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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-49928
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TEXAS UNITED BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2768656
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
202 W. COLORADO
LA GRANGE, TEXAS 78945
(Address of principal executive offices including zip code)
(979) 968-8451
(Registrant's telephone number, including area code)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $1.00 per share
(Title of class)
------------------------
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].
As of July 31, 2002, the number of outstanding shares of Common Stock,
par value $1.00 per share was 2,496,624.
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PART I
FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks .................................................... $ 12,475 $ 21,466
Federal funds sold and other temporary investments ......................... 8,147 11,200
------------ ------------
Total cash and cash equivalents ......................................... 20,622 32,666
Investment securities available-for-sale, at fair value ....................... 110,094 109,877
Loans, net .................................................................... 266,427 272,374
Loans held for sale ........................................................... 6,433 817
Premises and equipment, net ................................................... 20,290 18,882
Accrued interest receivable ................................................... 2,470 2,605
Goodwill ...................................................................... 3,419 3,419
Deposit premiums .............................................................. 3,304 3,470
Mortgage servicing rights ..................................................... 2,751 576
Other assets .................................................................. 11,725 8,943
------------ ------------
Total assets ............................................................ $ 447,535 $ 453,629
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ........................................................ $ 68,693 $ 71,976
Interest-bearing ........................................................... 303,074 303,712
------------ ------------
Total deposits .......................................................... 371,767 375,688
Federal funds purchased ....................................................... 10,000 647
Other liabilities ............................................................. 4,898 3,690
Borrowings .................................................................... 23,366 39,232
------------ ------------
Total liabilities ....................................................... 410,031 419,257
------------ ------------
Commitments and contingencies ................................................. -- --
Company obligated mandatorily redeemable capital securities of subsidiary
trust .................................................................... 7,000 7,000
Shareholders' equity:
Preferred stock, $1.00 par value, 500,000 shares authorized, none of
which are issued and outstanding......................................... -- --
Common stock, $1.00 par value, 20,000,000 authorized as of June 30,
2002 and 3,000,000 authorized as of December 31, 2001; 2,506,351
shares issued and 2,496,624 outstanding as of June 30, 2002 and
2,502,145 shares issued and 2,483,392 outstanding as of
December 31, 2001 ....................................................... 2,506 2,502
Additional paid-in capital ................................................. 14,185 14,136
Retained earnings .......................................................... 13,536 11,342
Accumulated other comprehensive income (loss) .............................. 456 (275)
Less treasury stock, at cost ............................................... (179) (333)
------------ ------------
Total shareholders' equity ........................................... 30,504 27,372
------------ ------------
Total liabilities and shareholders' equity ........................... $ 447,535 $ 453,629
============ ============
See accompanying notes to interim consolidated financial statements
1
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
2002 2001 2002 2001
------- ------- ------- -------
Interest income:
Loans ............................................ $ 5,896 $ 6,202 $11,714 $12,128
Investment securities:
Taxable ....................................... 1,342 917 2,504 1,691
Tax-exempt .................................... 248 321 537 644
Federal funds sold and other temporary
investments ................................... 15 93 53 341
------- ------- ------- -------
Total interest income ....................... 7,501 7,533 14,808 14,804
------- ------- ------- -------
Interest expense:
Deposits ......................................... 1,817 2,953 4,054 6,099
Federal funds purchased .......................... 100 40 169 44
Borrowings ....................................... 196 106 366 230
Company obligated mandatorily redeemable capital
securities of subsidiary trust ................ 200 185 383 418
------- ------- ------- -------
Total interest expense ...................... 2,313 3,284 4,972 6,791
------- ------- ------- -------
Net interest income ................................. 5,188 4,249 9,836 8,013
Provision for loan losses ........................... 400 127 850 256
------- ------- ------- -------
Net interest income after provision for loan
losses ........................................... 4,788 4,122 8,986 7,757
------- ------- ------- -------
Non interest income:
Service charges on deposit accounts .............. 1,266 1,073 2,409 2,102
Net servicing fees ............................... 463 106 1,402 215
Gain on sale of investment securities, net ....... 252 72 552 92
Other non interest income ........................ 590 475 1,243 870
------- ------- ------- -------
Total non interest income ................... 2,571 1,726 5,606 3,279
------- ------- ------- -------
Non interest expense:
Employee compensation and benefits ............... 2,941 2,539 5,934 4,683
Occupancy ........................................ 824 566 1,543 1,108
Other non-interest expense ....................... 1,800 1,491 3,401 2,912
------- ------- ------- -------
Total non interest expense .................. 5,565 4,596 10,878 8,703
------- ------- ------- -------
Income before provision for income taxes ............ 1,794 1,252 3,714 2,333
Provision for income taxes .......................... 501 216 1,021 423
------- ------- ------- -------
Net income .......................................... $ 1,293 $ 1,036 $ 2,693 $ 1,910
======= ======= ======= =======
Earnings per common share:
Basic ............................................ $ 0.52 $ 0.42 $ 1.08 $ 0.77
Diluted .......................................... $ 0.50 $ 0.40 $ 1.03 $ 0.74
Weighted average shares outstanding:
Basic ............................................ 2,502 2,496 2,500 2,487
Diluted .......................................... 2,613 2,597 2,612 2,591
See accompanying notes to interim consolidated financial statements
2
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
2002 2001 2002 2001
------ ------- ------ ------
Net income ............................................................ $1,259 $ 1,036 $2,693 $1,910
====== ======= ====== ======
Other comprehensive income (loss), net of tax:
Unrealized holding gains on investment securities arising
during the period ............................................... 1,555 (178) 1,095 770
Less: reclassification adjustment for gains included in net income .... 166 48 364 61
------ ------- ------ ------
Other comprehensive income (loss) .................................. 1,389 (226) 731 709
------ ------- ------ ------
Total comprehensive income ......................................... $2,648 $ 810 $3,424 $2,619
====== ======= ====== ======
See accompanying notes to interim consolidated financial statements
3
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001 AND
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TREASURY
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE STOCK
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) AT COST TOTAL
--------- ------ ------- -------- ------------- --------- --------
Balance at January 1, 2001 ........... 2,486,065 $2,486 $13,901 $ 9,011 $(663) $(131) $ 24,604
Net income ........................... -- -- -- 3,224 -- -- 3,224
Other comprehensive income ........... -- -- -- -- 388 -- 388
Issuance of common stock upon
exercise of employee stock
options ........................... 16,080 16 122 -- -- -- 138
Compensation related to exercise
of stock options .................. -- -- 105 -- -- -- 105
Purchase of treasury stock ........... -- -- -- -- -- (417) (417)
Sale of treasury stock ............... -- -- 8 -- -- 215 223
Dividends ............................ -- -- -- (893) -- -- (893)
--------- ------ ------- -------- ----- ----- --------
Balance at December 31, 2001 ......... 2,502,145 $2,502 $14,136 $ 11,342 $(275) $(333) $ 27,372
========= ====== ======= ======== ===== ----- ========
ACCUMULATED
ADDITIONAL OTHER TREASURY
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE STOCK
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) AT COST TOTAL
--------- ------ ------- -------- ------------- --------- --------
Balance at January 1, 2002 ............ 2,502,145 $2,502 $14,136 $ 11,342 $(275) $(333) $ 27,372
Net income ............................ -- -- -- 2,693 -- -- 2,693
Other comprehensive income ............ -- -- -- -- 731 -- 731
Issuance of common stock upon
exercise of employee stock options .. 4,206 4 32 -- -- -- 36
Sale of treasury stock ................ -- -- 17 -- -- 154 171
Dividends ............................. -- -- -- (499) -- -- (499)
--------- ------ ------- -------- ----- ----- --------
Balance at June 30, 2002 .............. 2,506,351 $2,506 $14,185 $ 13,536 $ 456 $(179) $ 30,504
========= ====== ======= ======== ===== ===== ========
See accompanying notes to interim consolidated financial statements
4
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income ................................................................... $ 2,693 $ 1,910
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................. 835 786
Provision for loan losses ................................................. 850 256
Gain on sales of securities, net .......................................... (552) (92)
Loss on sale of other real estate, loans, premises and equipment .......... 15 122
Amortization of premium, net of discounts on securities ................... 108 53
Changes in:
Other assets ............................................................ (4,825) (2,877)
Other liabilities ....................................................... 1,208 918
-------- --------
Net cash provided by operating activities ............................ 332 1,076
-------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale ................................ (65,853) (35,880)
Proceeds from sales, maturities, and principal paydowns of securities
available-for-sale ...................................................... 64,080 17,238
Net change in loans ....................................................... (154) (21,246)
Proceeds from sale of other real estate, loans, premises and equipment .... 3,902 3,206
Purchases of premises and equipment ....................................... (3,625) (1,432)
-------- --------
Net cash used by investing activities ................................... (1,650) (38,114)
-------- --------
Cash flows from financing activities:
Net change in:
Deposits .................................................................. (3,921) 14,382
Other borrowings .......................................................... (15,866) (1,942)
Federal funds purchased ................................................... 9,353 11,990
Net proceeds from issuance of common stock upon exercise of employee
stock options ............................................................. 36 138
Treasury stock sold .......................................................... 171 187
Treasury stock purchased ..................................................... -- (385)
Dividends paid ............................................................... (499) (414)
-------- --------
Net cash (used) provided by financing activities ........................ (10,726) 23,956
-------- --------
Net decrease in cash and cash equivalents ....................................... (12,044) (13,082)
Cash and cash equivalents at beginning of period ................................ 32,666 33,463
-------- --------
Cash and cash equivalents at end of period ...................................... $ 20,622 $ 20,381
======== ========
See accompanying notes to interim consolidated financial statements
5
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of Texas United Bancshares, Inc. (the "Company") and its wholly-owned
subsidiaries Texas United Nevada, Inc. ("TUNI"), State Bank (the "Bank"), Third
Coast Wealth Advisors, Inc. ("Third Coast"), and TXUI Statutory Trust I (the
"Trust"). All material intercompany accounts and transactions have been
eliminated in the consolidated report of the Company.
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the Company's consolidated financial position at
June 30, 2002, and December 31, 2001, the Company's consolidated results of
operations for the three and six months ended June 30, 2002 and 2001,
respectively, consolidated cash flows for the six months ended June 30, 2002 and
2001, and consolidated changes in shareholders' equity for the six months ended
June 30, 2002 and the year ended December 31, 2001. Interim period results are
not necessarily indicative of results of operations or cash flows for a
full-year period. The 2001 year-end consolidated balance sheet and statement of
changes in shareholders' equity data were derived from audited financial
statements, but do not include all disclosures required by generally accepted
accounting principles.
Certain amounts applicable to the prior periods have been reclassified
to conform to the classifications currently followed. Such reclassifications do
not affect earnings.
These financial statements and the notes thereto should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 2001 appearing in the Company's Registration Statement
on Form S-4 (Registration No. 333-84644).
2. EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted EPS is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares are computed using the treasury stock method.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
2002 2001 2002 2001
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income available to common shareholders ................ $1,293 $1,036 $2,693 $1,910
====== ====== ====== ======
Weighted-average common shares outstanding ................. 2,502 2,496 2,500 2,487
Weighted-average common shares and potentially dilutive
common shares .............................................. 2,613 2,597 2,612 2,591
====== ====== ====== ======
Basic EPS .................................................. $ 0.52 $ 0.42 $ 1.08 $ 0.77
Diluted EPS ................................................ $ 0.50 $ 0.40 $ 1.05 $ 0.74
3. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, FASB issued SFAS No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets".
6
SFAS No. 141 supercedes Accounting Principles Board (APB) Opinion No.
16 "Business Combinations". The most significant changes made by SFAS No. 141
are: (1) requiring the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain.
SFAS No. 142 supercedes ABB 17 "Intangible Assets". The statement
requires that goodwill no longer be amortized to earnings, but instead reviewed
for impairment. This change provides investors with greater transparency
regarding the economic value of goodwill and its impact on earnings. The
amortization of goodwill ceases upon adoption of the statement, which was
January 1, 2002 for the Company. The adoption of this statement did not have a
material impact on the Company's financial position or results of operations
since the recorded goodwill was deemed not to be impaired. The Company will no
longer record $150,000 of annual amortization expense relating to existing
goodwill.
In July 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". The statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it occurs.
When the liability is initially recorded the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. The liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The standard is effective for fiscal
years beginning after September 15, 2002, with early application encouraged.
Management believes adopting this statement will not have a material impact on
the Company's financial position, results of operation, or cash flows.
In August 2001, the FASB issued SFAS No. 144 "Accounting for Impairment
or Disposal of Long-lived Assets". SFAS No. 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. It supercedes, with exceptions, SFAS 121, "Accounting for the
Impairment of Long-lived Assets to be Disposed Of", and is effective for fiscal
years beginning after December 15, 2001. Management adopted this statement and
it did not have a material impact on the Company's financial position, results
of operation, or cash flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FAS Statement No. 13, and Technical
Corrections ("SFAS 145"). This statement rescinds the requirement in SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, that material gains and
losses on the extinguishment of debt be treated as extraordinary items. The
statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the accounting for sale-leaseback transactions and the
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Finally the standard makes a number of
consequential and other technical corrections to other standards. The provisions
of the statement relating to the rescission of SFAS 4 are effective for fiscal
years beginning after May 15, 2002. Provisions of the statement relating to the
amendment of SFAS 13 are effective for transactions occurring after May 15, 2002
and the other provisions of the statement are effective for financial statements
issued on or after May 15, 2002. The Company has reviewed SFAS 145 and its
adoption is not expected to have a material effect on its consolidated financial
statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or
Disposal Activities ("SFAS 146"). SFAS 146 applies to costs associated with an
exit activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. SFAS 146
will require a Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective e prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. SFAS 146
supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring), and requires liabilities
associated with exit and disposal activities to be expensed as incurred and can
be measured at fair value. SFAS 146 is effective for exit or disposal activities
of the Company that are initiated after December 31, 2002.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Statements and financial discussion and analysis contained in the Form
10-Q that are not historical facts are forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include information about possible or
assumed future results of the Company's operations or performance. When we use
any of the words "believe," "expect", "anticipate", "estimate", "continue",
"intend", "may", "will", "should", or similar expressions, identifies these
forward-looking statements. Many possible factors or events could affect the
future financial results and performance of the Company and could cause those
financial results or performance to differ materially from those expressed in
the forward-looking statement. These possible events or factors include, without
limitation:
o deposit attrition, operating costs, customer loss and business
disruption are greater than we expected;
o competitive factors including product and pricing pressures among
financial services organizations may increase;
o more difficulty integrating the business of The Bryan-College Station
Financial Holding Company or future acquisitions than expected;
o changes in the interest rate environment reduce our interest margins;
o changes in market rates and prices may adversely impact securities,
loans, deposits, mortgage servicing rights, and other financial
instruments;
o general business and economic conditions in the markets the Company
serves change or are less favorable than it expected;
o legislative or regulatory changes adversely affect the Company's
business;
o personal or commercial bankruptcies increase;
o changes in accounting principles, policies or guidelines;
o changes occur in the securities markets; and
o technology-related changes are harder to make or more expensive than
the Company anticipated.
A forward-looking statement may include a statement of the assumptions
or bases underlying the forward-looking statement. The Company believes it has
chosen the assumptions or bases in good faith and that they are reasonable.
However, the Company cautions you that assumptions or bases almost always vary
from actual results, and the differences between assumptions or bases and actual
results can be material. We will not update these statements unless the
securities laws require the Company to do so.
8
General. The Company is a bank holding company formed in June 1998 as a
result of the merger of South Central Texas Bancshares, Inc. with and into
Premier Bancshares, Inc. At the effective date of the merger, the resulting
company changed its name to Texas United Bancshares, Inc. The Company derives
substantially all of its net income from its wholly-owned subsidiary State Bank.
At June 30, 2002, State Bank had fourteen full service banking centers serving
ten counties in central and south central Texas.
Net income for the three months ended June 30, 2002 was $1.3 million,
an increase of 30.0% compared with $1.0 million for the same period in 2001. The
increase in net income was a combined result of higher net interest income and
increased non interest income, offset by higher non interest expense and
provisions for loan loss. Net income for the six months ended June 30, 2002 was
$2.7 million representing an increase of 42.1% compared with the $1.9 million
for the same period in 2001. Basic and diluted EPS (earnings per share) for the
three months ended June 30, 2002 were $ $0.52 and $0.50 compared with $0.42 and
$0.40 for the same period in 2001. For the six months ended June 30, 2002, basic
and diluted EPS were $1.08 and $1.05 compared with $0.77 and $0.74 per share for
the same period in 2001.
At June 30, 2002, total assets were $447.5 million compared with $453.6
million at December 31, 2001. The $6.1 million or 1.3% decrease in total assets
over December 31, 2001 was attributable to a decrease in balances on deposit
with other banks partially offset by increases in premises and equipment and
other assets. At June 30, 2002. net loans, including loans held for sale, were
$272.9 million compared with $273.2 million at December 31, 2001. Total deposits
at June 30, 2002 were $371.8 million compared to $375.7 million at December 31,
2001. The $3.9 million or 1.0% decrease in deposits compared with December 31,
2001 is a direct result of deposit run-off from the strategic lowering of rates
in order to lower the cost of funds. Shareholders' equity at June 30, 2002 was
$30.6 million compared to $27.4 million at December 31, 2001. The $3.2 million
or 11.7% increase is attributed to earnings retention and improvement on the
fair market value on available-for-sale securities included in accumulated other
comprehensive income. The Company's return on average assets was 1.27% for the
six months ended 2002, compared with 0.96% for the same period in 2001. The
return on average shareholders' equity was 19.3% for the six months ended 2002,
up from 14.5% for the same period in 2001.
Subsequent Event. On July 31, 2002, the Company completed the
acquisition and merger of The Bryan-College Station Financial Holding Company
and its Subsidiaries, including First Federal Savings Bank. The consideration
included the issuance of $2.6 million in common stock and the assumption of $3.6
million in outstanding debentures. The three locations of First Federal Savings
Bank became full-service branches of State Bank. At June 30, 2002, Bryan-College
Station FHC reported total consolidated assets of $81.0 million, total loans of
$61.1 million, and total deposits of $74.5 million.
9
Net Interest Income. For the three months ended June 30, 2002, net
interest income, before the provision for loan losses, increased by 23.8% to
$5.2 million from $4.2 million in the same period in 2001. The increase was due
to the strategic lowering of the cost of funds in relation to the decrease in
rates on earning assets. This has resulted in slightly lower yields on earning
assets offset by lower rates paid for interest-bearing liabilities. For the
three months ended June 30, 2002 and 2001, the net interest margin and spread
widened by 40 basis points to 5.29% from 4.89% and by 64 basis points to 4.97%
from 4.33%, respectively.
For the six months ended June 30, 2002, net interest income, before the
provision for loan losses, increased by 22.5% to $9.8 million compared with $8.0
million over the same period in 2001. For the six months ended June 30, 2002 and
2001, the net interest margin and spread widened by 38 basis points to 5.08%
from 4.70% and by 60 basis points to 4.72% from 4.12%, respectively. The
widening of the net interest margin was a combined result of increased volumes
in investments and loan balances, and a decrease in the cost of funds.
Interest income for both the three months ended June 30, 2002 and 2001
was $7.5 million. As compared to the three months period ended June 30, 2001,
the average total loan volumes for the three months period ended June 30, 2002
increased by $21.3 million or 8.4%. For the same periods, the average yields on
average total loan volumes decreased 121 basis points to 8.62%. As compared with
the three months period ended June 30, 2001, average total investment volumes
for the three months period ended June 30, 2002 increased by $34.7 million or
56.8%. For the same periods, the average yields on average investments decreased
by 40 basis points. For the three months ending June 30, 2002, as compared to
the same period in 2001, the yield on total average earning assets decreased by
101 basis points to 7.65%.
Interest income for both the six months ended June 30, 2002 and 2001
was $14.8 million. In a period of decreasing interest rates, this stability was
maintained through growth in average earning assets. As compared to the six
months period ended June 30, 2001, the average total loan volumes for the six
months period ended June 30, 2002 increased by $25.9 million or 10.4%. For the
same period, the average yields on average total loans decreased by 124 basis
points to 8.60%. As compared with the six months period ended June 30, 2001,
average total investment volumes for the six months ended June 30, 2002
increased by $33.4 million or 59.6%. For the same periods, the average yields on
average investments decreased by 44 basis points. For the six months ending June
30, 2002, as compared to the same period in 2001, the yield on total average
earning assets decreased by 103 basis points to 7.65%.
Interest expense decreased for the three months ended June 30, 2002 by
$1.0 million or 30.3% to $2.3 million, compared with $3.3 million for the same
period in 2001. The decreased interest expense was the result of higher average
interest bearing deposit volumes coupled with lower interest rates paid on those
deposits. As compared to the three month period ended June 30, 2001, average
interest bearing deposit volumes increased by $41.2 million or 13.5%. For the
same period, the average rates paid on interest bearing deposits decreased by
165 basis points to 2.68%.
For the six months ended June 30, 2002, interest expense decreased by
$1.8 million or 26.5% to $5.0 million compared with $6.8 million for the same
period in 2001. The decreased interest expense was the result of higher interest
bearing deposit volumes coupled with lower interest rates paid on those
deposits. As compared to the six months ended June 30, 2001, average interest
bearing deposit volumes increased by $41.3 million or 13.7%. For the same
period, the average rates paid on deposits decreased by 163 basis points or
2.93%. The Company views time deposits as a stable means of supporting loan
growth. The Company believes, based on its historical experience, that its large
time deposits have core-type characteristics. The Company continues to
anticipate that this source of funding will continue to sustain a portion of the
Company's assets growth in the future.
10
The following table sets forth for the periods indicated an analysis of
net interest income by each major category of interest-earning assets and
interest-bearing liabilities, the average amounts outstanding and the interest
earned or paid on such amounts. The tables also set forth the average rate
earned on total interest-earning assets, the average rate paid on total
interest-bearing liabilities and the net interest margin on average total
interest-earning assets for the same periods. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE(1) BALANCE PAID RATE(1)
-------- -------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Total loans ............................ $274,134 $ 5,896 8.62% $252,815 $ 6,202 9.83%
Taxable securities ..................... 95,808 1,342 5.62 61,097 917 6.02
Tax-exempt securities .................. 22,459 248 4.43 28,187 321 4.57
Federal funds sold and
other temporary investments ............ 901 15 6.68 6,734 93 5.54
-------- -------- -------- --------
Total interest earning assets .......... 393,302 7,501 7.65 348,833 7,533 8.66
Less allowance for loan losses ......... 2,182 1,694
-------- --------
Total interest-earning assets, net of
allowance for loan losses ........... 391,120 347,139
Noninterest-earning assets ................ 54,873 51,761
-------- --------
Total assets ........................ $445,993 $398,900
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ..... $ 97,781 $ 377 1.55% $ 74,291 $ 454 2.45%
Savings and money market
accounts ........................... 58,537 217 1.49 52,645 333 2.54
Time deposits ........................ 146,559 1,223 3.35 156,742 2,166 5.54
Federal funds purchased .............. 14,367 100 2.79 3,979 40 4.03
Company obligated manditorily
redeemable capital securities of
subsidiary trust ...................... 7,000 200 11.46 7,000 185 10.60
Other borrowings ..................... 21,552 196 3.65 9,893 106 4.30
-------- -------- -------- --------
Total interest-bearing liabilities ........ 345,796 2,313 2.68 304,550 3,284 4.33
-------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits ............................ 67,433 63,113
Other liabilities ...................... 3,434 4,927
-------- --------
Total liabilities ................... 416,663 372,590
-------- --------
Shareholders' equity ...................... 29,330 26,310
-------- --------
Total liabilities and shareholders'
equity ................................ $445,993 $398,900
======== ========
Net interest income ....................... $ 5,188 $ 4,249
======== ========
Net interest spread ....................... 4.97% 4.33%
Net interest margin ....................... 5.29% 4.89%
(1) Annualized
11
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE(1) BALANCE PAID RATE(1)
-------- -------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Total loans ............................ $274,587 $ 11,774 8.60% $248,662 $ 12,128 9.84%
Taxable securities ..................... 89,447 2,504 5.65 55,952 1,691 6.09
Tax-exempt securities .................. 23,806 537 4.55 28,338 644 4.58
Federal funds sold and
other temporary investments ............ 2,351 53 4.55 11,008 341 6.25
-------- -------- -------- --------
Total interest earning assets .......... 390,191 14,808 7.65 343,960 14,804 8.68
Less allowance for loan losses ......... 2,189 1,682
-------- --------
Total interest-earning assets, net of
allowance for loan losses ........... 388,002 342,278
Noninterest-earning assets ................ 53,645 48,609
-------- --------
Total assets ........................ $441,647 $390,887
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ..... $ 97,737 $ 861 1.78% $ 71,482 $ 984 2.78%
Savings and money market accounts .... 57,975 485 1.69 52,385 716 2.76
Time deposits ........................ 146,647 2,708 3.72 159,531 4,399 5.56
Federal funds purchased .............. 11,274 169 3.02 2,175 44 4.08
Company obligated manditorily
redeemable capital securities of
subsidiary trust ...................... 7,000 383 11.03 7,000 418 12.04
Other borrowings ..................... 21,288 366 3.47 8,039 230 5.77
-------- -------- -------- --------
Total interest-bearing liabilities ........ 341,921 4,972 2.93 300,612 6,791 4.56
-------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits .... 67,154 59,918
Other liabilities ...................... 3,605 4,551
-------- --------
Total liabilities ................... 412,680 365,081
Shareholders' equity ...................... 28,967 25,806
-------- --------
Total liabilities and shareholders'
equity ................................. $441,647 $390,887
======== ========
Net interest income ....................... $ 9,836 $ 8,013
======== ========
Net interest spread ....................... 4.72% 4.12%
Net interest margin ....................... 5.08% 4.70%
(1) Annualized
12
The following tables present the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and changes in interest rates for the
three and six month periods ended June 30, 2002 compared with the same period
ended June 30, 2001. For purposes of these tables, changes attributable to both
rate and volume have been allocated proportionately to the change due to volume
and rate.
THREE MONTHS ENDED JUNE 30,
--------------------------------
2002 VS. 2001
---------------------------------
INCREASE (DECREASE)
DUE TO
-------------------
VOLUME RATE TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Total loans ........................................... $ 459 $ (765) $ (306)
Securities ............................................ 488 (136) 352
Federal funds sold and other temporary investments .... (97) 19 (78)
------- ------- -------
Total increase (decrease) in interest income ....... 850 (882) (32)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits ...................... 91 (168) (77)
Savings and money market accounts ..................... 22 (138) (116)
Time deposits ......................................... (85) (858) (943)
Federal funds purchased ............................... 72 (12) 60
Company obligated manditorily redeemable capital
securities of subsidiary trust ..................... -- 15 15
Other borrowings ...................................... 106 (16) 90
------- ------- -------
Total increase (decrease) in interest expense ...... 206 (1,177) (971)
------- ------- -------
Increase (decrease) in net interest income ............... $ 644 $ 295 $ 939
======= ======= =======
SIX MONTHS ENDED JUNE 30,
--------------------------------
2002 VS. 2001
---------------------------------
INCREASE (DECREASE)
DUE TO
-------------------
VOLUME RATE TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Total loans ........................................... $ 1,115 $(1,529) $ (414)
Securities ............................................ 760 (54) 706
Federal funds sold and other temporary investments .... (197) (91) (288)
------- ------- -------
Total increase (decrease) in interest income ....... 1,678 (1,674) 4
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits ...................... 234 (357) (123)
Savings and money market accounts ..................... 94 (325) (231)
Time deposits ......................................... (479) (1,212) (1,691)
Federal funds purchased ............................... 137 (12) 125
Company obligated manditorily redeemable capital
securities of subsidiary trust ..................... -- (35) (35)
Other borrowings ...................................... 230 (94) 136
------- ------- -------
Total increase (decrease) in interest expense ...... 216 (2,035) (1,819)
------- ------- -------
Increase (decrease) in net interest income ............... $ 1,462 $ 361 $ 1,823
======= ======= =======
Provision for Loan Losses. Provisions for loan losses are charged to
income to bring the Company's allowance for loan losses to a level deemed
appropriate by management. For the three and six month periods ended June 30,
2002 compared to June 30, 2001, the provision increased by $273,000 or 215.0% to
$400,000, and increased by $594,000 or 232.0% to $850,000, respectively. The
allowance for loan losses at June 30, 2002 was $2.2 million, compared with $1.8
million at December 31, 2001. During the latter part of 2001 and in 2002,
management increased its provisions primarily due to growth in the loan
portfolio and changes in the Central Texas economy. At June 30, 2002, the ratio
of loan loss allowance to total loans was 0.81% compared with 0.64% at December
31, 2001.
13
Noninterest Income. Noninterest income for the three months ended June
30, 2002 and 2001 was $2.6 million and $1.7 million, respectively, an increase
of $900,000 or 52.9%. For the six months ended June 30, 2002 and 2001,
noninterest income was $5.6 million and $3.3 million, respectively, an increase
of $2.3 million or 69.7%. The increase in noninterest income is primarily
attributed to an increase in mortgage servicing rights income and gains on the
sale of investments.
The following table presents, for the periods indicated, the categories
of noninterest income:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
2002 2001 2002 2001
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts .... $1,266 $1,073 $2,409 $2,102
Net servicing fees ..................... 463 106 1,402 215
Gain on sale of securities, net ........ 252 72 552 92
Other noninterest income ............... 590 475 1,243 870
------ ------ ------ ------
Total noninterest income ......... $2,571 $1,726 $5,606 $3,279
====== ====== ====== ======
Noninterest Expense. For the three months ended June 30, 2002,
noninterest expense increased by $900,000 or 19.6% to $5.5 million, compared to
the same period in 2001. For the six months ended June 30, 2002, noninterest
expense increased by $2.0 million or 23.0% to $10.7 million, compared to the
same period in 2001. The increase in noninterest expense for both periods was
due to additional employee compensation and benefits, increased occupancy, data
processing and technology costs, printing and supplies, and advertising.
The following table presents, for the periods indicated, the major
categories in noninterest expense:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Employee compensation and benefits ........ $ 2,941 $ 2,539 $ 5,934 $ 4,683
Non-staff expenses:
Occupancy .............................. 824 566 1,543 1,108
Depreciation and amortization .......... 429 432 903 786
Data processing ........................ 187 156 345 268
Professional fees, consultants, and
contract labor ...................... 152 128 345 204
Advertising ............................ 226 93 321 171
Printing and supplies .................. 125 91 237 166
Telecommunications ..................... 73 81 194 182
Other noninterest expense .............. 608 510 1,056 1,135
------- ------- ------- -------
Total non-staff expenses ............ 2,624 2,057 4,944 4,020
------- ------- ------- -------
Total noninterest expense ........... $ 5,565 $ 4,596 $10,878 $ 8,703
======= ======= ======= =======
Employee compensation and benefits expense represents 52.8% and 54.6%
of total noninterest expense for the three and six months periods ended June 30,
2002, respectively. Employee compensation and benefits expense for the three
months ended June 30, 2002 and 2001 were $2.9 million and $2.5 million,
respectively, an increase of $400,000 or 16.0%. For the six months ended June
30, 2002 and 2001, employee compensation and benefits expenses was $5.9 million
and $4.7 million, respectively, reflecting an increase of $1.2 million or 25.5%.
The increases for the three and six month periods ended June 30, 2002 resulted
primarily from the costs associated with the additional staff to meet loan
growth, addition of one banking center, the staffing of the trust department,
and the addition of two loan production offices. Total full-time equivalent
(FTE) employees at June 30, 2002 and 2001 were 258 and 220, respectively.
14
For the three months ended June 30, 2002, non-staff expenses increased
by $500,000 or 28.6% compared with the same period in 2001. For the six months
ended June 30, 2002, non-staff expenses increased by $900,000 or 22.5% compared
with the same period in 2001. The increased non-staff expense, both for the
three and six months periods in 2002, was due to higher occupancy expense from
the full effect of opening one banking center in 2001, the trust department in
2002, and two loan production offices in 2002, the upgrade of technology
systems, increased advertising and printing costs, as well as other operating
systems improvements.
FINANCIAL CONDITION
Loan Portfolio. Total loans, including loans held for sale, increased
by $200,000 or 0.1%, from $274.9 million at December 31, 2001 to $275.1 million
at June 30, 2002. The increase is primarily due to the $11.7 million increase in
real estate loans offset primarily by a $8.7 million and a $2.8 million decrease
in commercial and industrial and consumer loans, respectively. At June 30, 2002
and December 31, 2001, the ratio of total loans to total deposits was 74.0% and
73.2%, respectively. For the same periods, total loans represented 61.4% and
60.6% of total assets, respectively.
The following table summarizes the loan portfolio of the Company by
type of loan at the dates indicated:
JUNE 30, 2002 DECEMBER 31, 2001
--------------------------- ---------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial .... $ 44,700 16.3% $ 53,401 19.4%
Real estate mortgage
1-4 residential ........... 108,726 39.5 114,663 41.7
Commercial ................ 45,965 16.7 35,886 13.1
Held for sale ............. 6,433 2.3 817 0.3
Other ..................... 25,923 9.4 23,970 8.7
Consumer and other, net ...... 43,352 15.8 46,208 16.8
---------- ---------- ---------- ----------
Total loans .................. $ 275,099 100.0% $ 274,945 100.0%
========== ==========
Allowance for loan losses .... 2,239 1,754
---------- ----------
Net loans .............. $ 272,860 $ 273,191
========== ==========
Nonperforming Assets. Nonperforming assets at June 30, 2002 and
December 31, 2001 were $758,000 and $562,000, respectively. The increase of
$196,000, or 34.9%, is primarily due to the prolonged deterioration in general
economic conditions.
The Company generally places a loan on nonaccrual status and ceases to
accrue interest when loan payment performance is deemed unsatisfactory. Loans
where the interest payments jeopardize the collection of principal are placed on
nonaccrual status, unless the loan is both well-secured 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 following table presents information regarding nonperforming assets
at the dates indicated:
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans ............................................. $305 $380
Accruing loans 90 days or more past due ...................... 433 144
Other real estate ............................................ 20 38
---- ----
Total nonperforming assets ............................. $758 $562
==== ====
Nonperforming assets to total assets ......................... 0.17% 0.12%
Nonperforming assets to total loans and other real estate .... 0.28% 0.20%
15
Allowance for Loan Losses. The Company has several systems in place to
assist in maintaining the overall quality of its loan portfolio. The Company has
established underwriting guidelines to be followed at each of its banking
centers. The Company also monitors its delinquency levels for any negative or
adverse trends and particularly monitors credits that have a total exposure of
$75,000 or more.
The allowance for loan losses is a reserve established through charges
to earnings in the form of a provision for loan losses. The Company utilizes a
model to determine the specific and general portions of the allowance for loan
losses. Through the loan review process, management assigns one of six loan
grades to each loan, according to payment history, collateral values and
financial condition of the borrower. Specific reserves are allocated for loans
assigned to a grade of "watch" or below, meaning that management has determined
that deterioration in a loan has occurred. The percentage of the specific
allocation for each loan is based on the risk elements attributable to that
particular loan. In addition, a general allocation is made for all loans in an
amount determined based on general economic condition, historical loan loss
experience, loan growth within a category, amount of past due loans and peer
averages. Management maintains the allowance based on the amounts determined
using the procedures set forth above.
For the six months ended June 30, 2002, net loan charge-offs were
$365,000 or 0.13% of average loans outstanding compared with $761,000 or 0.29%
for the year ended December 31, 2001. At June 30, 2002 and December 31, 2001,
the allowance for loan losses aggregated $2.2 million and $1.8 million, or 0.81%
and 0.61% of total loans, respectively. At June 30, 2002,The allowance for loan
losses as a percentage of nonperforming loans was 329.6% compared with 334.7% at
December 31, 2001.
The following table presents for the periods ended an analysis of the
allowance for loan losses and other related data:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2001
---------------- -----------------
(DOLLARS IN THOUSANDS)
Average total loans outstanding ............................ $ 274,587 $ 264,129
========= =========
Total loans outstanding at end of period ................... $ 275,099 $ 274,945
========= =========
Allowance for loan losses at beginning of period ........... 1,754 1,590
Provision for loan losses .................................. 850 925
Charge-offs:
Commercial and industrial ............................... (263) (389)
Real estate ............................................. -- (37)
Consumer ................................................ (596) (881)
Other ................................................... -- (76)
--------- ---------
Total charge-offs .................................... (859) (1,383)
--------- ---------
Recoveries:
Commercial and industrial ............................... 110 153
Real estate ............................................. 13 23
Consumer ................................................ 363 434
Other ................................................... 8 12
--------- ---------
Total recoveries ..................................... 494 622
--------- ---------
Net loan charge-offs ....................................... (365) (761)
--------- ---------
Allowance for loan losses at end of period ................. $ 2,239 $ 1,754
========= =========
Ratio of allowance to end of period total loans ............ 0.81% 0.64%
Ratio of net loan charge-offs to average total loans ....... 0.13% 0.29%
Ratio of allowance to end of period nonperforming loans .... 329.61% 334.73%
Securities. At June 30, 2002, the securities portfolio totaled $110.1
million, reflecting an increase of $100,000 or 0.1% from $110.0 million at
December 31, 2001. During the six months ended June 30, 2002, the Company
originated $65.5 million in mortgage loans and sold them to FNMA in various
mortgage pools. Additionally, the Company sold $64.1 million of securities in an
effort to reposition the portfolio for current economic conditions and to
provide funding for loan growth.
16
Deposits. At June 30, 2002, total deposits were $371.8 million, down
$3.9 million or 1.0% from $375.7 million at December 31, 2001.
Non-interest-bearing deposits at June 30, 2002 decreased by $3.3 million or 4.6%
to $68.7 million from $72.0 million at December 31, 2001. Interest-bearing
deposits at June 30, 2002 decreased by $600,000 or 0.2% to $303.1 million from
$303.7 million at December 31, 2001. The Company's ratios of noninterest-bearing
demand deposits to total deposits for June 30, 2002 and December 31, 2001 were
18.5% and 19.2%, respectively.
Borrowings. Borrowings consist of short-term and long-term advances
from the Federal Home Loan Bank (FHLB). Federal funds purchased increased $9.4
million to $10.0 million at June 30, 2002 from $647,000 at December 31, 2001.
Borrowings decreased $15.8 million to $23.4 million at June 30, 2002 from $39.2
million at December 31, 2001. The maturity dates for the FHLB borrowings range
from the years 2002 to 2013 and have interest rates from 2.65% to 5.91%.
Additionally, the Company had three unused, unsecured lines of credit with
correspondent banks totaling $30.0 million at June 30, 2002 and $29.4 million at
December 31, 2001.
Liquidity. Liquidity involves the Company's ability to raise funds to
support asset growth or reduce assets to meet deposit withdrawals and other
payment obligations, to maintain reserve requirements and otherwise to operate
the Company on an ongoing basis. The Company's liquidity needs are primarily met
by growth in core deposits. Although access to purchased funds from
correspondent banks is available and has been utilized on occasion to take
advantage of investment opportunities, The Company does not rely on these
external funding sources. The Company maintains investments in liquid assets
based upon management's assessment of cash needs, expected deposit flows,
objectives of its asset/liability management program, availability of federal
funds or FHLB advances, and other available yield on liquid assets. Several
options are available to increase liquidity, including loan originations,
increasing deposit marketing activities, and borrowing from the FHLB or
correspondent banks. The cash and federal funds sold position, supplemented by
amortizing investments along with payments and maturities within the loan
portfolio, have historically created an adequate liquidity position.
Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. At June 30, 2002, the
Company has cash and cash equivalents of $20.6 million, down from $32.7 million
at December 31, 2001. The decrease is mainly attributed to the reduction of FHLB
borrowings of $15.8 million and deposit withdrawals of $3.9 million, partially
offset by a $9.4 million increase in federal funds purchased.
Capital Resources. Shareholders' equity increased from $27.4 million at
December 31, 2001 to $30.6 million at June 30, 2002, an increase of $3.2 million
or 11.7%. The increase was primarily due to a net addition to undivided profits
of $2.8 million and a $731,000 improvement in unrealized securities losses,
offset by cash dividends paid of $499,000.
The following table provides a comparison of the Company's and the
Bank's leverage and risk-weighted capital ratios as of June 30, 2002 to the
minimum and well-capitalized regulatory standards.
TO BE WELL
CAPITALIZED
UNDER PROMPT
MINIMUM CORRECTIVE
REQUIRED FOR ACTION ACTUAL RATIO AT
CAPITAL PURPOSES PROVISIONS JUNE 30, 2002
---------------- ------------- -----------------
THE COMPANY
Leverage ratio........................ 4.00% (1) N/A 6.85%
Tier 1 risk-based capital ratio....... 4.00% N/A 10.40%
Risk-based capital ratio.............. 8.00% N/A 11.17%
THE BANK
Leverage ratio........................ 4.00% (2) 5.00% 6.58%
Tier 1 risk-based capital ratio....... 4.00% 6.00% 10.03%
Risk-based capital ratio.............. 8.00% 10.00% 10.81%
- ---------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage above the required
minimum.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes since December 31, 2001. For more
information regarding quantitative and qualitative disclosures about market
risk, please refer to the Company's Registration Statement on Form S-4
(Registration No. 333-84644), and in particular, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Sensitivity and Market Risk."
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Recent Sales of Unregistered Securities. On June 14, 2002, the
Company sold 4,000 shares of Common Stock to certain individuals at
$19.00 per share. Each sale was for cash and was made pursuant to
the registration exemption provided by Section 3(a)(11) of the
Securities Act of 1933, as amended.
(d) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 6, 2002.
At the meeting, the shareholders of the Company considered and acted upon the
following proposals:
1. Bruce Frenzel and James D. Selman, Jr. were elected as Class I
directors to serve on the Company's Board of Directors until the Company's 2005
Annual Meeting of Shareholders and until their successors are duly elected and
qualified. With respect to Bruce Frenzel, 1,860,089 shares were voted in favor
of his election and 71,210 shares were withheld from voting. With respect to
James D. Selman, Jr., 1,760,730 shares were voted in favor of his election and
170,569 shares were withheld from voting.
2. The shareholders approved an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of Common Stock from
3,000,000 shares to 20,000,000 shares. A total of 1,846,627 shares were voted in
favor of the amendment, 67,332 shares were voted against the amendment and
17,340 shares abstained from voting.
3. The shareholders approved an amendment the Company's Articles of
Incorporation to clarify that the affirmative vote of the holders of not less
than seventy percent (70%) of the shares of the Common Stock and seventy percent
(70%) of each other class of the outstanding capital stock is required to
approve a merger or consolidation in which the Company will not be the surviving
entity. A total of 1,835,810 shares were voted in favor of the amendment, 79,509
shares were voted against the amendment and 15,980 shares abstained from
voting.
ITEM 5. OTHER INFORMATION
Not applicable
18
ITEM 6A. EXHIBITS
The following exhibits are filed with this Quarterly Report on Form 10-Q:
EXHIBIT IDENTIFICATION
NUMBER OF EXHIBIT
------- --------------
3.1 Articles of Texas United Bancshares, Inc., as amended.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
ITEM 6B. REPORTS ON FORM 8-K
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
By: /s/ L. Don Stricklin
------------------------------------
Date: August 14, 2002 L. Don Stricklin
President and Chief Executive Officer
(principal executive officer)
Date: August 14, 2002 By: /s/ Thomas N. Adams
------------------------------------
Thomas N. Adams
Executive Vice President and
Chief Financial Officer
(principal financial officer/
principal accounting officer)
19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Articles of Incorporation, as amended
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.