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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, 1996
[ ] 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 (I.R.S. EMPLOYER
OF IDENTIFICATION
INCORPORATION OR ORGANIZATION) 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 ___ No _X_
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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. _X_
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There were 9,390,933 shares of the Registrant's Common Stock outstanding as
of the close of business on February 28, 1997. The aggregate market value of the
Registrant's Common Stock held by non-affiliates was approximately $158.5
million (based upon the closing price of $19.25 on February 28, 1997, as
reported on the NASDAQ National Market System).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the 1997 Annual
Meeting of Shareholders, which will be filed within 120 days after December 31,
1996, are incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Southwest Bancorporation of Texas, Inc. (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, 1996, 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 seven 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 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 seven 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. While
the Company has not entered into any agreement or understanding with respect to
any potential acquisition,
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the Company believes market and regulatory factors may present opportunities for
the Company to acquire other financial institutions.
THE BANK
The Bank, a national banking association, was chartered in January 1982 and
commenced business operations in October 1982. In July 1989, the Bank hired as
its President and Chief Executive Officer, Walter E. Johnson who had worked in
the banking industry for over 30 years. From 1972 to 1988 Mr. Johnson had been
president of Allied Bank of Texas, a premier Houston middle market lender whose
total assets approached $4 billion at the time it was acquired by First
Interstate Bancorp in 1988. Primarily as a result of Mr. Johnson's reputation
and community contacts, the Bank completed three successful capital offerings,
raising $13 million, $8 million and $20 million of new capital in 1990, 1992,
and January 1997 respectively. Mr. Johnson also improved the Bank's credit
review practices and lending policies and assembled an experienced team of loan
officers, consisting primarily of individuals with whom he had worked at Allied
Bank of Texas and First Interstate Bank. The Bank's 11 senior loan officers
average more than 19 years of lending experience in the metropolitan Houston
area. As a result of Mr. Johnson's leadership, the Bank's assets have grown from
$43.4 million at June 30, 1989 to $1.0 billion at December 31, 1996.
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. In addition,
the Company offers a broad array of fee income products including merchant card
services, letters of credit, customized cash management services, brokerage and
mutual funds and drive-in banking services. In the second half of 1997, the Bank
intends to introduce a home banking product.
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
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 their 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 STAR 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 management system. Positive Pay, a service under which the Bank
only pays checks listed on a legitimate "company issue" file, is another
recent product addition 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 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
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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.
EMPLOYEES
As of December 31, 1996, the Company had 315 full-time employees, 110 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 163 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 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 Company (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. One set of restrictions is found in Section 23A of
the Federal Reserve Act, which affects loans or other credit extensions to,
asset purchases with 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.
Another set of restrictions is found in Section 23B of the Federal Reserve
Act. Among other things, Section 23B 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
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indicates the Bank is responsible for the obligations of its affiliates. The
Company 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 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 (excluding
agricultural loans), 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 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% and 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.
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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 the legislation 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, 1996, the Bank met the capital requirements of a
"well-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, 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. In any event, if the Bank was placed into conservatorship or
receivership,
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because of the cross-guarantee provisions of the Federal Deposit Insurance Act,
as amended, the Delaware Company as the sole shareholder of the Bank, would
likely lose its investment in the Bank.
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 and its wholly-owned second tier holding company, Southwest
Bancorporation of Delaware, Inc. (the "Delaware Company"), are bank holding
companies registered under the Bank Holding Company Act of 1956 (the "BHCA"),
and each 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 are
limited to the business of banking and activities closely related or incidental
to banking, and the Company may not directly or indirectly acquire the ownership
or control of more than five percent of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board.
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
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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 and the Delaware Company are
each 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 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 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.
The Bank is subject to capital adequacy guidelines of the OCC that are
substantially similar to the Federal Reserve Board's guidelines.
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, the Delaware 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
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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.
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, 1996, however, the Bank
satisfied the requirements of a "well capitalized" institution and, therefore,
these requirements are presently inapplicable 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. The Texas Banking Code permits, in certain circumstances,
out-of-state bank holding companies to acquire banks and bank holding companies
in Texas.
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996. On
September 30, 1996, President Clinton signed into law the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the "Regulatory Reduction Act").
The Regulatory Reduction Act's principal provisions relate to capitalization of
the Savings Association Insurance Fund of the FDIC, but it also contains
numerous regulatory relief measures, including provisions to reduce regulatory
burdens associated with compliance with various consumer and other laws
applicable to the Bank, including, for example, provisions designed to
coordinate the disclosure and other requirements under the Truth-in-Lending Act
and the Real Estate Settlement Procedures Act and modify certain insider lending
restrictions and anti-tying prohibitions.
Congress has been considering legislation in various forms that would
require federal thrifts to convert their charters to national or state bank
charters. The Regulatory Reduction Act requires the Treasury Department to
prepare for Congress by March 31, 1997 a comprehensive study on development of a
common charter for federal savings associations and commercial banks; and, in
the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single Deposit Insurance Fund
on that date. The Company cannot determine whether, or in what form, such
legislation may eventually be enacted.
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
8
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.
ITEM 2. PROPERTIES
FACILITIES
The Company currently has seven leased facilities, each of which is located
in a major business or professional area of Houston. 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
35-story office tower located in the Galleria area.
BRANCH DEPOSITS
AT
DECEMBER 31,
BRANCH SQ. FT. LOCATION 1996
- ---------------------------------------- --------- ----------------------- ----------------
(IN THOUSANDS)
Galleria/Headquarters................... 83,770 4400 Post Oak Parkway $472,508
Downtown -- 1100 Louisiana.............. 10,000 1100 Louisiana 129,835
Northwest Crossing...................... 8,134 Hwy 290 at Tidwell 109,224
Memorial City........................... 3,554 899 Frostwood 67,553
Greenway Plaza.......................... 2,669 12 Greenway Plaza 49,114
Medical Center.......................... 2,437 6602 Fannin 5,335
Downtown -- Two Houston Center.......... 2,219 909 Fannin --(1)
- ------------
(1) Opened in January 1997.
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
(a) A special meeting of shareholders of the Company (the "Meeting") was
held on December 17, 1996.
(b) The Company's Bylaws were amended at the Meeting to provide for a
classified Board of Directors, and the existing directors were reelected and
classified as follows: (i) John B. Brock III and Andres Palandjoglou were
elected as Class I Directors, with terms expiring at the 1997 Annual Meeting of
Shareholders; (ii) Ernest H. Cockrell, Paul B. Murphy, Jr. and Michael T. Willis
were elected as Class II Directors, to serve until the 1998 Annual Meeting of
Shareholders; and (iii) John W. Johnson, Walter E. Johnson and Wilhelmina R.
Morian were elected as Class III Directors, to serve until the 1999 Annual
Meeting of Shareholders.
9
(c) The following items were voted upon at the Meeting:
(i) The Company's Articles of Incorporation were amended to (1)
change the name of the Company from Southwest Bancorporation, Inc. to
Southwest Bancorporation of Texas, Inc.; (2) increase the total authorized
shares of Common Stock from 20,000,000 to 50,000,000; (3) to provide that
shareholders of the Company have the power to call a special meeting only
upon written request signed by the holders of at least one-third of the
outstanding shares entitled to vote; and (4) to provide that the power to
amend the Bylaws of the Company shall be vested exclusively in the Board of
Directors. A total of 2,075,729 shares were cast in favor of the amendment,
and no shares were cast against or abstained from voting for the amendment.
(ii) The Company's Bylaws were amended to provide for a classified
Board of Directors and the existing directors were elected to the Classes
set forth in paragraph (b), above. A total of 2,075,729 shares were cast in
favor of the amendment and classification, and no shares were cast against
or abstained from voting therefor.
(iii) A new 1996 Stock Option Plan was approved, providing for the
issuance of options to purchase up to 650,000 shares of Common Stock
thereunder. Both "incentive stock options" and "nonqualified stock
options" may be issued under such Plan. A total of 2,025,319 shares were
cast in favor of the proposal to approve such plan, 50,410 shares were cast
against the proposal and no shares abstained from voting thereon.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading in the NASDAQ National Market
System on January 28, 1997, and is quoted in such System 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 28, 1997,
there were approximately 412 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. The
payment of dividends by the Bank to the Company is subject to restrictions
imposed by federal banking laws, regulations and authorities. 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, 1996, approximately $23.2 million
was available for payment of dividends by the Bank to the Company under these
restrictions without regulatory approval.
10
The federal banking statutes also prohibit a national bank from making any
capital distribution (including a dividend payment), if, after making the
distribution, the institution would be "undercapitalized," as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit a national bank from engaging in an unsafe or unsound
practice in conducting its business, as determined by the agency. The payment of
dividends could be deemed to constitute such an unsafe or unsound practice,
depending upon the financial condition of the Bank. Regulatory authorities could
also impose administratively stricter limitations on the ability of the Bank to
pay dividends to the Company if such limits were deemed appropriate to preserve
the Bank's capital. See "Item 1. Business -- Supervision and Regulation."
RECENT SALES OF UNREGISTERED SECURITIES
On June 30, 1996, the Company issued 3,088,452 shares of Common Stock to
the former shareholders of the Bank in exchange for all of their shares of
common stock of the Bank on a one-for-one basis, in connection with the
Company's organization as a holding company for the Bank under Section 3(a) of
the Bank Holding Company Act of 1956. This transaction was exempt from
registration under the Securities Act of 1933 (the "Act") pursuant to Section
3(a)(12) thereof because the transaction occurred solely as part of the
reorganization in which the shareholders of the Bank exchanged their shares of
Bank common stock for shares of Common Stock of the Company (which had no
significant assets other than securities of the Bank), the shareholders of the
Bank received substantially the same proportional share interests in the Company
as they held in the Bank, the rights and interests of shareholders of the
Company are substantially the same as those in the Bank other than as may be
required by law, and the Company has substantially the same assets and
liabilities on a consolidated basis as the Bank had prior to the transaction.
For the 1996 calendar year, the Company issued 17,435 shares of Common
Stock to the Company's 401(k) plan as the Company's contribution to such plan
for the benefit of its employees in a transaction not involving a sale of
securities and therefore not subject to the registration requirements under the
Act. (The interests of the Company's employees in such plan are exempt from
registration under the Act pursuant to Section 3(a)(2) of the Act.)
On November 18, 1996, the Company declared a 2.5 for 1 stock split effected
in the form of a 150% stock dividend on all outstanding shares of Common Stock
of the Company, which was paid on December 31, 1996 to shareholders of record as
of November 20, 1996. A total of 4,640,955 shares were issued in connection with
this stock split, and such transaction was not subject to the registration
requirements of the Act because it did not involve a sale of securities under
the Act.
During 1996, options to purchase a total of 418,000 shares of Common Stock
were granted to employees of the Company under the Company's stock option plans
at a weighted average exercise price of $15.85 per share. The grants of such
options were not subject to the registration requirements of the Act because
they did not involve a sale of securities under the Act.
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, 1996 are derived from the Company's Consolidated Financial
Statements which have been audited by independent public accountants.
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income.................. $ 63,433 $ 50,582 $ 34,288 $ 24,690 $ 18,605
Interest expense................. 27,262 21,890 11,444 7,750 6,631
--------- --------- --------- --------- ---------
Net interest income.......... 36,171 28,692 22,844 16,940 11,974
Provision for loan losses........ 1,670 925 1,145 1,005 767
--------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses..................... 34,501 27,767 21,699 15,935 11,207
Noninterest income............... 4,888 3,712 3,063 2,159 1,478
Noninterest expenses............. 23,968 19,458 15,782 12,684 9,042
--------- --------- --------- --------- ---------
Income before taxes.......... 15,421 12,021 8,980 5,410 3,643
Provision for income taxes....... 5,376 4,214 3,141 1,871 1,252
Cumulative effect of change in
accounting principle........... -- -- -- 16 --
--------- --------- --------- --------- ---------
Net income before extraordinary
item........................... 10,045 7,807 5,839 3,555 2,391
Extraordinary item............... -- -- -- -- 372
Preferred stock dividend......... 457 50 -- -- --
--------- --------- --------- --------- ---------
Net income available to common
shareholders................... $ 9,588 $ 7,757 $ 5,839 $ 3,555 $ 2,763
========= ========= ========= ========= =========
PER SHARE DATA:
Net income(1).................... $ 1.12 $ 0.92 $ 0.70 $ 0.43 $ 0.44
Book value....................... 7.07 5.81 4.65 3.84 3.38
Weighted average common shares
outstanding
(in thousands)................. 8,535 8,394 8,302 8,211 6,281
BALANCE SHEET DATA(2):
Total assets..................... $1,044,499 $ 825,474 $ 578,335 $ 472,314 $ 339,114
Securities....................... 289,217 295,183 151,467 136,504 63,581
Loans............................ 601,475 438,259 358,304 285,892 210,458
Allowance for loan losses........ 6,024 4,921 4,294 3,249 2,204
Total deposits................... 833,569 672,641 489,836 417,695 303,762
Total shareholders' equity....... 54,669 44,826 35,770 29,443 25,848
PERFORMANCE RATIOS:
Return on average assets......... 1.11% 1.16% 1.14% 0.90% 1.02%
Return on average common
equity......................... 19.44 19.20 17.44 12.93 16.34
Net interest margin.............. 4.51 4.60 4.82 4.65 4.81
Efficiency ratio(3).............. 58.10 58.08 60.67 66.41 67.22
ASSET QUALITY RATIOS(2):
Nonperforming assets to loans and
other real estate.............. 0.21% 0.07% 0.19% 0.22% 0.31%
Net charge-offs (recoveries) to
average loans.................. 0.12 0.08 0.03 (0.02) 0.24
Allowance for loan losses to
total loans.................... 1.00 1.12 1.20 1.14 1.05
Allowance for loan losses to
nonperforming loans(4)......... 616.58 1,673.78 1,081.58 1,406.84 1,231.31
CAPITAL RATIOS(2):
Leverage ratio................... 6.59% 6.29% 6.33% 6.23% 7.62%
Average shareholders' equity to
average total assets........... 5.71 6.04 6.55 6.99 6.25
Tier 1 risk-based capital
ratio.......................... 9.49 10.72 9.59 10.04 12.23
Total risk-based capital ratio... 10.41 11.74 10.72 11.15 13.27
- ------------
(1) Net income per share is based upon the weighted average number of common
shares outstanding and common share equivalents during the period.
(2) At period end, except net charge-offs (recoveries) to average loans and
average shareholders' equity to average total assets.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) Nonperforming loans consist of nonaccrual loans 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 balance
sheets and consolidated statements of income. This section 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, 1996, 1995 AND 1994
OVERVIEW
Total assets at December 31, 1996, 1995 and 1994 were $1.0 billion, $825.5
million, and $578.3 million, respectively. This growth was a result of a strong
local economy, the addition of new loan officers and the Company's style of
relationship banking. Loans were $601.5 million at December 31, 1996, an
increase of $163.2 million or 37.2% from $438.3 million at the end of 1995.
Loans were $358.3 million at year end 1994. Deposits experienced similar growth,
increasing to $833.6 million at year end 1996 from $672.6 million at year end
1995 and $489.8 million at the year end 1994. Shareholders' equity was $54.7
million, $44.8 million and $35.8 million at December 31, 1996, 1995 and 1994,
respectively.
Net income available for common shareholders was $9.6 million, $7.8
million, and $5.8 million and earnings per common share was $1.12, $0.92, and
$0.70 for the years ended 1996, 1995 and 1994, 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 of
1.11%, 1.16%, and 1.14% and returns on average common equity of 19.44%, 19.20%,
and 17.44% for the years ended 1996, 1995 and 1994, respectively.
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. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
1996 VERSUS 1995. Net interest income totaled $36.2 million in 1996
compared to $28.7 million in 1995, an increase of $7.5 million or 26.1%. This
resulted in net interest margins of 4.51% and 4.60% and net interest spreads of
3.35% and 3.42% for 1996 and 1995, respectively.
The increase in net interest income was due primarily to a $176.9 million
or 28.3% increase in average earning assets. Average loans grew $100.6 million
or 25.9% during 1996 while average securities grew $89.8 million or 43.4% during
the same period. The yield earned on average loans outstanding decreased 41
basis points to 9.14% in 1996 and was partially offset by a 38 basis point
increase in the yield earned on average securities. Overall, the yield earned on
average earning assets declined 18 basis points to 7.92% in 1996 and was only
partially offset by an 11 basis point decrease in the rate paid on average
interest-bearing liabilities.
1995 VERSUS 1994. Net interest income totaled $28.7 million in 1995
compared to $22.8 million in 1994, an increase of $5.8 million or 25.6%. This
resulted in net interest margins of 4.60% and 4.82% and net interest spreads of
3.42% and 3.89% for 1995 and 1994, respectively.
The primary reason for higher net interest income was strong growth in
average loans coupled with higher yields on the loan portfolio which increased
to 9.55% from 8.41%. In addition, the securities portfolio experienced
substantial growth and the yield on the portfolio increased 73 basis points to
5.64% for the year ended 1995. Offsetting these increases was a large increase
in interest expense due to the growth in savings and money market account
balances and an increase in the rate paid to 4.54% from 3.17% for the year ended
1995 versus 1994. Also, interest expense increased due to additional volume and
interest rates paid on certificates of deposit and repurchase agreements and
borrowed funds.
13
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,
--------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- ----------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/
BALANCE EXPENSED RATE BALANCE EXPENSED RATE BALANCE EXPENSED
----------- -------- ------- ----------- -------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans................................. $ 488,978 $44,709 9.14% $ 388,329 $37,089 9.55% $ 317,373 $26,684
Securities............................ 296,482 17,856 6.02 206,717 11,668 5.64 140,478 6,898
Federal funds sold and other earning
assets.............................. 15,804 868 5.49 29,325 1,825 6.22 15,839 706
----------- -------- ------- ----------- -------- ------- ----------- --------
Total interest-earning assets..... 801,264 63,433 7.92% 624,371 50,582 8.10% 473,690 34,288
----------- -------- ------- ----------- -------- ------- ----------- --------
Less allowance for loan losses.......... (5,348) (4,700) (3,679)
----------- ----------- -----------
Total earning assets, net of
allowance............................. 795,916 619,671 470,011
Nonearning assets....................... 67,650 49,325 41,160
----------- ----------- -----------
Total assets...................... $ 863,566 $ 668,996 $ 511,171
=========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... 37,325 521 1.40% 31,886 626 1.96% 34,928 597
Savings and money market accounts..... 302,408 13,477 4.46 243,652 11,066 4.54 153,105 4,850
Certificates of deposit............... 139,994 7,501 5.36 119,349 6,290 5.27 116,099 4,530
Repurchase agreements and borrowed
funds............................... 117,073 5,763 4.92 72,578 3,908 5.38 37,697 1,467
----------- -------- ------- ----------- -------- ------- ----------- --------
Total interest-bearing
liabilities..................... 596,800 27,262 4.57% 467,465 21,890 4.68% 341,829 11,444
----------- -------- ------- ----------- -------- ------- ----------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 205,720 151,905 133,696
Other liabilities..................... 4,409 8,425 2,173
----------- ----------- -----------
Total liabilities................. 806,929 627,795 477,698
----------- ----------- -----------
Bank preferred stock.................... 7,323 804 --
Shareholders' equity.................... 49,314 40,397 33,473
----------- ----------- -----------
Total liabilities and
shareholders' equity............ $ 863,566 $ 668,996 $ 511,171
=========== =========== ===========
Net interest income..................... $36,171 $28,692 $22,844
======== ======== ========
Net interest spread..................... 3.35% 3.42%
======= =======
Net interest margin..................... 4.51% 4.60%
======= =======
AVERAGE
YIELD/
RATE
-------
ASSETS
Interest-earning assets:
Loans................................. 8.41%
Securities............................ 4.91
Federal funds sold and other earning
assets.............................. 4.46
-------
Total interest-earning assets..... 7.24%
-------
Less allowance for loan losses..........
Total earning assets, net of
allowance.............................
Nonearning assets.......................
Total assets......................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... 1.71%
Savings and money market accounts..... 3.17
Certificates of deposit............... 3.90
Repurchase agreements and borrowed
funds............................... 3.89
-------
Total interest-bearing
liabilities..................... 3.35%
-------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...
Other liabilities.....................
Total liabilities.................
Bank preferred stock....................
Shareholders' equity....................
Total liabilities and
shareholders' equity............
Net interest income.....................
Net interest spread..................... 3.89%
=======
Net interest margin..................... 4.82%
=======
14
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,
---------------------------------------------------------------
1995 VS. 1994
1996 VS. 1995 -----------------------------
------------------------------
INCREASE
INCREASE (DECREASE) (DECREASE)
DUE TO DUE TO
------------------- ------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- --------- --------- ------ --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $ 9,613 $ (1,993) $ 7,620 $5,966 $ 4,439 $ 10,405
Securities.............................. 5,067 1,121 6,188 3,250 1,579 4,829
Federal funds sold and other earning
assets................................ (841) (116) (957) 571 490 1,061
------- --------- --------- ------ --------- ---------
Total increase in interest income... 13,839 (988) 12,851 9,787 6,508 16,295
------- --------- --------- ------ --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits........ 107 (212) (105) (51 ) 96 45
Savings and money market accounts....... 2,669 (258) 2,411 2,877 3,325 6,202
Certificates of deposit................. 1,088 123 1,211 127 1,632 1,759
Repurchase agreements and borrowed
funds................................. 2,396 (541) 1,855 1,358 1,083 2,441
------- --------- --------- ------ --------- ---------
Total increase in interest
expense........................... 6,260 (888) 5,372 4,311 6,136 10,447
------- --------- --------- ------ --------- ---------
Increase in net interest income......... $ 7,579 $ (100) $ 7,479 $5,476 $ 372 $ 5,848
======= ========= ========= ====== ========= =========
PROVISION FOR LOAN LOSSES
The 1996 provision for loan losses increased to $1.67 million from $925,000
in 1995, an increase of $745,000 or 80.5%. The provision for the year ended 1995
decreased by $220,000 or 19.2% from the year ended December 31, 1994. The
increased provision in 1996 resulted from higher than expected loan growth
rather than higher nonperforming assets.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1996 was $4.9 million,
an increase of $1.2 million or 31.7% over the same period in 1995. Noninterest
income of $3.7 million earned in the year ended December 31, 1995 represented an
increase of $649,000 or 21.2% over the same period in 1994. The following table
presents for the periods indicated the major changes in noninterest income.
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts..... $ 2,883 $ 2,386 $ 2,122
Retail services income.................. 90 44 37
Corporate services income............... 26 11 35
Loan operations......................... 535 439 354
Investment services..................... 1,201 695 221
Other noninterest income................ 153 137 294
--------- --------- ---------
Total noninterest income...... $ 4,888 $ 3,712 $ 3,063
========= ========= =========
Service charges were $2.9 million for the year ended December 31, 1996,
compared to $2.4 million for the year ended December 31, 1995, an increase of
$497,000 or 20.8%, and increased $264,000 or 12.4% from 1994 to 1995. During
this three year period the Company introduced several new products which
contributed to the increase in service charge income. In addition, the number of
deposit accounts similarly grew from 12,736 at December 31, 1994 to 14,686 at
December 31, 1995 to 17,997 at December 31, 1996.
15
Other significant increases in noninterest income were recognized in the
categories of loan operations and investment services. Fee income from
investment services has increased significantly in each of the past three years.
For the year ended 1996 investment services income grew to $1.2 million, an
increase of $506,000 or 72.8% over the 1995 level, and increased to $695,000 for
the year ended 1995, an increase of $474,000 or 214.5% from 1994. These
increases are the result of a strategic focus by the Company to increase its
competitive position in providing investment services.
NONINTEREST EXPENSES
For the year ended 1996, noninterest expenses totaled $24.0 million, an
increase of $4.5 million, or 23.2%, from $19.5 million during 1995, which had
increased from $15.8 million during 1994. The increase in noninterest expenses
during these periods was due primarily to salaries and employee benefits. For
the same time periods the efficiency ratio was 58.10% in 1996, 58.08% in 1995
and 60.67% in 1994. The improvement was due primarily to a large increase in
earning assets and the Company's continued efforts to control overhead expenses.
Salary and benefit expense for the year ended December 31, 1996 was $14.4
million, an increase of $3.7 million or 34.6% from $10.7 million for the year
ended December 31, 1995. Salary and benefit expense for the year ended December
31, 1995 was up $2.0 million or 23.0% from the same period in 1994. 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 1996, 1995 and 1994 were 315, 256, and 205, respectively.
Occupancy expense rose $965,000 and $515,000 or 38.4% and 25.8% in 1996 and
1995, respectively. Major categories included within occupancy expense are
building lease expense, depreciation expense, and maintenance contract expense.
Building lease expense increased to $1,047,000 in 1996 from $779,000 in 1995, an
increase of $268,000 or 34.4% and increased $122,000 or 18.6% for the year ended
1995. Additionally, the Company increased the rentable square feet of the
Galleria location by moving to a larger facility. Depreciation expense increased
$597,000 and $412,000 or 41.5% and 40.1% in 1996 and 1995 respectively. 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, 1996 was $339,000,
an increase of $92,000 or 37.2% compared to $247,000 in 1995 and $157,000 in
1994. The Company has purchased maintenance contracts for major operating
systems throughout the organization.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory
rate, plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of nondeductible interest expense, and
the amount of other nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officers salaries, less interest income from federal securities. In 1996 income
tax expense was $5.4 million, an increase of $1.2 million or 28.6% from the $4.2
million of income tax expense in 1995. In 1995 income tax expense was $4.2
million, an increase of $1.1 million or 35.5% from the $3.1 million of income
tax expense in 1994. The income tax component of the Texas franchise tax was
$18,600 in 1996, $145,000 in 1995, and $53,000 in 1994.
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.
16
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans were $601.5 million at December 31, 1996, an increase of $163.2
million, or 37.2% from December 31, 1995. Total loans were $438.3 million at
December 31, 1995, an increase of $80 million, or 22.3%, from $358.3 million at
December 31, 1994.
The following table summarizes the loan portfolio of the Company by major
category as of the dates indicated:
DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993
-------------------- -------------------- -------------------- --------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
-------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $295,003 49.0% $194,095 44.3% $148,177 41.3% $125,062
Real estate
Construction & land development..... 71,808 12.0 46,926 10.7 43,895 12.3 35,362
1-4 family residential.............. 113,801 18.9 88,120 20.1 75,132 21.0 59,371
Commercial owner occupied........... 52,138 8.7 36,765 8.4 26,907 7.5 21,167
Farmland............................ 8,845 1.5 5,283 1.2 2,945 0.8 2,998
Other............................... 3,159 0.5 22,923 5.2 23,766 6.6 13,325
Consumer............................. 56,721 9.4 44,147 10.1 37,483 10.5 28,607
-------- ------- -------- ------- -------- ------- --------
Total Loans....................... $601,475 100.0% $438,259 100.0% $358,305 100.0% $285,892
======== ======= ======== ======= ======== ======= ========
1993 1992
-------- --------------------
PERCENT AMOUNT PERCENT
------- -------- -------
Commercial and industrial............ 43.7% $ 95,339 45.3%
Real estate
Construction & land development..... 12.4 13,977 6.6
1-4 family residential.............. 20.8 51,510 24.5
Commercial owner occupied........... 7.4 17,866 8.5
Farmland............................ 1.0 2,283 1.1
Other............................... 4.7 10,478 5.0
Consumer............................. 10.0 19,005 9.0
------- -------- -------
Total Loans....................... 100.0% $210,458 100.0%
======= ======== =======
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 income. 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 80% 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 seven year period,
such loans often remain outstanding for significantly shorter periods than their
contractual terms.
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.
17
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, 1996
are summarized in the following table:
DECEMBER 31, 1996
---------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $ 190,707 $ 91,637 $ 12,659 $ 295,003
Real estate construction............. 44,004 26,719 1,085 71,808
---------- ---------- --------- ----------
Total......................... $ 234,711 $ 118,356 $ 13,744 $ 366,811
========== ========== ========= ==========
Loans with a fixed interest rate..... $ 56,651 $ 39,128 $ 7,714 $ 103,493
Loans with a floating interest
rate............................... 178,060 79,228 6,030 263,318
---------- ---------- --------- ----------
Total......................... $ 234,711 $ 118,356 $ 13,744 $ 366,811
========== ========== ========= ==========
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT
OF A LOAN, as amended by SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN -- INCOME RECOGNITION AND DISCLOSURES. Under SFAS No. 114, as amended, a
loan is considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the loan's observable market price or based on the fair value of the collateral
if the loan is collateral-dependent. The adoption of SFAS No. 114 did not result
in any additional provision for loan losses.
NONPERFORMING ASSETS
The Company has well developed procedures in place to maintain a high
quality loan portfolio. These 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 loan review department has
consistently identified and analyzed weaknesses in the portfolio and reports
credit risk grade changes on a monthly basis to bank management and directors.
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 industries, collateral types, business lines,
large credit sizes 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.
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.
18
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets were $1,258,000 at December 31, 1996, compared
with $294,000 at December 31, 1995 and $688,000 at December 31, 1994. This
resulted in a ratio of nonperforming assets to loans plus other real estate of
0.21%, 0.07%, and 0.19% for the years ended 1996, 1995, and 1994, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $ 955 $ 291 $ 397 $ 202 $ 179
Accruing loans 90 or more days past
due................................ 22 3 -- 29 --
Restructured loans................... -- -- -- -- --
Other real estate and foreclosed
property........................... 281 -- 291 400 466
--------- --------- --------- --------- ---------
Total nonperforming assets.... $ 1,258 $ 294 $ 688 $ 631 $ 645
========= ========= ========= ========= =========
Nonperforming assets to total loans
and other real estate.............. 0.21% 0.07% 0.19% 0.22% 0.31%
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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve 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 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,
the evaluation of its loan portfolio by the loan review function and the annual
examination of the Company's financial statements by its independent auditors.
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. An unallocated allowance is also established based on the
Company's historical charge-off experience. 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, 1996
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,
1996.
19
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Allowance for loan losses at January
1.................................. $ 4,921 $ 4,294 $ 3,250 $ 2,204 $ 1,857
Provision for loan losses............ 1,670 925 1,145 1,005 767
Charge-offs.......................... (595) (312) (167) (19) (441)
Recoveries........................... 28 14 66 60 21
--------- ---------- ---------- ---------- ----------
Allowance for loan losses at December
31................................. $ 6,024 $ 4,921 $ 4,294 $ 3,250 $ 2,204
========= ========== ========== ========== ==========
Allowance to year-end loans.......... 1.00% 1.12% 1.20% 1.14% 1.05%
Net charge-offs (recoveries) to
average loans...................... 0.12 0.08 0.03 (0.02) 0.24
Allowance to year-end nonperforming
loans.............................. 616.58 1,673.78 1,081.58 1,406.84 1,231.28
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. 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,
---------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
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....... $ 385 49.0% $ 103 44.3% $ 88 41.3%
Real estate:
Construction and land
development............. -- 12.0 -- 10.7 -- 12.3
1-4 family residential..... -- 18.9 -- 20.1 -- 21.0
Commercial owner occupied.. -- 8.7 -- 8.4 -- 7.5
Farmland................... -- 1.5 -- 1.2 -- 0.8
Other...................... -- 0.5 -- 5.2 -- 6.6
Consumer........................ 49 9.4 25 10.1 51 10.5
Unallocated..................... 5,590 4,793 4,155
--------- --------- ---------
Total allowance for loan losses...... $ 6,024 $ 4,921 $ 4,294
========= ========= =========
DECEMBER 31,
-------------------------------------------------
1993 1992
----------------------- -----------------------
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....... $ 100 43.7% $ 140 45.3%
Real estate:
Construction and land
development............. -- 12.4 -- 6.6
1-4 family residential..... -- 20.8 -- 24.5
Commercial owner
occupied................ -- 7.4 -- 8.5
Farmland................... -- 1.0 1.1
Other...................... -- 4.7 -- 5.0
Consumer........................ 58 10.0 32 9.0
Unallocated..................... 3,092 2,032
--------- ---------
Total allowance for loan losses...... $ 3,250 $ 2,204
========= =========
20
SECURITIES
Effective January 1, 1994, the Company adopted SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. At the date of purchase, the
Company is required to classify 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 are classified as held to maturity and measured at amortized
cost in the financial statements only if management has the positive intent and
ability to hold those securities to maturity. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading and measured at fair value in the financial statements with
unrealized gains and losses included in earnings. Securities not classified as
either held to maturity or trading are classified as available for sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, in a separate component of shareholders' equity
until realized. Prior to January 1, 1994, securities were stated at cost,
adjusted for accretion of discounts and amortization of premiums which were
recognized as adjustments to interest income. Gains and losses on sales of
securities are determined using the specific-identification method.
In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" which provided a one-time reassessment of the
appropriateness of the classifications of all securities. Based on such
reassessment, the Company transferred all securities in the held to maturity
portfolio to the available for sale portfolio in November 1995. The transferred
securities had an amortized cost of approximately $150.3 million and net
unrealized losses of approximately $574,000. The transfer resulted in a decrease
of approximately $373,000 to consolidated shareholders' equity. Such
reassessment does not change management's intent to hold other debt securities
to maturity in the future. At this time, classification of all securities as
available for sale allows the Company to manage its investment portfolio more
effectively and to enhance the average yield on the portfolio.
The following table summarizes the amortized cost of securities held by the
Company as of the dates shown:
DECEMBER 31
---------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
U.S. Government securities........... $ 83,345 $ 97,797 $ 95,336 $ 88,745 $ 38,231
Mortgage-backed securities........... 159,106 154,083 55,079 45,857 24,003
Federal Reserve Bank Stock........... 950 946 718 716 479
Federal Home Loan Bank Stock......... 39,386 37,692 1,421 1,036 718
Other securities..................... 6,161 4,329 150 150 150
---------- ---------- ---------- ---------- ---------
Total securities................ $ 288,948 $ 294,847 $ 152,704 $ 136,504 $ 63,581
========== ========== ========== ========== =========
The following table summarizes the carrying value and classification of
securities as of the dates shown:
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Available for sale...................... $ 289,217 $ 295,183 $ 63,628
Held to maturity........................ -- -- 87,839
Securities at amortized cost............ -- -- --
---------- ---------- ----------
Total securities................... $ 289,217 $ 295,183 $ 151,467
========== ========== ==========
21
The following table presents the amortized cost of securities classified as
available for sale and their approximate values at December 31, 1996, December
31, 1995, and December 31, 1994:
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------------- -----------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS VALUE COST GAIN LOSS
--------- ---------- ---------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Government securities........... $ 83,345 $315 $ (68) $ 83,592 $ 97,797 $491 $ (200)
Mortgage-backed securities........... 159,106 524 (507) 159,123 154,083 451 (416)
Federal Reserve Bank Stock........... 950 -- -- 950 946 -- --
Federal Home Loan Bank Stock......... 39,386 -- -- 39,386 37,692 -- --
Other securities..................... 6,161 5 -- 6,166 4,329 10 --
--------- --- ---------- -------- --------- --- ----------
Total securities.................. $288,948 $844 $ (575) $289,217 $294,847 $952 $ (616)
========= === ========== ======== ========= === ==========
DECEMBER 31, 1994
---------------------------------------------
GROSS GROSS
FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
VALUE COST GAIN LOSS VALUE
-------- --------- ---------- ---------- -------
U.S. Government securities........... $ 98,088 $47,584 $ 29 $ (810) $46,803
Mortgage-backed securities........... 154,118 15,142 14 (470) 14,686
Federal Reserve Bank Stock........... 946 718 -- -- 718
Federal Home Loan Bank Stock......... 37,692 1,421 -- -- 1,421
Other securities..................... 4,339 -- -- -- --
--
-------- --------- ---------- -------
Total securities.................. $295,183 $64,865 $ 43 $ (1,280) $63,628
======== ========= == ========== =======
The following table presents the amortized cost of securities classified as
held to maturity and their approximate fair values at December 31, 1994. No
securities were classified as held to maturity at December 31, 1996 or December
31, 1995.
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
U.S. Government securities.............. $47,752 $ -- $ (1,928) $45,824
Mortgage-backed securities.............. 39,937 -- (2,294) 37,643
Other securities........................ 150 -- (7) 143
--------- ---------- ---------- -------
Total securities................... $87,839 $ -- $ (4,229) $83,610
========= ========== ========== =======
Securities totaled $289.2 million at December 31, 1996, a decrease of $6
million from $295.2 million at December 31, 1995. During 1995, securities
increased $143.7 million from $151.5 million at December 31, 1994. The yield on
the securities portfolio for 1996 was 6.02% while the yield was 5.64% in 1995.
The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortgage-backed securities at
December 31, 1996 were $7.5 million in agency issued collateral mortgage
obligations.
At December 31, 1996, 53.6% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. At December 31, 1996,
approximately $78.2 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase.
The following table summarizes the contractual maturity of investments
(including securities, federal funds sold and interest-bearing deposits) and
their weighted average yields at December 31, 1996. 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.
DECEMBER 31, 1996
------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT WITHIN YEARS BUT WITHIN
WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
----------------- ---------------- ---------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ----- ------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
U.S. Government securities.............. $ 39,877 5.96 % $43,468 6.04 % $ -- -- % $ -- --%
Mortgage-backed securities.............. -- -- 31,638 5.86 42,118 6.76 85,350 6.29
Federal Reserve Bank
Stock................................. -- -- -- -- -- -- 950 6.00
Federal Home Loan Bank Stock............ -- -- -- -- -- -- 39,386 5.90
Other securities........................ 6,011 5.02 50 7.86 100 7.86 -- --
Federal funds sold...................... 63,832 5.35 -- -- -- -- -- --
Interest-bearing deposits............... 1,154 5.18 -- -- -- -- -- --
-------- ----- ------- ----- ------- ----- -------- -----
Total investments................... $110,874 5.55 % $75,156 5.97 % $42,218 6.76 % $125,686 6.17%
======== ===== ======= ===== ======= ===== ======== =====
TOTAL YIELD
-------- -----
U.S. Government securities.............. $ 83,345 6.00 %
Mortgage-backed securities.............. 159,106 6.33
Federal Reserve Bank
Stock................................. 950 6.00
Federal Home Loan Bank Stock............ 39,386 5.90
Other securities........................ 6,161 5.09
Federal funds sold...................... 63,832 5.35
Interest-bearing deposits............... 1,154 5.18
-------- -----
Total investments................... $353,934 6.00 %
======== =====
22
DEPOSITS
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings, NOW
accounts, money market and time accounts. The Company relies primarily on
advertising, competitive pricing policies and customer service to attract and
retain these deposits. As of December 31, 1996, the Company had less than five
percent of its deposits classified as brokered funds and does not anticipate any
significant increase. Deposits provide generally all the funding for the
Company's lending and investment activities, and the interest paid for deposits
must be managed carefully to control the level of interest expense.
The Company's ratio of average demand deposits to average total deposits
for years ended December 31, 1996, 1995, and 1994 were 30.0%, 28.4%, and 30.4%,
respectively.
Average total deposits during 1996 increased to $685.4 million from $551.7
million in 1995, an increase of $133.7 million or 24.2%. Average
noninterest-bearing deposits increased to $205.7 million in 1996 from $156.8
million in 1995 due to the increase in the number of deposit accounts. Average
deposits in 1995 rose to $551.7 million from $437.8 million in 1994, an increase
of $113.8 million or 25.9%.
The average daily balances and weighted average rates paid on deposits for
each of the years ended December 31, 1996, 1995 and 1994 are presented below:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
NOW accounts......................... $ 37,325 1.40% $ 31,886 1.96% $ 34,928 1.69%
Regular savings...................... 2,739 2.30 2,680 2.83 2,126 2.77
Treasury Plus........................ 172,597 4.84 91,396 5.35 -- --
Money market......................... 127,073 3.98 149,576 4.08 150,979 3.17
CD's less than $100,000.............. 43,182 5.23 38,306 5.14 40,536 3.99
CD's $100,000 and over............... 88,390 5.42 73,760 5.32 70,190 3.83
IRA's & QRP's........................ 8,421 5.36 7,281 5.46 5,373 4.17
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing
deposits........................ 479,727 4.48% 394,885 4.55% 304,132 3.28%
---------- --------- ---------- --------- ---------- ---------
Noninterest-bearing deposits......... 205,720 -- 156,776 -- 133,696 --
---------- --------- ---------- --------- ----------
Total deposits......