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| EBTX > SEC Filings for EBTX > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
Special Cautionary Note Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "continue," "would," "could," "hope," "might," "assume," "objective," "seek," "plan," "strive" and similar words, or the negatives of these words, are intended to identify forward-looking statements.
Many possible events or factors could affect our future financial results and performance and could cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the other factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K, factors that could contribute to those differences include, but are not limited to:
• general business or economic conditions, either nationally, regionally or in the local markets we serve, may be less favorable than expected, resulting in, among other things, a deterioration of credit quality or a reduced demand for credit or a decline in wealth management fees;
• volatility and disruption in national and international financial markets;
• changes in the interest rate environment, which may reduce our margins or impact the value of changes in market rates and prices and may impact the value of securities, loans, deposits and other financial instruments;
• incorrect assumptions underlying the establishment of and provisions made to the allowance for loan losses;
• legislative or regulatory developments including changes in laws concerning taxes, banking, securities, investment advisory, trust, insurance and other aspects of the financial services industry;
• government intervention in the U.S. financial system;
• the continued service of key management personnel;
• our ability to attract, motivate and retain key employees;
• changes in the availability of funds resulting in increased cost or reduced liquidity;
• factors that increase competitive pressure among financial services organizations, including product and pricing pressures;
• our ability to expand and grow our business and operations, including the establishment of additional private client offices and acquisition of additional banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities; and
• fiscal and governmental policies of the United States federal government.
Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-Q. These statements speak only as of the date of this report (or an earlier date to the extent applicable). We undertake no obligation to update publicly such forward-looking statements in light of new information or future events.
Overview
Encore Bancshares, Inc. is a bank holding company and wealth management organization that provides banking, investment management, financial planning and insurance services to professional firms, privately-owned businesses, investors and affluent individuals. We are headquartered in Houston, Texas and currently manage, through our primary subsidiary, Encore Bank, National Association (Encore Bank), eleven private client offices in the greater Houston market and six private client offices in southwest Florida. We also operate five wealth management offices and three insurance offices in Texas. As of June 30, 2009, we reported, on a consolidated basis, total assets of $1.6 billion, total loans of $1.1 billion, total deposits of $1.2 billion, shareholders' equity of $187.8 million and $2.3 billion in assets under management.
In the second quarter of 2009, we reclassified net expenses of foreclosed real estate from other noninterest income to other noninterest expense for all periods presented. These reclassifications had no impact on financial condition, results of operations or equity in any of the reported periods.
Results of Operations
Net earnings for the quarter ended June 30, 2009 were $821,000, compared with $481,000 for the quarter ended June 30, 2008. Earnings per diluted common share for the second quarter of 2009 were $0.02, compared with $0.04 for the comparable period of 2008. The decrease in diluted earnings per share was due primarily to the accrual of dividends on preferred stock which was issued in the fourth quarter of 2008. Results for the second quarter of 2009 include an improvement in net interest income on a fully taxable-equivalent basis (TE) of $736,000, or 6.8%, and a decrease in the provision for loan losses of $850,000. Partially offsetting these improvements was a $639,000 increase in noninterest expense, which was due primarily to a special assessment from the FDIC.
We posted a return on average common equity of 0.67% and 1.21%, a return on average assets of 0.21% and 0.13%, and an efficiency ratio of 76.14% and 73.71% for the quarters ended June 30, 2009 and 2008. The efficiency ratio is calculated by dividing total noninterest expense (excluding amortization of intangibles) by the sum of net interest income and noninterest income (excluding gains or losses on sales of securities).
Net earnings for the six months ended June 30, 2009 were $2.0 million, compared with $1.7 million, for the same period of 2008. Earnings per diluted common share for the six months ended June 30, 2009 were $0.08 compared with $0.15 for the same period of 2008. Net interest income (TE) increased by $2.4 million, but this increase was partly offset by a $688,000 increase in the provision for loan losses and a $853,000 decrease in noninterest income. We posted a return on average common equity of 1.08% and 2.08%, a return on average assets of 0.25% and 0.23%, and an efficiency ratio of 73.86% and 76.29% for the six months ended June 30, 2009 and 2008.
Net Interest Income
Our operating results are significantly impacted by net interest income, which represents the amount by which interest income on interest-earning assets, including securities and loans, exceeds interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is a key source of our earnings. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income.
Net interest income (TE) was $11.6 million for the three months ended June 30, 2009, an increase of $736,000, or 6.8%, compared with the second quarter of 2008. Average earning assets grew $110.4 million, or 7.9%, due primarily to growth in securities. The net interest margin (TE) decreased 4 basis points to 3.09% for the same comparison period. The margin compression was due in part to greater liquidity on the balance sheet and a shifting in the deposit mix as clients have moved to certificates of deposit in pursuit of higher yields. In addition, average noninterest-bearing deposits were $159.3 million for the second quarter of 2009, a $35.8 million, or 29.0%, increase compared with the same period of 2008.
Net interest income (TE) was $23.1 million for the six months ended June 30, 2009, an increase of $2.4 million, or 11.6%, compared with the same period of 2008. Average interest-earning assets increased $125.7 million, or 9.2%, due primarily to growth in securities and loans. For the six months ended June 30, 2009, the net interest margin (TE) was 3.11%, an increase of 8 basis points, compared with the same period of 2008. The improvement in the margin was due primarily to a falling interest rate environment and a steepening of the yield curve. Average loans were $1.2 billion for the six months ended June 30, 2009, a $42.3 million, or 3.7%, increase compared with the same period of 2008.
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, the interest earned or paid on such amounts and the average rate earned or paid. 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 for the same periods. All balances are daily average balances and nonaccrual loans were included in the average loans with a zero yield for the purpose of calculating the rate earned on total loans. To give effect to our tax-exempt securities and loans, taxable-equivalent adjustments have been made with respect to these assets in 2009. Taxable-equivalent amounts in 2008 were immaterial.
Three Months Ended June 30,
2009 2008
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans (1) $ 1,166,448 $ 17,291 5.95 % $ 1,170,959 $ 18,238 6.26 %
Mortgages held-for-sale 1,612 32 7.96 1,151 25 8.74
Securities (1) 215,473 2,173 4.04 139,510 1,250 3.60
Federal funds sold and other 121,328 156 0.52 82,841 552 2.68
Total interest-earning assets (1) 1,504,861 19,652 5.24 1,394,461 20,065 5.79
Less: Allowance for loan losses (25,656 ) (11,526 )
Noninterest-earning assets 111,519 103,918
Total assets $ 1,590,724 $ 1,486,853
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Interest checking $ 177,393 $ 212 0.48 % $ 194,973 $ 641 1.32 %
Money market and savings 243,276 685 1.13 307,047 1,363 1.79
Time deposits 564,583 4,746 3.37 466,199 5,119 4.42
Total interest-bearing deposits 985,252 5,643 2.30 968,219 7,123 2.96
Borrowings and repurchase agreements 226,118 2,119 3.76 202,229 1,767 3.51
Junior subordinated debentures 20,619 309 6.01 20,619 330 6.44
Total interest-bearing liabilities 1,231,989 8,071 2.63 1,191,067 9,220 3.11
Noninterest-bearing liabilities:
Noninterest-bearing deposits 159,257 123,453
Other liabilities 11,366 12,015
Total liabilities 1,402,612 1,326,535
Shareholders' equity 188,112 160,318
Total liabilities and shareholders' equity $ 1,590,724 $ 1,486,853
Net interest income (1) $ 11,581 $ 10,845
Net interest spread (1) 2.61 % 2.68 %
Net interest margin (1) 3.09 % 3.13 %
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(1) On taxable-equivalent basis in 2009 to consistently reflect income from taxable and tax-exempt loans and securities based on a 34% federal tax rate. Taxable-equivalent amounts in 2008 were immaterial.
Six Months Ended June 30,
2009 2008
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans (1) $ 1,187,456 $ 34,835 5.92 % $ 1,145,199 $ 36,616 6.43 %
Mortgages held-for-sale 1,502 60 8.06 1,308 57 8.76
Securities (1) 201,789 4,146 4.14 140,804 2,569 3.67
Federal funds sold and other 108,393 312 0.58 86,130 1,355 3.16
Total interest-earning assets (1) 1,499,140 39,353 5.29 1,373,441 40,597 5.94
Less: Allowance for loan losses (25,420 ) (11,352 )
Noninterest-earning assets 111,270 103,092
Total assets $ 1,584,990 $ 1,465,181
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Interest checking $ 179,672 $ 425 0.48 % $ 188,728 $ 1,594 1.70 %
Money market and savings 235,880 1,363 1.17 320,144 3,743 2.35
Time deposits 559,821 9,587 3.45 450,398 10,328 4.61
Total interest-bearing deposits 975,373 11,375 2.35 959,270 15,665 3.28
Borrowings and repurchase agreements 240,741 4,235 3.55 198,042 3,522 3.58
Junior subordinated debentures 20,619 625 6.11 20,619 686 6.69
Total interest-bearing liabilities 1,236,733 16,235 2.65 1,177,931 19,873 3.39
Noninterest-bearing liabilities:
Noninterest-bearing deposits 150,090 115,179
Other liabilities 10,820 12,664
Total liabilities 1,397,643 1,305,774
Shareholders' equity 187,347 159,407
Total liabilities and shareholders' equity $ 1,584,990 $ 1,465,181
Net interest income (1) $ 23,118 $ 20,724
Net interest spread (1) 2.64 % 2.55 %
Net interest margin (1) 3.11 % 3.03 %
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(1) On taxable-equivalent basis in 2009 to consistently reflect income from taxable and tax-exempt loans and securities based on a 34% federal tax rate. Taxable-equivalent amounts in 2008 were immaterial.
Provision for Loan Losses
The provision for loan losses is the amount we determine necessary to be charged against the current period's earnings to maintain the allowance for loan losses at a level that we consider adequate in relation to the estimated losses inherent in the loan portfolio. The provision was $2.9 million and $6.0 million for the three months and six months ended June 30, 2009, compared with $3.8 million and $5.3 million for the same periods of 2008. The changes in the provision in both periods compared with the same periods of 2008 reflect the amount we considered necessary to fund estimated losses inherent in the loan portfolio primarily as a result of the recessionary economic environment, weakness in our Florida market, higher net charge-offs in 2009 and other qualitative factors.
Noninterest Income
Noninterest income represented 35.57% and 37.96% of total revenue for the three months ended June 30, 2009 and 2008.
Noninterest income decreased $308,000, or 4.6%, to $6.3 million for the three months ended June 30, 2009, compared with the same period in 2008. The decrease was due primarily to a $573,000, or 12.3%, decrease in trust and investment management fees. The decline in trust and investment management fees was due to a 16.0% decrease in assets under
management, as a result of depreciation in values of equity markets. Partly offsetting this decline in trust and investment management fees was a gain of $222,000 on sale of approximately $9.7 million in second mortgage loans during the second quarter of 2009.
Noninterest income decreased $853,000, or 6.4%, to $12.4 million for the six months ended June 30, 2009, compared with the same period in 2008. The decrease was due primarily to a $1.2 million, or 13.6%, decrease in trust and investment management fees.
The following table presents, for the periods indicated, the major categories of noninterest income:
Three Months Six Months
Ended June 30, Ended June 30,
2009 2008 2009 2008
(dollars in thousands)
Trust and investment management fees $ 4,087 $ 4,660 $ 7,836 $ 9,067
Mortgage banking 351 135 502 189
Insurance commissions and fees 1,404 1,385 3,014 3,112
Other 485 455 1,079 916
Total noninterest income $ 6,327 $ 6,635 $ 12,431 $ 13,284
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Noninterest Expense
Noninterest expense was $13.7 million for the second quarter of 2009, up $639,000, or 4.9%, compared with the second quarter of 2008, primarily due to a special FDIC assessment of $684,000, which was levied on all banks to replenish the FDIC insurance fund. In addition, we recorded higher professional fees, which were primarily related to higher legal and audit fees at Encore Bank.
Noninterest expense for the six months ended June 30, 2009 was $26.4 million, essentially flat with the same period of 2008. The special FDIC assessment was offset by lower compensation expense in 2009 primarily due to a severance charge in 2008 and no such charge in 2009.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Three Months Six Months
Ended June 30, Ended June 30,
2009 2008 2009 2008
(dollars in thousands)
Compensation $ 7,231 $ 7,467 $ 14,745 $ 15,545
Non-staff expenses:
Occupancy 1,554 1,485 3,008 2,923
Equipment 449 487 882 1,018
Advertising and promotion 200 219 416 423
Outside data processing 783 717 1,547 1,411
Professional fees 1,043 739 1,979 1,895
Intangible amortization 169 188 340 375
FDIC assessment 746 30 798 61
Other 1,536 1,740 2,733 2,670
Total noninterest expense $ 13,711 $ 13,072 $ 26,448 $ 26,321
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Income Tax Expense
The provision for income taxes increased to $326,000 for the three months ended June 30, 2009, compared with $150,000 for the same three months of 2008. The effective tax rate for the three months ended June 30, 2009 and 2008 was 28.4% and 23.8%. The provision for income taxes increased to $980,000 for the six months ended June 30, 2009, compared with $758,000 for the same period of 2008. The effective tax rate for the six months ended June 30, 2009 and 2008 was 33.4% and 31.5%.
Result of Segment Operations
We manage the company along three operating segments: banking, wealth management and insurance. The column identified as "Other" includes the parent company and the elimination transactions between segments. The accounting policies of the individual operating segments are the same as our accounting policies described in Note A to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.
The following table presents the net earnings and total assets for each of our operating segments as of and for the periods indicated:
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