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| EBTX > SEC Filings for EBTX > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-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 for the year ended December 31, 2008, factors that could contribute to those differences include, but are not limited to:
• changes in the strength of general business or economic conditions, either nationally, regionally or in the local markets we serve, may result 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;
• increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio;
• the concentration of our loan portfolio in loans collateralized by real estate;
• our level of commercial real estate and commercial loans;
• 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 costs or reduced liquidity;
• factors that increase competitive pressure among financial services organizations, including product and pricing pressures;
• the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;
• 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 financial 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 September 30, 2009, we had, 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 $186.5 million and $2.5 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.
Critical Accounting Policies
We have made no changes in our methods of application of our critical accounting policies from the information previously disclosed in the Critical Accounting Policies section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.
This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include net interest income, net interest spread and net interest margin on a taxable-equivalent basis, which is standard practice in the banking industry. We have included in this report information relating to these non-GAAP financial measures for the applicable periods presented. We believe these non-GAAP financial measures provide information useful to investors in understanding our financial results and believe that its presentation, together with the accompanying reconciliations, provides a complete understanding of factors and trends affecting our business and allows investors to view performance in a manner similar to management, the entire financial services sector, bank stock analysts and bank regulators. These non-GAAP measures should not be considered a substitute for operating results determined in accordance with GAAP and we strongly encourage investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names.
Results of Operations
The net loss for the quarter ended September 30, 2009 was $1.8 million, compared with net earnings of $228,000 for the quarter ended September 30, 2008. Loss per diluted common share for the third quarter of 2009 was $0.22, compared with earnings per diluted common share of $0.02 for the comparable period of 2008. Earnings per common share include the accrual of dividends on preferred stock which was issued in the fourth quarter of 2008. The decrease in earnings was due primarily to higher credit costs, as we provisioned $2.4 million in excess of net charge-offs for the third quarter of 2009 reflecting deterioration of real estate values in Florida.
We posted a return on average common equity of (5.72)% and 0.56%, a return on average assets of (0.43)% and 0.06%, and an efficiency ratio of 71.37% and 67.82% for the quarters ended September 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).
For the nine months ended September 30, 2009, net earnings were $203,000, compared with $1.9 million for the same period of 2008. The loss per diluted common share (as a result of deducting preferred dividends from net earnings) for the nine months ended September 30, 2009 was $0.14, compared with earnings per diluted common share of $0.17 for the comparable period of 2008. Net interest income on a fully taxable-equivalent basis (TE) increased $2.9 million, or 8.9%, but was more than offset by higher credit costs and higher expenses. The increase in expenses was due primarily to higher FDIC insurance assessments. We posted a return on average common equity of (1.22)% and 1.56%, a return on average assets of 0.02% and 0.17%, and an efficiency ratio of 73.00% and 73.39% for the nine months ended September 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 $12.1 million for the three months ended September 30, 2009, an increase of $473,000, or 4.1%, compared with the third quarter of 2008. Average earning assets grew $145.5 million, or 10.5%, due primarily to growth in securities and deposits in banks. The net interest margin (TE) decreased 21 basis points to 3.13% for the same comparison period. The margin compression was due primarily to a decrease in loans and greater liquidity on the balance sheet as a result of the recession. Partially offsetting this margin compression was an improvement in average noninterest-bearing deposits, which were $147.9 million for the third quarter of 2009, a $28.9 million, or 24.3%, increase compared with the same period of 2008.
Net interest income (TE) was $35.2 million for the nine months ended September 30, 2009, an increase of $2.9 million, or 8.9%, compared with the same period of 2008. Average interest-earning assets increased $132.4 million, or 9.6%, due primarily to growth in securities and deposits in banks. For the nine months ended September 30, 2009, the net interest margin (TE) was 3.12%, a decrease of 2 basis points, compared with the same period of 2008. Average noninterest-bearing deposits were $149.3 million for the nine months ended September 30, 2009, a $32.9 million, or 28.2%, 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 September 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) $ 1,123,482 $ 17,114 6.04 % $ 1,186,606 $ 18,738 6.28 %
Mortgages held-for-sale 1,716 34 7.86 596 13 8.68
Securities (1) 235,819 2,315 3.89 156,354 1,469 3.74
Federal funds sold and other 168,213 180 0.42 40,128 261 2.59
Total interest-earning assets (1) 1,529,230 19,643 5.10 1,383,684 20,481 5.89
Less: Allowance for loan losses (23,972 ) (12,630 )
Noninterest-earning assets 109,852 108,224
Total assets $ 1,615,110 $ 1,479,278
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Interest checking $ 191,553 $ 227 0.47 % $ 192,424 $ 610 1.26 %
Money market and savings 306,789 833 1.08 283,130 1,217 1.71
Time deposits 525,821 4,071 3.07 448,983 4,631 4.10
Total interest-bearing deposits 1,024,163 5,131 1.99 924,537 6,458 2.78
Borrowings and repurchase agreements 222,978 2,129 3.79 240,104 2,085 3.45
Junior subordinated debentures 20,619 302 5.81 20,619 330 6.37
Total interest-bearing liabilities 1,267,760 7,562 2.37 1,185,260 8,873 2.98
Noninterest-bearing liabilities:
Noninterest-bearing deposits 147,888 119,024
Other liabilities 10,792 12,186
Total liabilities 1,426,440 1,316,470
Shareholders' equity 188,670 162,808
Total liabilities and shareholders'
equity $ 1,615,110 $ 1,479,278
Net interest income (1) $ 12,081 $ 11,608
Net interest spread (1) 2.73 % 2.91 %
Net interest margin (1) 3.13 % 3.34 %
Net interest income (GAAP) $ 11,955 $ 11,608
Taxable-equivalent adjustment 126 -
Net interest income on
taxable-equivalent basis $ 12,081 $ 11,608
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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.
Nine Months Ended September 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) $ 1,165,897 $ 51,949 5.96 % $ 1,159,102 $ 55,354 6.38 %
Mortgages held-for-sale 1,574 94 7.98 1,069 70 8.75
Securities (1) 213,257 6,461 4.05 146,025 4,038 3.69
Federal funds sold and other 128,552 492 0.51 70,684 1,616 3.05
Total interest-earning assets (1) 1,509,280 58,996 5.23 1,376,880 61,078 5.93
Less: Allowance for loan losses (24,932 ) (11,781 )
Noninterest-earning assets 110,792 104,815
Total assets $ 1,595,140 $ 1,469,914
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Interest checking $ 183,676 $ 652 0.47 % $ 189,969 $ 2,204 1.55 %
Money market and savings 259,776 2,196 1.13 307,716 4,960 2.15
Time deposits 548,363 13,658 3.33 449,923 14,959 4.44
Total interest-bearing deposits 991,815 16,506 2.23 947,608 22,123 3.12
Borrowings and repurchase agreements 234,755 6,364 3.62 212,165 5,607 3.53
Junior subordinated debentures 20,619 927 6.01 20,619 1,016 6.58
Total interest-bearing liabilities 1,247,189 23,797 2.55 1,180,392 28,746 3.25
Noninterest-bearing liabilities:
Noninterest-bearing deposits 149,348 116,470
Other liabilities 10,810 12,503
Total liabilities 1,407,347 1,309,365
Shareholders' equity 187,793 160,549
Total liabilities and shareholders'
equity $ 1,595,140 $ 1,469,914
Net interest income (1) $ 35,199 $ 32,332
Net interest spread (1) 2.68 % 2.68 %
Net interest margin (1) 3.12 % 3.14 %
Net interest income (GAAP) $ 34,874 $ 32,332
Taxable-equivalent adjustment 325 -
Net interest income on
taxable-equivalent basis $ 35,199 $ 32,332
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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 $7.7 million and $13.7 million for the three months and nine months ended September 30, 2009, compared with $5.2 million and $10.5 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. Included in the provision for loan losses in the third quarter of 2009 were specific reserves of $5.6 million for two loans in Florida.
Noninterest Income
Noninterest income represented 36.30% and 34.45% of total revenue for the three months ended September 30, 2009 and 2008.
Noninterest income increased $713,000, or 11.7%, to $6.8 million for the three months ended September 30, 2009, compared with the same period in 2008. The increase reflected growth in trust and investment management fees and gain on sale of securities.
Noninterest income was essentially flat for the nine months ended September 30, 2009, compared with the same period in 2008. A decrease in trust and investment management fees was partially offset by increased mortgage banking income and gain on sale of securities.
The following table presents, for the periods indicated, the major categories of noninterest income:
Three Months Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
(dollars in thousands)
Trust and investment management fees $ 4,501 $ 4,277 $ 12,337 $ 13,344
Mortgage banking 110 28 612 217
Insurance commissions and fees 1,365 1,385 4,379 4,497
Net gain (loss) on sale of available-for-sale
securities 387 (2 ) 387 (2 )
Other 450 412 1,529 1,328
Total noninterest income $ 6,813 $ 6,100 $ 19,244 $ 19,384
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Noninterest Expense
Noninterest expense was $13.3 million for the third quarter of 2009, up $1.1 million, or 8.9%, compared with the third quarter of 2008, primarily due to a combination of higher FDIC insurance assessments, higher professional expenses related to loan collection and higher compensation expense.
For the nine months ended September 30, 2009, noninterest expense was $39.7 million, an increase of $1.2 million, or 3.2%, compared with the same period of 2008. The increase was due primarily to higher FDIC insurance assessments, which included the special assessment of $684,000 in the second quarter of 2009, and higher professional expenses related to loan collection.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Three Months Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
(dollars in thousands)
Compensation $ 7,761 $ 6,991 $ 22,506 $ 22,536
Non-staff expenses:
Occupancy 1,496 1,477 4,504 4,400
Equipment 430 494 1,312 1,512
Advertising and promotion 214 187 630 610
Outside data processing 797 762 2,344 2,173
Professional fees 912 671 2,891 2,566
Intangible amortization 171 187 511 562
FDIC assessment 270 50 1,068 111
Other 1,238 1,379 3,971 4,049
Total noninterest expense $ 13,289 $ 12,198 $ 39,737 $ 38,519
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Income Tax Expense
The benefit for income taxes was $453,000 for the three months ended September 30, 2009, compared with a provision of $33,000 for the same three months of 2008. The effective tax rate for the three months ended September 30, 2009 and 2008 was 20.5% and 12.6%. The provision for income taxes decreased to $527,000 for the nine months ended September 30, 2009, compared with $791,000 for the same period of 2008. The effective tax rate for the nine months ended September 30, 2009 and 2008 was 72.2% and 29.6%. The effective rate in the current period was affected by lower income levels and immaterial return-to-accrual reconciliation differences booked in the current year, which resulted in a higher than normal effective tax rate.
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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