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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12-b-2 of the Exchange Act). Yes [ ] No [X].
As of October 31, 2002, the number of outstanding shares of Common
Stock, par value $1.00 per share, was 2,644,054.
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PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks................................................ $ 20,877 $ 21,466
Federal funds sold and other temporary investments..................... --- 11,200
-------- --------
Total cash and cash equivalents..................................... 20,877 32,666
Investment securities available-for-sale, at fair value................... 124,032 109,877
Loans, net................................................................ 344,786 272,374
Loans held for sale....................................................... 18,783 817
Premises and equipment, net............................................... 23,357 18,882
Accrued interest receivable............................................... 2,926 2,605
Goodwill.................................................................. 9,550 6,889
Core deposit intangibles.................................................. 543 ---
Mortgage servicing rights................................................. 2,533 1,349
Other assets.............................................................. 10,865 8,170
-------- --------
Total assets........................................................ $558,252 $453,629
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing.................................................... $80,455 $71,976
Interest-bearing....................................................... 361,517 303,712
-------- --------
Total deposits...................................................... 441,972 375,688
Federal funds purchased................................................... 15,782 647
Other liabilities......................................................... 6,558 3,690
Borrowings................................................................ 48,746 39,232
Subordinated notes and debentures......................................... 3,663 ---
-------- --------
Total liabilities................................................... 516,721 419,257
-------- --------
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 shares authorized as of
September 30, 2002 and 3,000,000 shares authorized as of December
31, 2001; 2,644,054 shares issued and 2,635,324 shares outstanding
as of September 30, 2002 and 2,502,145 shares issued and 2,483,392
shares outstanding as of December 31, 2001.......................... 2,644 2,502
Additional paid-in capital............................................. 16,664 14,136
Retained earnings...................................................... 13,995 11,342
Accumulated other comprehensive income (loss).......................... 1,390 (275)
Less treasury stock, at cost........................................... (162) (333)
-------- --------
Total shareholders' equity....................................... 34,531 27,372
-------- --------
Total liabilities and shareholders' equity....................... $558,252 $453,629
======== ========
See accompanying notes to condensed consolidated financial statements
1
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- -----------------------
2002 2001 2002 2001
------ ------ ------- -------
Interest income:
Loans....................................... $7,004 $6,254 $18,718 $18,382
Investment securities:
Taxable.................................. 1,248 943 3,752 2,634
Tax-exempt............................... 161 308 698 952
Federal funds sold and other temporary
investments.............................. 39 57 92 398
------ ------ ------- -------
Total interest income.................. 8,452 7,562 23,260 22,366
------ ------ ------- -------
Interest expense:
Deposits.................................... 1,988 2,830 6,042 8,929
Federal funds purchased..................... 118 30 287 74
Borrowings.................................. 216 201 582 431
Subordinated notes and debentures 77 --- 77 ---
Company obligated mandatorily redeemable capital
securities of subsidiary trust......... 194 184 577 602
------ ------ ------- -------
Total interest expense................. 2,593 3,245 7,565 10,036
------ ------ ------- -------
Net interest income............................ 5,859 4,317 15,695 12,330
Provision for loan losses...................... 500 256 1,350 512
------ ------ ------- -------
Net interest income after provision for loan
losses...................................... 5,359 4,061 14,345 11,818
------ ------ ------- -------
Non-interest income:
Service charges on deposit accounts......... 1,518 1,083 3,927 3,185
Net servicing fees.......................... (263) 141 1,139 356
Gain on sale of investment securities, net.. 397 37 949 129
Other non-interest income................... 546 410 1,789 1,280
------ ------ ------- -------
Total non-interest income.............. 2,198 1,671 7,804 4,950
------ ------ ------- -------
Non-interest expense:
Employee compensation and benefits.......... 3,206 2,242 9,140 6,925
Occupancy................................... 1,336 638 2,879 1,746
Other non-interest expense.................. 2,235 1,502 5,436 4,414
------ ------ ------- -------
Total non-interest expense............. 6,777 4,382 17,455 13,085
------ ------ ------- -------
Income before provision for income taxes....... 780 1,350 4,694 3,683
Provision for income taxes..................... 189 300 1,278 723
------ ------ ------- -------
Net income..................................... $ 591 $1,050 $3,416 $2,960
====== ====== ====== ======
Earnings per common share:
Basic....................................... $ 0.23 $ 0.42 $ 1.35 $ 1.19
Diluted..................................... $ 0.22 $ 0.41 $ 1.30 $ 1.15
Dividends declared per common share:
Basic...................................... $ 0.10 $ 0.10 $ 0.30 $ 0.26
Diluted.................................... $ 0.10 $ 0.10 $ 0.29 $ 0.25
Weighted average shares outstanding:
Basic....................................... 2,589 2,483 2,523 2,480
Diluted..................................... 2,703 2,584 2,637 2,581
See accompanying notes to condensed consolidated financial statements
2
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ----------------------
2002 2001 2002 2001
------ ------ ------ ------
Net income...................................... $ 591 $1,050 $3,416 $2,960
====== ====== ====== ======
Other comprehensive income (loss), net of tax:
Unrealized holding gains on investment
securities arising during the period...... 1,196 944 2,291 1,589
Less: reclassification adjustment for
gains included in net income.............. 262 24 626 85
------ ------ ------ ------
Other comprehensive income................... 934 920 1,665 1,504
------ ------ ------ ------
Total comprehensive income................... $1,525 $1,970 $5,081 $4,464
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements
3
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001 AND
NINE MONTHS ENDED SEPTEMBER 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........................ --- --- --- 3,416 --- --- 3,416
Other comprehensive income........ --- --- --- --- 1,665 --- 1,665
Issuance of common stock
upon exercise of employee stock
options......................... 4,206 4 32 --- --- --- 36
Issuance of common stock
related to the acquisition
of The Bryan-College Station
Financial Holding Company....... 137,703 138 2,477 --- --- --- 2,615
Sale of treasury stock............ --- --- 19 --- --- 171 190
Dividends......................... --- --- --- (763) --- --- (763)
--------- ------ ------- ------- ------ ----- -------
Balance at September 30, 2002..... 2,644,054 $2,644 $16,664 $13,995 $1,390 $(162) $34,531
========= ====== ======= ======= ====== ====== =======
See accompanying notes to condensed consolidated financial statements
4
TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
2002 2001
-------------- ------------
Cash flows from operating activities:
Net income................................................................ $3,416 $2,960
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 1,474 1,157
Impairment on mortgage servicing rights................................ 306 --
Provision for loan losses.............................................. 1,350 512
Gain on sales of securities, net....................................... (949) (129)
Loss on sale of other real estate, loans, premises and equipment....... 1 223
Amortization of premium, net of discounts on securities................ 210 88
Changes in:
Other assets......................................................... (5,211) (3,474)
Other liabilities.................................................... 2,868 2,749
-------- --------
Net cash provided by operating activities........................ 3,465 4,086
-------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale............................. (108,474) (38,443)
Proceeds from sales, maturities, and principal paydowns of securities
available-for-sale................................................... 94,078 25,650
Net change in loans.................................................... (35,035) (36,350)
Proceeds from sale of other real estate, loans, premises and equipment. 4,204 3,438
Net increase in cash resulting from acquisitions....................... 19,087 ---
Purchases of premises and equipment.................................... (5,675) (2,236)
-------- --------
Net cash used by investing activities................................ (31,815) (47,941)
-------- --------
Cash flows from financing activities:
Net change in:
Deposits............................................................... (7,573) 20,726
Other borrowings....................................................... 9,514 (2,167)
Federal funds purchased................................................ 15,135 7,600
Net proceeds from issuance of common stock upon exercise of
employee stock options................................................. 36 138
Treasury stock sold....................................................... 190 187
Treasury stock purchased ................................................. --- (415)
Dividends paid............................................................ (741) (591)
-------- --------
Net cash provided by financing activities........................... 16,561 25,478
-------- --------
Net decrease in cash and cash equivalents.................................... (11,789) (18,377)
Cash and cash equivalents at beginning of period............................. 32,666 33,463
-------- --------
Cash and cash equivalents at end of period................................... $ 20,877 $ 15,086
======== ========
See accompanying notes to condensed 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
September 30, 2002, the Company's consolidated results of operations for the
three and nine months ended September 30, 2002 and 2001, consolidated cash flows
for the nine months ended September 30, 2002 and 2001, and consolidated changes
in shareholders' equity for the nine months ended September 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. BUSINESS ACQUISITION AND COMBINATION
On July 31, 2002, the Company completed the acquisition of The
Bryan-College Station Financial Holding Company and its subsidiaries
("Bryan-College Station"). In exchange for all of the issued and outstanding
stock of Bryan-College Station, the Company issued 137,703 shares of its common
stock and assumed $3.6 million in outstanding debentures. The three locations of
First Federal Savings Bank ("First Federal"), Bryan-College Station's wholly
owned subsidiary, became banking centers of State Bank. On July 31, 2002,
Bryan-College Station reported total consolidated assets of $79.8 million, total
loans of $57.8 million, and $73.9 million in deposits.
3. NEW ACCOUNTING PRONOUNCEMENTS
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions" ("SFAS 147"). SFAS 147 provides interpretive guidance on
the application of the purchase method of acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
SFAS 147 removes acquisitions of financial institutions from the scope of SFAS
72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions",
and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a
Savings and Loan Association or a Similar Institution is Acquired in a Business
Combination Accounted for by the Purchase Method". SFAS 147 requires that those
transactions be accounted in accordance with SFAS 141, "Business Combinations"
and SFAS 142, "Goodwill and Other Identifiable Assets". Thus, the requirement of
SFAS 72 to recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, SFAS 147 amends
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"), to include in its scope long-term customer relationship intangible
assets of financial institutions such as depositor and borrower relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that SFAS 144
requires for other long-lived assets that are held and used. The Company will no
longer amortize approximately $400,000
6
related to unidentifiable intangible assets acquired in connection with the
Pleasanton and Texas Guaranty acquisitions. The provisions of the Statement
shall be effective for acquisitions on or after October 1, 2002. Transition
provisions for previously recognized unidentifiable intangible assets are
effective October 1, 2002, with earlier application permitted. If the
transaction that gave rise to the unidentifiable intangible asset was a business
combination, the carrying amount of that asset shall be reclassified to goodwill
as of the later of the date of acquisition or the date that SFAS 142 is applied
in its entirety, which was January 1, 2002 for the Company. Any amortization of
the unidentifiable intangible asset recorded from the date of adoption of SFAS
142 to the date of adoption of SFAS 147 shall be removed. As of September 30,
2002, the Company reclassified $3.5 million in unidentifiable intangible assets
to goodwill and reversed $300,000 in amortization expense.
4. 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.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
(Dollars in thousands, except per share data)
Reported net earnings ............................. $ 591 $ 1,050 $ 3,416 $ 2,960
Add back: Goodwill amortization, net of tax benefit -- 139 -- 392
--------- --------- --------- ---------
Adjusted net earnings ............................. $ 591 $ 1,189 $ 3,416 $ 3,352
========= ========= ========= =========
Basic earnings per share:
Reported net earnings ....................... $ 0.23 $ 0.42 $ 1.35 $ 1.19
Goodwill amortization, net of tax benefit ... -- 0.06 -- 0.16
--------- --------- --------- ---------
Adjusted net earnings ....................... $ 0.23 $ 0.48 $ 1.35 $ 1.35
========= ========= ========= =========
Diluted earnings per share:
Reported net earnings ....................... $ 0.22 $ 0.41 $ 1.30 $ 1.15
Goodwill amortization, net of tax benefit ... -- 0.05 -- 0.15
--------- --------- --------- ---------
Adjusted net earnings ....................... $ 0.22 $ 0.46 $ 1.30 $ 1.30
========= ========= ========= =========
The gross carrying amount of intangible assets and associated amortization
at September 30, 2002 is presented in the following table:
Accumulated
Amortization and
Gross Carrying Impairment
Amount Valuation
-------------- ----------------
(Dollars in thousands)
Amortized intangible assets:
Mortgage servicing rights................................................ $ 3,450 $ 917
Core deposit intangibles................................................. $ 564 $ 21
The projections of amortization expense shown below for mortgage servicing
rights are based on existing asset balances and the existing interest rate
environment as of September 30, 2002. Future amortization expense may be
significantly different depending upon changes in the mortgage servicing
portfolio, mortgage interest rates and market conditions.
7
The following table shows the current period and estimated future
amortization for intangible assets:
MORTGAGE
SERVICING CORE DEPOSIT
RIGHTS INTANGIBLES TOTAL
--------- ------------ -----
(Dollars in thousands)
Nine months ended September 30, 2002 (actual)........................ $ 571 $ 21 $ 592
Three months ended December 31, 2002 (estimate)...................... 105 31 136
Estimate for the year ended December 31,
2003............................................................ 420 119 539
2004............................................................ 420 103 523
2005............................................................ 420 88 508
2006............................................................ 389 72 461
2007............................................................ 342 56 398
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. The use of
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 expect;
o competitive factors including product and pricing pressures among
financial services organizations may increase;
o the Company may have difficulty integrating the business of any future
acquisitions;
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 expects;
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 anticipates.
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 us 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 September 30, 2002, State Bank had seventeen full service banking centers
serving twelve counties in central and south central Texas.
Net income for the three months ended September 30, 2002 was $591,000,
a decrease of 41.5% compared with $1.1 million for the same period in 2001. The
decrease in net income was primarily due to an increase in non-interest expense,
the reduction in fair value on the mortgage servicing rights portfolio, and
provisions for loan loss. Net income for the nine months ended September 30,
2002 was $3.4 million representing an increase of 13.3% compared with $3.0
million for the same period in 2001. The increase in net income was primarily
due to increases in net interest and non-interest income, offset by higher
non-interest expense, the reduction in fair value on the mortgage servicing
rights portfolio, and provisions for loan loss. Basic and diluted EPS for the
three months ended September 30, 2002 were $0.23 and $0.22 compared with $0.42
and $0.41 for the same period in 2001. For the nine months ended September 30,
2002, basic and diluted EPS were $1.35 and $1.30 compared with $1.19 and $1.15
per share for the same period in 2001.
At September 30, 2002, total assets were $558.3 million compared with
$453.6 million at December 31, 2001. The $104.7 million or 23.1% increase in
total assets over December 31, 2001 was attributable to the $79.8 million
acquired from Bryan-College Station, and internal growth in investment
securities, loans, and other assets. The increase was partially offset by a
decrease in cash and cash equivalents. At September 30, 2002, net loans,
including loans held for sale, were $363.6 million compared with $273.2 million
at December 31, 2001. The Company acquired $57.8 million in loans in connection
with the acquisition of Bryan-College Station. Total deposits at September 30,
2002 were $442.0 million compared to $375.7 million at December 31, 2001. The
$66.3 million or 17.6% increase in deposits over December 31, 2001 is attributed
to the $73.9 million in deposits assumed in the Bryan-College Station
acquisition partially offset by a $7.6 million deposit run-off due to the
strategic lowering of rates in order to lower the cost of funds. Shareholders'
equity at September 30, 2002 was $34.5 million compared to $27.4 million at
December 31, 2001. The $7.1 million or 25.9% increase is attributed to the
Bryan-College Station acquisition, 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 0.97% for the
nine months ended September 30, 2002, down from the 0.99% for the same period in
2001. The return on average shareholders' equity was 15.4% for the nine months
ended September 30, 2002, up from 15.0% for the same period in 2001.
9
Net Interest Income. For the three months ended September 30, 2002, net
interest income, before the provision for loan losses, increased by 37.2% to
$5.9 million from $4.3 million in the same period in 2001. The increase was
primarily due to the strategic lowering of the cost of funds in relation to the
decrease in rates on earning assets. This has resulted in lower rates paid for
interest-bearing liabilities that were partially offset by lower yields on
earning assets and the interest expense on subordinated debentures assumed from
Bryan-College Station. For the three months ended September 30, 2002 and 2001,
the net interest margins and spreads widened by 17 basis points to 4.93% from
4.76% and by 52 basis points to 4.72% from 4.20%, respectively.
For the nine months ended September 30, 2002, net interest income,
before the provision for loan losses, increased by 27.6% to $15.7 million
compared with $12.3 million over the same period in 2001. For the nine months
ended September 30, 2002 and 2001, the net interest margins and spreads widened
by 30 basis points to 5.02% from 4.72% and by 59 basis points to 4.74% from
4.15%, 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 the three months ended September 30, 2002 was $8.5
million compared to $7.6 million for the same period in 2001. As compared to the
three months ended September 30, 2001, the average total loan volumes for the
three months ended September 30, 2002 increased by $88.9 million or 33.5% and
the average yield on average total loan volume decreased 151 basis points to
7.84%. As compared with the three months ended September 30, 2001, average total
investment volumes for the three months ended September 30, 2002 increased by
$24.1 million or 26.8% and the average yield on average investments decreased by
61 basis points. For the three months ended September 30, 2002, as compared to
the same period in 2001, the yield on total average earning assets decreased by
123 basis points to 7.11%.
Interest income for the nine months ended September 30, 2002 was $23.3
million compared to $22.4 million for the same period in 2001. In a period of
decreasing interest rates, this stability was maintained through growth in
average earning assets. As compared to the nine months ended September 30, 2001,
the average total loan volumes for the nine months ended September 30, 2002
increased by $46.9 million or 18.5% and the average yield on average total loans
decreased by 136 basis points to 8.31%. As compared with the nine months ended
September 30, 2001, average total investment volumes for the nine months ended
September 30, 2002 increased by $27.0 million or 31.2% and the average yield on
average investments decreased by 30 basis points. For the nine months ended
September 30, 2002, as compared to the same period in 2001, the yield on total
average earning assets decreased by 111 basis points to 7.45%.
Interest expense decreased for the three months ended September 30,
2002 by $600,000 or 18.8% to $2.6 million, compared with $3.2 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. Average interest bearing deposit volumes increased by $119.1
million or 38.3% for the three months ended September 30, 2002 compared to the
same period in 2001. For the same periods, the average rates paid on interest
bearing deposits decreased by 175 basis points to 2.39%.
For the nine months ended September 30, 2002, interest expense
decreased by $2.4 million or 24.0% to $7.6 million compared with $10.0 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. Average interest bearing deposit volumes increased by $69.2
million or 22.8% for the nine months ended September 30, 2002 compared to the
same period in 2001. For the same periods, the average rates paid on deposits
decreased by 170 basis points or 2.71%.
10
The following tables set 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 SEPTEMBER 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..................... $354,191 $7,004 7.84% $265,263 $6,254 9.35%
Taxable securities.............. 99,653 1,248 4.97 62,490 943 5.99
Tax-exempt securities........... 14,540 161 4.39 27,653 308 4.42
Federal funds sold and
other temporary
investments................. 3,467 39 4.46 4,499 57 5.03
-------- ------ -------- ------
Total interest earning assets... 471,851 8,452 7.11 359,905 7,562 8.34
------ ------
Less allowance for loan losses.. 3,041 1,686
-------- --------
Total interest-earning assets, net
of allowance for loan losses..... 468,810 358,219
Noninterest-earning assets......... 70,949 51,292
-------- --------
Total assets................. $539,759 $409,511
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits.................... $113,109 $361 1.27% $81,758 $507 2.46%
Savings and money market
accounts.................... 69,733 217 1.23 46,427 293 2.50
Time deposits................. 195,280 1,410 2.86 154,368 2,030 5.22
Federal funds purchased....... 9,368 118 5.00 3,226 30 3.69
Company obligated mandatorily
redeemable capital
securities of subsidiary
trust....................... 7,000 194 10.99 7,000 184 10.43
Other borrowings.............. 33,140 216 2.59 18,226 201 4.38
Subordinated notes and
debentures.................. 2,442 77 12.51 --- --- ---
-------- ------ -------- -----
Total interest-bearing
liabilities...................... 430,072 2,593 2.39 311,005 3,245 4.14
------ -----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits...................... 70,660 65,505
Other liabilities............... 5,389 4,726
-------- --------
Total liabilities............ 506,121 381,236
Shareholders' equity............... 33,638 28,275
-------- --------
Total liabilities and
shareholders' equity............. $539,759 $409,511
======== ========
Net interest income................ $5,859 $4,317
======== ========
Net interest spread................ 4.72% 4.20%
Net interest margin................ 4.93% 4.76%
(1) Annualized
11
FOR THE NINE MONTHS ENDED SEPTEMBER 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..................... $301,121 $18,718 8.31% $254,196 $18,382 9.67%
Taxable securities.............. 92,994 3,752 5.39 58,615 2,634 6.01
Tax-exempt securities........... 20,572 698 4.54 27,912 952 4.56
Federal funds sold and other
temporary investments......... 2,964 92 4.15 8,624 398 6.17
-------- ------- -------- -------
Total interest earning assets... 417,651 23,260 7.45 349,347 22,366 8.56
------- -------
Less allowance for loan losses.. 2,580 1,678
-------- --------
Total interest-earning assets,
net of allowance for loan
losses.......................... 415,071 347,669
Noninterest-earning assets......... 59,280 49,426
-------- --------
Total assets................. $474,351 $397,095
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... $103,786 $1,231 1.58% $78,047 $1,491 2.55%
Savings and money market
accounts...................... 60,842 691 1.52 51,587 1,038 2.69
Time deposits................... 164,985 4,120 3.34 153,482 6,400 5.57
Federal funds purchased......... 10,639 287 3.61 2,525 74 3.92
Company obligated manditorily
redeemable capital securities
of subsidiary trust........... 7,000 577 11.02 7,000 602 11.50
Other borrowings.............. 25,238 582 3.08 11,434 431 5.04
Subordinated notes and
debentures.................... 814 77 12.65 --- --- ---
-------- ------ -------- ------
Total interest-bearing liabilities. 373,304 7,565 2.71 304,075 10,036 4.41
------ ------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits...................... 64,763 62,505
Other liabilities............... 5,760 4,169
-------- --------
Total liabilities............ 443,827 370,749
Shareholders' equity............... 30,524 26,346
-------- --------
Total liabilities and shareholders'
equity........................... $474,351 $397,095
======== ========
Net interest income..................... $15,695 $12,330
======= =======
Net interest spread..................... 4.74% 4.15%
Net interest margin..................... 5.02% 4.72%
(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 nine month periods ended September 30, 2002 compared with the same
periods ended September 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 SEPTEMBER 30,
-----------------------------------------------
2002 VS. 2001
-----------------------------------------------
INCREASE (DECREASE)
DUE TO
----------------------------
VOLUME RATE TOTAL
------------- ------------ --------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Total loans.......................................... $1,743 $(993) $750
Securities........................................... 289 (131) 158
Federal funds sold and other temporary
investments......................................... (115) 97 (18)
------ ------ ------
Total increase (decrease) in interest income...... 1,917 (1,027) 890
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits..................... 99 (245) (146)
Savings and money market accounts.................... 72 (148) (76)
Time deposits........................................ 293 (913) (620)
Federal funds purchased.............................. 77 11 88
Company obligated mandatorily redeemable capital
securities of subsidiary trust.................... --- 10 10
Other borrowings..................................... 97 (82) 15
Subordinated notes and debentures.................... 77 --- 77
------ ------ ------
Total increase (decrease) in interest expense..... 715 (1,367) (652)
------ ------ ------
Increase in net interest income......................... $1,202 $340 $1,542
====== ====== ======
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
2002 VS. 2001
-----------------------------------------------
INCREASE (DECREASE)
DUE TO
----------------------------
VOLUME RATE TOTAL
-------------- ----------- --------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Total loans.......................................... $2,925 $(2,589) $336
Securities........................................... 1,065 (201) 864
Federal funds sold and other temporary investments... (176) (130) (306)
------ ------ ------
Total increase (decrease) in interest income...... 3,814 (2,920) 894
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits..................... 305 (565) (260)
Savings and money market accounts.................... 106 (453) (347)
Time deposits........................................ 288 (2,568) (2,280)
Federal funds purchased.............................. 220 (7) 213
Company obligated mandatorily redeemable capital
securities of subsidiary trust..................... --- (25) (25)
Other borrowings..................................... 319 (168) 151
Subordinated notes and debentures.................... 77 --- 77
------ ------ ------
Total increase (decrease) in interest expense..... 1,315 (3,786) (2,471)
------ ------ ------
Increase in net interest income......................... $2,499 $866 $3,365
====== ====== ======
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
adequate by management to absorb probable losses inherent in the loan portfolio.
For the three and nine months ended September 30, 2002 compared to the same
periods in 2001, the provision increased by $244,000 or 95.3% to $500,000, and
increased by $838,000 or 163.7% to $1.4 million, respectively. The allowance for
loan losses at September 30, 2002 was $3.4 million, compared with $1.8 million
at December 31, 2001. During the latter part of 2001 and in 2002, management
increased the provisions made primarily due to growth in the loan portfolio and
changes in the Central Texas economy. At September 30, 2002, the ratio of loan
loss allowance to total loans was 0.92% compared with 0.64% at December 31,
2001.
13
Noninterest Income. Noninterest income for the three months ended
September 30, 2002 and 2001 was $2.2 million and $1.7 million, respectively, an
increase of $500,000 or 29.4%. The increase is primarily attributed to an
increase in service charges and gains on the sale of investments, partially
offset by mortgage servicing rights amortization and impairment charges. For the
nine months ended September 30, 2002 and 2001, noninterest income was $7.8
million and $5.0 million, respectively, an increase of $2.8 million or 56.0%.
The increase is primarily attributed to an increase in service charges, mortgage
servicing rights income, and gains on the sale of investments.
Mortgage servicing fees, net of amortization and impairment, were
($263,000) for the three months ended September 30, 2002 as compared to $141,000
for the same period in 2001. For the nine months ended September 30, 2002,
mortgage servicing fees, net of amortization and impairment, were $1.1 million
as compared to $356,000 for the same period in 2001. The Company recorded a
$306,000 impairment charge in the third quarter 2002 to reflect fair value of
the mortgage servicing rights asset. The decrease in fair value of capitalized
mortgage servicing rights is a result of the decline in the 10-year Treasury
rate in the third quarter 2002 resulting in historically low mortgage rates and
an increase in prepayments of mortgages serviced by the Company.
Noninterest Expense. For the three months ended September 30, 2002,
noninterest expense increased by $2.4 million or 54.5% to $6.8 million, compared
to the same period in 2001. For the nine months ended September 30, 2002,
noninterest expense increased by $4.4 million or 33.6% to $17.5 million,
compared to the same period in 2001. The increase in noninterest expense for
both periods was due to additional employee compensation and benefits, expenses
incurred from the Bryan-College Station acquisition, 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2002 2001 2002 2001
-------------- ----------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
Employee compensation and benefits........... $3,206 $2,242 $9,140 $6,925
Non-staff expenses:
Occupancy................................. 1,336 638 2,879 1,746
Depreciation and amortization............. 902 371 1,605 1,157
Data processing........................... 301 212 746 480
Professional fees, consultants, and
contract labor......................... 227 121 572 325
Advertising............................... 352 206 753 377
Printing and supplies..................... 127 104 384 270
Telecommunications........................ 183 282 377 464
Other noninterest expense................. 143 206 999 1,341
----- ----- ----- -----
Total non-staff expenses............... 3,571 2,140 8,315 6,160
----- ----- ----- -----
Total noninterest expense.............. $6,777 $4,382 $17,455 $13,085
====== ====== ======= =======
Employee compensation and benefits expense represents 47.3% and 52.4%
of total noninterest expense for the three and nine months ended September 30,
2002, respectively. Employee compensation and benefits expense for the three
months ended September 30, 2002 and 2001 were $3.2 million and $2.2 million,
respectively, an increase of $1.0 million or 45.5%. For the nine months ended
September 30, 2002 and 2001, employee compensation and benefits expenses was
$9.1 million and $6.9 million, respectively, an increase of $2.2 million or
31.9%. The increases for the three and nine month periods ended September 30,
2002 resulted primarily from the costs associated with the additional staff to
meet loan growth, addition of the three former First Federal banking centers,
the staffing of the trust department, and the addition of two loan production
offices. Total full-time equivalent (FTE) employees at September 30, 2002 and
2001 were 282 and 227, respectively.
For the three months ended September 30, 2002, non-staff expenses
increased by $1.4 million or 66.7% compared with the same period in 2001. For
the nine months ended September 30, 2002, non-staff expenses
14
increased by $2.1 million or 33.9% compared with the same period in 2001. The
increased non-staff expense, both for the three and nine months periods in 2002,
was primarily due to acquisition costs of Bryan-College Station, 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 $92.0 million or 33.5%, from $274.9 million at December 31, 2001 to $366.9
million at September 30, 2002. The increase is primarily due to $57.8 million
acquired from Bryan-College Station coupled with an increase in real estate and
consumer loans and partially offset by a $1.8 million decrease in commercial and
industrial loans. At September 30, 2002 and December 31, 2001, the ratio of
total loans to total deposits was 83.0% and 73.2%, respectively. For the same
periods, total loans represented 65.5% and 60.6% of total assets, respectively.
Loans held for sale were $18.8 million at September 30, 2002, an
increase of $18.0 million compared with $817,000 at December 31, 2001. Loans
held for sale represent mortgage loans originated by the Company to be sold to
Fannie Mae. The Company retains the servicing on all loans sold to Fannie Mae
and records a mortgage servicing right.
The following table summarizes the loan portfolio of the Company by
type of loan at the dates indicated:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
----------------------------- ----------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
Commercial and industrial.......................... $51,624 14.1% $53,401 19.4%
Real estate mortgage
1-4 residential................................. 123,544 33.7 114,663 41.7
Commercial...................................... 57,404 15.6 35,886 13.1
Held for sale................................... 18,783 5.1 817 0.3
Other........................................... 50,887 13.9 23,970 8.7
Consumer and other, net............................ 64,690 17.6 46,208 16.8
-------- ----- -------- ------
Total loans........................................ $366,932 100.0% $274,945 100.0%
===== ======
Allowance for loan losses.......................... 3,363 1,754
-------- --------
Net loans.................................... $363,569 $273,191
======== ========
Nonperforming Assets. Nonperforming assets at September 30, 2002 and
December 31, 2001 were $1.3 million and $562,000, respectively. The increase of
$779,000, or 138.6%, is primarily due nonperforming loans acquired in the
Bryan-College Station acquisition and 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, 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:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans................................................ $847 $380
Accruing loans 90 days or more past due......................... 474 144
Other real estate............................................... 20 38
------ ----
Total nonperforming assets................................ $1,341 $562
====== ====
Nonperforming assets to total assets ........................... 0.24% 0.12%
Nonperforming assets to total loans and other real estate ...... 0.37% 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
$100,000 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 nine months ended September 30, 2002, net loan charge-offs were
$465,000 or 0.15% of average loans outstanding compared with $761,000 or 0.29%
for the year ended December 31, 2001. At September 30, 2002 and December 31,
2001, the allowance for loan losses aggregated $3.4 million and $1.8 million, or
0.92% and 0.64% of total loans, respectively. At September 30, 2002, the
allowance for loan losses as a percentage of nonperforming loans was 254.6%
compared with 334.7% at December 31, 2001.
The following table presents for the periods indicated an analysis of
the allowance for loan losses and other related data:
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(DOLLARS IN THOUSANDS)
Average total loans outstanding............................. $301,121 $264,129
======== ========
Total loans outstanding at end of period.................... $366,932 $274,945
======== ========
Allowance for loan losses at beginning of period............ 1,754 1,590
Provision for loan losses................................... 1,350 925
Balance acquired in the Bryan-College Station
acquisition.............................................. 724 ---
Charge-offs:
Commercial and industrial................................ (263) (389)
Real estate.............................................. (3) (37)
Consumer................................................. (919) (881)
Other.................................................... (1) (76)
------- -------
Total charge-offs..................................... (1,186) (1,383)
------- -------
Recoveries:
Commercial and industrial................................ 208 153
Real estate.............................................. 20 23
Consumer................................................. 461 434
Other.................................................... 32 12
------- -------
Total recoveries...................................... 721 622
------- -------
Net loan charge-offs........................................ (465) (761)
------- -------
Allowance for loan losses at end of period.................. $ 3,363 $1,754
======= =======
Ratio of allowance to end of period total loans............. 0.92% 0.64%
Ratio of net loan charge-offs to average total loans........ 0.15% 0.29%
Ratio of allowance to end of period nonperforming loans..... 254.58% 334.73%
Securities. At September 30, 2002, the securities portfolio totaled
$124.0 million, reflecting an increase of $14.0 million or 12.7% from $110.0
million at December 31, 2001. During the nine months ended September 30, 2002,
the Company purchased $108.5 million in investment securities. Included in this
amount, the Company originated $49.4 million in mortgage loans that were sold to
Fannie Mae in various mortgage pools and reacquired by the Company as investment
securities. Additionally, the Company sold $82.2 million of securities in an
effort to
16
reposition the portfolio for current economic conditions and to provide funding
for loan growth. The Company also received $12.3 million in maturities and
principal paydowns on investment securities.
Other Assets. At September 30, 2002, other assets totaled $10.9
million, reflecting an increase of $2.7 million or 32.9% from $8.2 million at
December 31, 2001. The increase is partially attributed to $904,000 of other
assets acquired from Bryan-College Station, a $351,000 increase in prepaid
assets, a $421,000 increase in the deferred compensation plan asset, and the
purchase of $500,000 in Federal Home Loan Bank ("FHLB") stock.
Deposits. At September 30, 2002, total deposits were $442.0 million, an
increase of $66.3 million or 17.6% from $375.7 million at December 31, 2001. The
increase is primarily due to the $73.9 million in deposits acquired from
Bryan-College Station partially offset by a $7.6 million deposit run-off.
Non-interest-bearing deposits at September 30, 2002 increased by $8.5 million or
11.8% to $80.5 million from $72.0 million at December 31, 2001. Interest-bearing
deposits at September 30, 2002 increased by $57.8 million or 19.0% to $361.5
million from $303.7 million at December 31, 2001. The Company's ratios of
noninterest-bearing demand deposits to total deposits as of September 30, 2002
and December 31, 2001 were 18.2% and 19.2%, respectively.
Borrowings and Federal Funds Purchased. Borrowings consist of
short-term and long-term advances from the FHLB. Federal funds purchased
increased $15.2 million to $15.8 million at September 30, 2002 from $647,000 at
December 31, 2001. Borrowings increased $9.5 million to $48.7 million at
September 30, 2002 from $39.2 million at December 31, 2001. The funds were used
to acquire investment securities and to fund loans. 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 $14.2 million at September 30, 2002 and
$29.4 million at December 31, 2001.
In connection with the acquisition of Bryan-College Station, the
Company assumed $3.6 million in subordinated debentures. The debentures carry an
interest rate of 11.5% and mature in March 2003.
At September 30, 2002, the Company has $1.7 million borrowed on its
$10.0 million revolving credit line with a bank. The funds were used to redeem
the outstanding shares of First Federal's Series A preferred stock and costs
associated with becoming a public reporting company.
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 liquid assets. Several options are
available to increase liquidity, including sale of investment securities,
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 September 30, 2002, the
Company has cash and cash equivalents of $20.9 million, down from $32.7 million
at December 31, 2001. The decrease is mainly attributed to the increase in
investment securities and loan growth, and partially offset by deposit
withdrawals of $7.6 million and a reduction in federal funds sold of $11.2
million.
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 asset growth in the future.
Capital Resources. Shareholders' equity increased from $27.4 million at
December 31, 2001 to $34.6 million at September 30, 2002, an increase of $7.2
million or 26.3%. The increase was primarily due to a net addition to undivided
profits of $3.5 million, a $1.7 million improvement in unrealized securities
gains and losses, and the issuance of $2.6 million in common stock in connection
with the acquisition of Bryan-College Station, partially offset by dividends of
$763,000.
17
The following table provides a comparison of the Company's and State
Bank's leverage and risk-weighted capital ratios as of September 30, 2002 to the
minimum and well-capitalized regulatory standards:
TO BE WELL
CAPITALIZED
MINIMUM UNDER PROMPT
REQUIRED FOR CORRECTIVE ACTUAL RATIO AT
CAPITAL ADEQUACY ACTION SEPTEMBER 30,
PURPOSES PROVISIONS 2002
----------------- ----------------- ---------------
THE COMPANY
Leverage ratio.............................. 4.00%(1) N/A 5.75%
Tier 1 risk-based capital ratio............. 4.00% N/A 8.55%
Risk-based capital ratio.................... 8.00% N/A 9.49%
THE BANK
Leverage ratio.............................. 4.00%(2) 5.00% 6.50%
Tier 1 risk-based capital ratio............. 4.00% 6.00% 9.44%
Risk-based capital ratio.................... 8.00% 10.00% 10.37%
- -----------------
(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 ratio above the
required minimum.
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."
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. Within 90 days prior to the
date of this report, the Company carried out an evaluation, under the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934 (the "Exchange Act")) are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported to the Company's
management within the time periods specified in the Securities and Exchange
Commission's rules and forms.
Changes in internal controls. Subsequent to the date of the Company's most
recent evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
disclosure controls and procedures, and there were no corrective actions with
regard to significant deficiencies and material weaknesses based on such
evaluation.
18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6A. EXHIBITS
EXHIBIT IDENTIFICATION
NUMBER OF EXHIBIT
------- --------------
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: November 14, 2002 L. Don Stricklin
President and Chief Executive
Officer (principal executive
officer)
Date: November 14, 2002 By: /s/ Thomas N. Adams
---------------------------------
Thomas N. Adams
Executive Vice President and
Chief Financial Officer
(principal financial officer/
principal accounting officer)
19
CERTIFICATIONS
I, L. Don Stricklin, President and Chief Executive Officer of the registrant,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas United
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ L. Don Stricklin
- -------------------------------------
L. Don Stricklin
President and Chief Executive Officer
20
I, Thomas N. Adams, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas United
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; 4.
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Thomas N. Adams
- -----------------------
Thomas N. Adams
Chief Financial Officer
21
EXHIBIT INDEX
EXHIBIT IDENTIFICATION
NUMBER OF EXHIBIT
------- --------------
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.