $ 0.93 $ 0.88 $ 0.71 $ 0.53 $ 0.50
Cash dividends per common share
paid by Fort Bend.............. $ 0.10 $ 0.40 $ 0.285 $ 0.14 $ 0.14
Book value per share............. $ 6.96 $ 6.47 $ 5.48 $ 4.33 $ 3.71
Average common shares (in
thousands)..................... 27,744 25,795 24,333 21,168 20,521
Average common share equivalents
(in thousands)................. 1,200 2,947 3,080 3,304 1,962
PERFORMANCE RATIOS:
Return on average assets......... 1.03% 1.11% 1.06% 0.93% 1.05%
Return on average common
equity......................... 15.25% 16.10% 15.44% 14.75% 15.58%
Net interest margin.............. 4.48% 4.42% 4.44% 4.35% 4.36%
Efficiency ratio(3).............. 63.99% 62.79% 63.14% 65.03% 61.95%
BALANCE SHEET DATA(2):
Total assets..................... $2,852,196 $2,522,391 $2,124,210 $1,567,221 $1,251,785
Securities....................... 652,539 718,740 652,210 458,981 472,649
Loans............................ 1,913,857 1,528,999 1,160,724 874,244 626,904
Allowance for loan losses........ 19,716 14,980 11,927 9,101 7,374
Total deposits................... 2,172,754 1,999,462 1,781,332 1,291,665 1,044,088
Total shareholders' equity....... 194,997 177,336 136,239 91,843 75,876
CAPITAL RATIO:
Average equity to average
assets......................... 6.78% 6.88% 6.88% 6.28% 6.72%
ASSET QUALITY RATIOS(2):
Nonperforming assets(4) to loans
and other real estate.......... 0.24% 0.25% 0.42% 0.37% 0.66%
Net charge-offs to average
loans.......................... 0.08% 0.08% 0.12% 0.20% 0.15%
Allowance for loan losses to
total loans.................... 1.07% 0.99% 1.04% 1.04% 1.18%
Allowance for loan losses to
nonperforming loans(5)......... 650.91% 460.07% 285.13% 359.01% 187.68%
- ------------
(1) Basic earnings per common share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per common share is computed by
dividing net income available to common shareholders adjusted for any
changes in income that would result from the assumed conversion of all
potential dilutive common shares, by the sum of the weighted average number
of common shares outstanding and the effect of all dilutive potential common
shares outstanding for the period.
(2) At period end, except net charge-offs (recoveries) to average loans.
(3) Calculated by dividing total noninterest expenses by net interest income
plus noninterest income, excluding net security gains/losses.
(4) Nonperforming assets consist of nonperforming loans and other real estate
owned.
(5) Nonperforming loans consist of nonaccrual loans, troubled debt
restructurings and loans contractually past due 90 days or more.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements and accompanying notes and other detailed information
appearing elsewhere in this Annual Report.
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
OVERVIEW
On April 1, 1999, Southwest Bancorporation of Texas, Inc. (the "Company")
and Fort Bend Holding Corp. ("Fort Bend") completed their merger, which was
accounted for as a pooling of interests. The merger agreement provided for the
exchange of 1.45 shares of the Company's Common Stock for each share of Fort
Bend Common Stock, resulting in the issuance of approximately 4.6 million shares
of Company Common Stock on a fully diluted basis. In connection with this
merger, the Company incurred approximately $4.5 million in pretax merger-related
expenses and other charges including investment banking fees, other professional
fees and severance expense (the "special charge"). The historical financial
data has been restated to include the accounts and operations of Fort Bend for
all periods presented.
Through the merger with Fort Bend, the Company acquired Fort Bend's 51%
ownership interest in Mitchell Mortgage Company L.L.C. ("Mitchell"), a
full-service mortgage banking affiliate of The Woodlands Operating Company L.P.
("Woodlands"). Following the merger, Woodlands had the right to convert its
49% ownership interest in Mitchell into shares of Company Common Stock at an
exchange rate of 119.3408 shares for each $1,000 of its ownership interest in
Mitchell. Prior to the merger Woodlands had the right to convert its ownership
interest into Fort Bend common stock. On June 17, 1999, Woodlands exercised its
conversion right, resulting in the issuance of 307,323 shares of Company Common
Stock to Woodlands in exchange for Woodlands' 49% ownership interest in Mitchell
and Mitchell becoming a wholly-owned subsidiary of the Bank, effective as of
June 30, 1999. As a result, 100% of the accounts and operations of Mitchell
after that date are included in the financial statements of the Company.
Total assets at December 31, 1999, 1998 and 1997 were $2.85 billion, $2.52
billion, and $2.12 billion, respectively. This growth was a result of a strong
local economy, the addition of new loan officers, aggressive marketing, and the
Company's overall growth strategy. Loans were $1.91 billion at December 31,
1999, an increase of $384.9 million or 25% from $1.53 billion at the end of
1998, marking the second consecutive year that loan growth exceeded $350
million. Loans were $1.16 billion at year end 1997. Deposits increased to $2.17
billion at year end 1999 from $2.00 billion at year end 1998 and $1.78 billion
at year end 1997.
Net income available for common shareholders was $26.9 million, $24.5
million, and $18.8 million and diluted earnings per common share was $0.93,
$0.88, and $0.71 for the years ended 1999, 1998 and 1997, respectively. This
increase in net income was primarily the result of strong loan growth,
maintaining strong asset quality and expense control and resulted in returns on
average assets ("ROA") of 1.03%, 1.11%, and 1.06% and returns on average
common equity ("ROE") of 15.25%, 16.10%, and 15.44% for the years ended 1999,
1998 and 1997, respectively.
Results for 1999 include the impact of the special charge taken in the
second quarter. On an operating basis, excluding this special charge, the
Company's net income was $30.5 million or $1.05 per diluted common share,
resulting in an ROA of 1.17%, ROE of 17.29, and an efficiency ratio of 60.66%.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
earnings. In 1999, net interest income provided 79.8% of the Company's net
revenues, compared with 80.1% in 1998
13
and 81.3% in 1997. Interest rate fluctuations, as well as changes in the amount
and type of earning assets and liabilities, combine to affect net interest
income.
1999 VERSUS 1998. Net interest margin increased six basis points in 1999
to 4.48%. The principal factor contributing to the increase was lower cost of
funds partially offset by lower yielding earning assets resulting in higher
interest rate spreads.
Total net interest income was $107.0 million in 1999 compared to $90.8
million in 1998, an increase of $16.2 million or 18%. Growth in average earning
assets was $332.4 million or 16% while yields decreased seven basis points to
7.80%. During the first six months of the year yields remained relatively flat
and then increased during the final six months of the year as the Bank's prime
lending rate increased. The yield on earning assets during the fourth quarter
was the highest for the year, resulting in increased yields on a weighted
average basis.
Net interest margin risk is typically related to a narrowing of the prime
rate and cost of funds. The Company reduced this risk with a modestly asset
sensitive balance sheet during 1999. On June 30, 1999 the Federal Reserve
increased the federal funds rate and discount rate by 25 basis points. This was
followed by two additional 25 basis point increases on August 25, 1999 and
November 17, 1999. Due to the Bank's asset sensitivity the net interest margin
gradually increased during the second half of the year. This resulted in net
interest margins of 4.48% and 4.42% and net interest spreads of 3.53% and 3.34%
for 1999 and 1998, respectively.
The increase in net interest income was due primarily to a $332.4 million
or 16% increase in average earning assets. Average loans grew $338.7 million or
26% during 1999 while average securities grew $82.6 million or 13% during the
same period. The yield earned on average loans outstanding decreased 37 basis
points to 8.51% in 1999. Overall, the yield earned on average earning assets
decreased seven basis points to 7.80% in 1999 compared to a 26 basis point
decrease in the rate paid on average interest-bearing liabilities.
1998 VERSUS 1997. Net interest income totaled $90.8 million in 1998
compared to $72.8 million in 1997, an increase of $17.9 million or 25%. This
resulted in net interest margins of 4.42% and 4.44% and net interest spreads of
3.34% and 3.32% for 1998 and 1997, respectively.
The increase in net interest income was due primarily to a $415.6 million
or 25% increase in average interest-earning assets. Average loans grew $302.6
million or 30% during 1998 while average securities grew $110.7 million or 22%
during the same period. The increase in net interest income caused by this
increase in average interest-earning assets was partially offset by an increase
in average interest-earning liabilities of $321.5 million or 26%. The yield
earned on average interest-earning assets decreased 11 basis points to 7.87% in
1998 compared to an overall decrease in the yield earned on average
interest-bearing liabilities of 13 basis points to 4.53% for the period.
14
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 not
give effect to changes in fair value that are reflected as a component of
consolidated shareholders' equity.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- ----------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID
----------- -------- ------- ----------- -------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans................................. $1,652,242 $140,598 8.51% $1,313,500 $116,586 8.88% $1,010,910 $ 92,307
Securities............................ 699,581 43,865 6.67 616,999 38,302 6.21 506,275 31,709
Federal funds sold and other.......... 36,010 1,760 4.89 124,897 6,859 5.49 122,591 6,879
----------- -------- ------- ----------- -------- ------- ----------- --------
Total interest-earning assets..... 2,387,833 186,223 7.80% 2,055,396 161,747 7.87% 1,639,776 130,895
-------- ------- -------- ------- --------
Less allowance for loan losses.......... (17,534) (13,321) (10,294)
----------- ----------- -----------
2,370,299 2,042,075 1,629,482
Nonearning assets....................... 227,332 167,580 138,584
----------- ----------- -----------
Total assets...................... $2,597,631 $2,209,655 $1,768,066
=========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits..... $ 870,033 31,277 3.59% $ 808,779 31,766 3.93% $ 618,924 24,517
Certificates of deposit............... 609,423 30,386 4.99 536,095 27,984 5.22 465,665 24,933
Repurchase agreements and borrowed
funds............................... 374,398 17,578 4.70 222,246 11,223 5.05 161,072 8,605
----------- -------- ------- ----------- -------- ------- ----------- --------
Total interest-bearing
liabilities..................... 1,853,854 79,241 4.27% 1,567,120 70,973 4.53% 1,245,661 58,055
-------- ------- -------- ------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 543,961 469,721 380,034
Other liabilities..................... 23,712 20,838 20,658
----------- ----------- -----------
Total liabilities................. 2,421,527 2,057,679 1,646,353
Shareholders' equity.................... 176,104 151,976 121,713
----------- ----------- -----------
Total liabilities and
shareholders' equity............ $2,597,631 $2,209,655 $1,768,066
=========== =========== ===========
Net interest income..................... $106,982 $ 90,774 $ 72,840
======== ======== ========
Net interest spread..................... 3.53% 3.34%
======= =======
Net interest margin..................... 4.48% 4.42%
======= =======
AVERAGE
YIELD/
RATE
-------
ASSETS
Interest-earning assets:
Loans................................. 9.13%
Securities............................ 6.26
Federal funds sold and other.......... 5.61
-------
Total interest-earning assets..... 7.98%
-------
Less allowance for loan losses..........
Nonearning assets.......................
Total assets......................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits..... 3.96%
Certificates of deposit............... 5.35
Repurchase agreements and borrowed
funds............................... 5.34
-------
Total interest-bearing
liabilities..................... 4.66%
-------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...
Other liabilities.....................
Total liabilities.................
Shareholders' equity....................
Total liabilities and
shareholders' equity............
Net interest income.....................
Net interest spread..................... 3.32%
=======
Net interest margin..................... 4.44%
=======
15
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 higher 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.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- --------- --------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $30,067 $ (6,055) $ 24,012 $27,630 $ (3,351) $ 24,279
Securities.............................. 5,127 436 5,563 6,935 (342) 6,593
Federal funds sold and other............ (4,881) (218) (5,099) 129 (149) (20)
------- --------- --------- ------- --------- ---------
Total increase (decrease) in
interest
income............................ 30,313 (5,837) 24,476 34,694 (3,842) 30,852
------- --------- --------- ------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market and savings deposits....... 2,406 (2,895) (489) 7,520 (271) 7,249
Certificates of deposits................ 3,827 (1,425) 2,402 3,771 (720) 3,051
Repurchase agreements and borrowed
funds................................. 7,684 (1,329) 6,355 3,268 (650) 2,618
------- --------- --------- ------- --------- ---------
Total increase (decrease) in
interest expense.................. 13,917 (5,649) 8,268 14,559 (1,641) 12,918
------- --------- --------- ------- --------- ---------
Increase (decrease) in net interest
income................................ $16,396 $ (188) $ 16,208 $20,135 $ (2,201) $ 17,934
======= ========= ========= ======= ========= =========
PROVISION FOR LOAN LOSSES
The 1999 provision for loan losses was $6.1 million, an increase of $2.0
million or 50% from 1998. The provision for the year ended 1998 was $4.0 million
unchanged from the year ended December 31, 1997. Net charge-offs during 1999
equaled $1.3 million, which when subtracted from the provision for loan losses
of $6.1 million resulted in a net increase in the allowance for loan losses of
$4.8 million. This increase approximates a reserve of 1.23% provided for new
loans recorded. Although no assurance can be given, management believes that the
present allowance for loan losses is adequate considering loss experience,
delinquency trends and current economic conditions. Management constantly
reviews the Company's loan loss allowance policy as its loan portfolio grows and
diversifies. (See "-- Financial Condition -- Loan Review and Allowance for Loan
Losses.")
NONINTEREST INCOME
Noninterest income grew to $27.0 million for the year ended December 31,
1999, an increase of $4.5 million or 20% from 1998. Noninterest income totaled
$22.5 million in 1998, an increase of $5.7 million or 33.9% from 1997.
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts..... $ 10,515 $ 8,552 $ 6,843
Investment services..................... 4,232 3,537 2,536
Factoring fee income.................... 3,169 1,775 --
Loan fee income......................... 2,445 2,804 2,730
Bank-owned life insurance income........ 1,379 390 --
Letters of credit fee income............ 829 627 423
Gain (loss) on sale of securities,
net................................... (139) 463 498
Other income............................ 4,581 4,334 3,739
--------- --------- ---------
$ 27,011 $ 22,482 $ 16,769
========= ========= =========
16
The largest component of noninterest income is service charges, which were
$10.5 million for the year ended December 31, 1999, compared to $8.6 million for
1998 and $6.8 for 1997. These were increases of 23% and 25%, respectively for
1999 and 1998. Several factors are attributable for this growth. First, during
this three-year period the Company introduced several new products to their
existing retail product line. Secondly, in August 1999, the Company initiated a
deposit campaign encompassing all of their existing market areas and redesigned
the consumer banking area which has experienced strong growth since its
inception. Additionally, the number of deposit accounts grew from 65,939 at
December 31, 1997 to 70,997 at December 31, 1998 and to 78,324 at December 31,
1999.
Additional areas of increased growth included investment services and
factoring fee income. Factoring fee income is derived from the acquisition of
First Republic Capital Corp. and City Financial Services, Inc. in February of
1998. This acquisition was accounted for as a pooling of interests, and due to
immateriallity, prior years financial statements were not restated. Investment
services income grew to $4.2 million, or 20% from the 1998 period. During the
past several years, the international department and the foreign exchange
division have experienced strong growth, including the addition of seven new
officers. This addition adds to the high quality of personal service and
responsiveness to customer needs. Secondly the Company introduced new services
such as confirmation of letters of credit for a variety of countries and banks.
The international department also has a registered broker for non-U.S. citizens
which allows the Company to offer investment products in that market as well.
NONINTEREST EXPENSES
For the year ended December 31, 1999, noninterest expenses totaled $85.8
million, an increase of $15.0 million, or 21%, from $70.8 million during 1998,
which had increased from $56.3 million during 1997. The increase in noninterest
expenses during these periods was due primarily to salaries and employee
benefits, occupancy expenses, FDIC insurance and merger-related expenses. The
efficiency ratio was 63.99%, 62.79% and 63.14% for the years ended December 31,
1999, 1998 and 1997 respectively. The increase in efficiency ratio during 1999
resulted primarily from expenses incurred in connection with the acquisition of
Fort Bend Holding Corp. Excluding the special charge incurred, the efficiency
ratio would have improved to 60.66%. Additionally, less than 75% of the
estimated cost savings projected from the merger were realized during 1999. Full
cost savings are expected to be achieved in 2000.
Salaries and employee benefits expense for the year ended December 31, 1999
was $48.9 million, an increase of $6.1 million or 14% from $42.8 million for the
year ended December 31, 1998. Salaries and employee benefits expense for the
year ended December 31, 1998 increased $10.7 million or 33% from the same period
in 1997. This increase was due primarily to hiring of additional personnel
required to accommodate the Company's growth. Total full-time equivalent
employees for the years ended December 31, 1999, 1998 and 1997 were 934, 850,
and 734, respectively.
Occupancy expense rose $2.3 million from the prior year in both 1999 and
1998. Major categories included within occupancy expense are building lease
expense, depreciation expense, and maintenance contract expense. Building lease
expense increased to $3.7 million in 1999 from $2.8 million in 1998, an increase
of $916,000 or 33%. The Company continues to increase the rentable square feet
of the Galleria location to accommodate the increases in personnel. Depreciation
expense increased $455,000 to $4.9 million for the year ended December 31, 1999.
This increase was due primarily to depreciation on equipment provided to new
employees and expense related to technology upgrades throughout the Company.
Maintenance contract expense for the year ended December 31, 1999 was $1.4
million, an increase of $350,000 or 33% compared to $1.1 million in 1998 and
$789,000 in 1997. The Company has purchased maintenance contracts for major
operating systems throughout the organization.
FDIC insurance expense increased $488,000 to $832,000 during 1999. This
increase was the result of a three basis point increase in rates as a result of
the Bank's capital classification changing from well capitalized to adequately
capitalized and due to a $173.0 million increase in deposits from which the FDIC
assessment is calculated.
17
During the second quarter of 1999, the Company expensed approximately $4.5
million (pretax) in merger-related expenses and other charges including
investment banking fees, other professional fees and severance expense
associated with the merger of Fort Bend Holding Corp.
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. In 1999 income
tax expense was $15.3 million, an increase of $1.7 million or 13% from the $13.5
million of income tax expense in 1998. In 1998 income tax expense was $13.5
million, an increase of $3.3 million or 33% from the $10.2 million of income tax
expense in 1997.
IMPACT OF INFLATION
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities. See " -- Financial
Condition -- Interest Rate Sensitivity and Liquidity" below.
FINANCIAL CONDITION
LOANS HELD FOR INVESTMENT
Loans were $1.84 billion at December 31, 1999, an increase of $323.1
million, or 21% from December 31, 1998. Loans were $1.51 billion at December 31,
1998, an increase of $365.9 million, or 32%, from $1.15 billion at December 31,
1997.
During the past 5 years loans have grown at an annualized rate of 30%. This
growth is consistent with the Bank's strategy of targeting corporate "middle
market" and private banking customers and providing innovative products with
superior customer service. This plan also includes establishing new branches in
areas that demographically complement existing or targeted customer base,
pursuing selected mergers / acquisitions which will add new markets, delivery
systems and talent to the Bank and leveraging new or existing technology to
improve the profitability of the Bank and its customers.
The following table summarizes the loan portfolio of the Company by major
category as of the dates indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- ------- --------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $ 721,229 39.27 % $ 639,027 42.22 % $ 453,082 39.47 % $332,129 38.11%
Real estate:
Construction & land development.... 494,755 26.94 296,004 19.56 177,911 15.50 119,316 13.69
1-4 family residential............. 268,349 14.61 255,619 16.89 242,106 21.09 204,579 23.47
Commercial owner occupied.......... 185,679 10.11 167,084 11.04 139,296 12.14 104,468 11.99
Farmland........................... 13,056 0.71 8,314 0.55 8,384 0.73 8,879 1.02
Other................................ 20,447 1.10 17,480 1.14 10,852 0.95 6,498 0.74
Consumer............................. 133,295 7.26 130,161 8.60 116,173 10.12 95,715 10.98
--------- ------- --------- ------- --------- ------- -------- -------
Loans held for investment........ $1,836,810 100.00 % $1,513,689 100.00 % $1,147,804 100.00 % $871,584 100.00%
========= ======= ========= ======= ========= ======= ======== =======
1995
------------------
AMOUNT PERCENT
-------- -------
Commercial and industrial............ $218,723 34.94 %
Real estate:
Construction & land development.... 67,831 10.84
1-4 family residential............. 157,167 25.11
Commercial owner occupied.......... 71,613 11.44
Farmland........................... 5,327 0.85
Other................................ 27,905 4.45
Consumer............................. 77,416 12.37
-------- -------
Loans held for investment........ $625,982 100.00 %
======== =======
18
The primary lending focus of the Company is on small- and medium-sized
commercial, residential mortgage and consumer loans. The Company offers a
variety of commercial lending products including term loans, lines of credit and
equipment financing. A broad range of short- to medium-term commercial loans,
both collateralized and uncollateralized, are made available to businesses for
working capital (including inventory and receivables), business expansion
(including acquisitions of real estate and improvements) and the purchase of
equipment and machinery. The purpose of a particular loan generally determines
its structure.
Generally, the Company's commercial loans are underwritten in the Company's
primary market area on the basis of the borrower's ability to service such debt
from cash flow. As a general practice, the Company takes as collateral a lien on
any available real estate, equipment or other assets. Working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets.
A substantial portion of the Company's real estate loans consists of loans
collateralized by real estate and other assets of commercial customers.
Additionally, a portion of the Company's lending activity consists of the
origination of single-family residential mortgage loans collateralized by
owner-occupied properties located in the Company's primary market area. The
Company offers a variety of mortgage loan products which generally are amortized
over five to 30 years.
Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 90% of appraised value. The
Company requires mortgage title insurance and hazard insurance in the amount of
the loan. Although the contractual loan payment periods for single-family
residential real estate loans are generally for a three to five year period,
such loans often remain outstanding for significantly shorter periods than their
contractual terms.
The Bank is engaged in the mortgage banking business and originates and
purchases residential and commercial mortgage loans to sell to investors with
servicing rights retained. The Bank 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.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 84 months and vary based
upon the nature of collateral and size of loan.
The contractual maturity ranges of the commercial and industrial and real
estate construction loan portfolio and the amount of such loans with fixed
interest rates and floating rates in each maturity range as of December 31, 1999
are summarized in the following table:
DECEMBER 31, 1999
-----------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ---------- --------- ------------
Commercial and industrial............ $ 452,276 $ 236,226 $ 32,727 $ 721,229
Real estate construction............. 310,088 154,403 30,264 494,755
---------- ---------- --------- ------------
Total......................... $ 762,364 $ 390,629 $ 62,991 $ 1,215,984
========== ========== ========= ============
Loans with a fixed interest rate..... $ 244,032 $ 110,414 $ 19,206 $ 373,652
Loans with a floating interest
rate............................... 518,332 280,215 43,785 842,332
---------- ---------- --------- ------------
Total......................... $ 762,364 $ 390,629 $ 62,991 $ 1,215,984
========== ========== ========= ============
LOANS HELD FOR SALE
Loans held for sale of $77.0 million at December 31, 1999 increased from
$15.3 million at December 31, 1998. These loans are typically sold to investors
within one month of origination. The
19
increase during 1999 is due to a reclassification from the loan portfolio. It is
expected that these loans will ultimately be sold after restrictions have
expired relating to pooling of interests merger.
LOAN REVIEW AND ALLOWANCE FOR LOAN LOSSES
The Company's loan review procedures include a Credit Quality Assurance
Process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors, an independent loan review department
staffed with OCC experienced personnel, low individual lending limits for
officers, Senior Loan Committee approval for large credit relationships and
quality loan documentation procedures. The Company also maintains a well
developed monitoring process for credit extensions in excess of $100,000. The
Company performs monthly and quarterly concentration analyses based on various
factors such as industries, collateral types, business lines, large credit
sizes, international investments and officer portfolio loads. The Company has
established underwriting guidelines to be followed by its officers. The Company
also monitors its delinquency levels for any negative or adverse trends. There
can be no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.
Historically, the Houston metropolitan area has been affected by the state
of the energy business, but since the mid 1980's the economic impact has been
reduced by a combination of increased industry diversification and less reliance
on debt to finance expansion. When energy prices drop, as they did in 1998, it
is the Company's practice to review and adjust underwriting standards with
respect to companies affected by oil and gas price volatility, and to
continuously monitor existing credit exposure to companies which are impacted by
this price volatility.
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Based on an evaluation of the loan
portfolio, management presents a quarterly review of the allowance for loan
losses to 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 evaluation, management considers growth in the loan portfolio, the
diversification by industry of the Company's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio of
current economic indicators and their probable impact on borrowers, the amount
of charge-offs for the period, the amount of nonperforming loans and related
collateral security and the evaluation of its loan portfolio by the loan review
function. Charge-offs occur when loans are deemed to be uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. The allocated component of the allowance is supplemented by
an unallocated component. The unallocated portion of the allowance includes
management's judgmental determination of the amounts necessary for subjective
factors such as economic uncertainties and concentration risks. The Company then
charges to operations a provision for loan losses determined on an annualized
basis to maintain the allowance for loan losses at an adequate level determined
according to the foregoing methodology.
Management believes that the allowance for loan losses at December 31, 1999
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 December 31,
1999.
20
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning
balance............................ $ 14,980 $ 11,927 $ 9,101 $ 7,374 $ 6,641
Provision charged against
operations......................... 6,060 4,053 3,982 2,414 1,244
Charge-offs.......................... (1,536) (1,151) (1,283) (1,614) (870)
Recoveries........................... 212 133 127 192 31
Increase from acquisition............ -- -- -- 735 328
Adjustment to conform reporting
periods............................ -- 18 -- -- --
--------- --------- --------- ---------- ----------
Allowance for loan losses, ending
balance............................ $ 19,716 $ 14,980 $ 11,927 $ 9,101 $ 7,374
========= ========= ========= ========== ==========
Allowance to period-end loans........ 1.07% 0.99% 1.04% 1.04% 1.18%
Net charge-offs to average loans..... 0.08% 0.08% 0.12% 0.20% 0.15%
Allowance to period-end nonperforming
loans.............................. 650.91% 460.07% 285.13% 359.01% 187.68%
The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. Portions of the allowance for loan losses are allocated to
cover the estimated losses inherent in particular risk categories of loans. The
allocation of the allowance for loan losses is based upon the Company's loss
experience over a period of years and is adjusted for subjective factors such as
economic trends, performance trends, portfolio age and concentrations of credit.
Prior year allocations have been restated to conform to this methodology. The
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.
DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses
applicable to:
Commercial and industrial........ $ 8,503 39.27% $ 7,023 42.22% $ 3,908 39.47%
Real estate:
Construction and land
development............... 2,942 26.94 2,123 19.56 1,054 15.50
1-4 family residential...... 1,409 14.61 1,802 16.89 1,355 21.09
Commercial owner occupied... 947 10.11 1,153 11.04 760 12.14
Farmland.................... 60 0.71 57 0.55 46 0.73
Other....................... 94 1.10 120 1.14 59 0.95
Consumer......................... 1,633 7.26 1,598 8.60 1,136 10.12
Unallocated...................... 4,128 n/a 1,104 n/a 3,609 n/a
--------- ----------- --------- ----------- --------- -----------
Total allowance for loan losses...... $ 19,716 100.00% $ 14,980 100.00% $ 11,927 100.00%
========= =========== ========= =========== ========= ===========
DECEMBER 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
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........ $ 2,802 38.11% $ 1,779 34.94%
Real estate:
Construction and land
development............... 874 13.69 538 10.84
1-4 family residential...... 1,366 23.47 1,174 25.11
Commercial owner occupied... 716 11.99 661 11.44
Farmland.................... 58 1.02 40 0.85
Other....................... 44 0.74 212 4.45
Consumer......................... 898 10.98 784 12.37
Unallocated...................... 2,343 n/a 2,186 n/a
--------- ----------- --------- -----------
Total allowance for loan losses...... $ 9,101 100.00% $ 7,374 100.00%
========= =========== ========= ===========
21
NONPERFORMING ASSETS AND IMPAIRED LOANS
The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory. All
loans past due 90 days, however, are placed on nonaccrual status, unless the
loan is both well collateralized and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring.
Nonperforming assets were $4.4 million at December 31, 1999, compared with
$3.8 million at December 31, 1998 and $4.8 million at December 31, 1997. This
resulted in a ratio of nonperforming assets to loans plus other real estate of
0.24%, 0.25%, and 0.42% for the years ended 1999, 1998, and 1997, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
DECEMBER 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $ 2,388 $ 2,324 $ 3,253 $ 2,104 $ 1,598
Accruing loans 90 or more days past
due................................ 641 681 383 26 23
Restructured loans................... -- 251 547 405 2,308
Other real estate and foreclosed
property........................... 1,337 504 643 655 225
---------- --------- --------- --------- ---------
Total non-performing assets... $ 4,366 $ 3,760 $ 4,826 $ 3,190 $ 4,154
========== ========= ========= ========= =========
Nonperforming assets to total loans
and other real estate.............. 0.24% 0.25% 0.42% 0.37% 0.66%
The Company regularly updates appraisals on loans collateralized by real
estate, particularly those categorized as nonperforming loans and potential
problem loans. In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible writedowns or appropriate additions to
the allowance for loan losses.
A loan is considered impaired when, based upon current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due according to the contractual terms
of the loan agreement. The Company's impaired loans were approximately $13.7
million and $14.0 million at December 31, 1999 and 1998, respectively. The
largest component of impaired loans at December 31, 1999 and 1998 is a
commercial energy related loan of approximately $10.8 million and 10.6 million,
respectively. The average recorded investment in impaired loans during 1999 and
1998 was $13.9 million and $6.3 million, respectively. The total required
allowance for loan losses related to these loans was $0 for each reported
period. Interest income on impaired loans of $1.5 million and $415,000 was
recognized for cash payments received in 1999 and 1998, respectively.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
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. 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
22
determined using the specific-identification method. The Company has classified
all securities as available for sale at December 31, 1999. This allows the
Company to manage its investment portfolio more effectively and to enhance the
average yield on the portfolio.
The amortized cost of securities classified as available for sale and held
to maturity is as follows:
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Available for sale:
U.S. Government securities...... $ 78,527 $ 143,570 $ 163,730 $ 127,466 $ 136,794
Mortgage-backed securities...... 560,471 488,851 323,716 169,920 166,744
Federal Reserve Bank stock...... 2,408 1,869 1,791 950 946
Federal Home Loan Bank stock.... 14,886 7,672 39,451 41,319 39,808
Other securities................ 14,253 3,894 28,732 11,147 8,694
---------- ---------- ---------- ---------- ----------
Total securities available
for sale................ $ 670,545 $ 645,856 $ 557,420 $ 350,802 $ 352,986
========== ========== ========== ========== ==========
Held to maturity:
U.S. Government securities...... $ -- $ 6,248 $ 9,244 $ 11,235 $ 9,233
Mortgage-backed securities...... -- 60,869 82,815 97,084 110,490
---------- ---------- ---------- ---------- ----------
Total securities held to
maturity................ $ -- $ 67,117 $ 92,059 $ 108,319 $ 119,723
========== ========== ========== ========== ==========
The following table presents the amortized cost of securities classified as
held to maturity and available for sale and their approximate fair values as of
the dates shown:
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------- -----------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS VALUE COST GAIN LOSS
--------- ---------- ---------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Available for sale:
U.S. Government securities.......... $ 78,527 $ 35 $ (1,567) $ 76,995 $143,570 $1,575 $--
Mortgage-backed securities.......... 560,471 356 (16,852) 543,975 488,851 4,549 (452)
Federal Reserve Bank stock.......... 2,408 -- -- 2,408 1,869 -- --
Federal Home Loan Bank stock........ 14,886 -- -- 14,886 7,672 -- --
Other securities.................... 14,253 22 -- 14,275 3,894 107 (12)
--------- ---------- ---------- -------- --------- ---------- ----------
Total securities available for
sale............................ $670,545 $ 413 $(18,419) $652,539 $645,856 $6,231 $ (464)
========= ========== ========== ======== ========= ========== ==========
Held to maturity:
U.S. Government securities.......... $ -- $-- $ -- $ -- $ 6,248 $ 14 $ (186)
Mortgage-backed securities.......... -- -- -- -- 60,869 689 (259)
--------- ---------- ---------- -------- --------- ---------- ----------
Total securities held to
maturity........................ $ -- $-- $ -- $ -- $ 67,117 $ 703 $ (445)
========= ========== ========== ======== ========= ========== ==========
DECEMBER 31, 1997
----------------------------------------------
GROSS GROSS
FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
VALUE COST GAIN LOSS VALUE
-------- --------- ---------- ---------- --------
Available for sale:
U.S. Government securities.......... $145,145 $163,730 $ 536 $ (5) $164,261
Mortgage-backed securities.......... 492,948 323,716 2,275 (151) 325,840
Federal Reserve Bank stock.......... 1,869 1,791 -- -- 1,791
Federal Home Loan Bank stock........ 7,672 39,451 -- -- 39,451
Other securities.................... 3,989 28,732 76 -- 28,808
-------- --------- ---------- ---------- --------
Total securities available for
sale............................ $651,623 $557,420 $2,887 $ (156) $560,151
======== ========= ========== ========== ========
Held to maturity:
U.S. Government securities.......... $ 6,076 $ 9,244 $ 21 $ (281) $ 8,984
Mortgage-backed securities.......... 61,299 82,815 923 (516) 83,222
-------- --------- ---------- ---------- --------
Total securities held to
maturity........................ $ 67,375 $ 92,059 $ 944 $ (797) $ 92,206
======== ========= ========== ========== ========
In connection with the Fort Bend merger, the Company transferred all of
Fort Bend's held-to-maturity debt securities to the available for sale category.
The amortized cost of these securities at the time of transfer was $57.8 million
and the unrealized gain was $80,000 ($52,000 net of income taxes). The Company
does not intend to sell these securities in the near term.
Securities totaled $652.5 million at December 31, 1999, a decrease of $66.2
million from $718.7 million at December 31, 1998. During 1998, securities
increased $66.5 million from $652.2 million at December 31, 1997. The yield on
the securities portfolio for 1999 was 6.67% while the yield was 6.21% in 1998.
23
The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortg