FORM 10-Q
UNITED STATES
(Mark One) SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM____________TO___________
COMMISSION FILE NUMBER: 000-25051
PROSPERITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2331986
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3040 Post Oak Blvd.
Houston, Texas 77056
(Address of principal executive offices, including zip code)
(713) 993-0002
(Registrant's telephone number, including area code)
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 [ ]
As of April 15, 1999, there were 5,172,825 shares of the registrant's Common
Stock, par value $1.00 per share, outstanding.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements ............................................. 3
Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and December 31,1998 ................ 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 (unaudited) ...................... 4
Consolidated Statements of Shareholders' Equity
for the Year Ended December 31, 1998 and for
the Three Months Ended March 31, 1999 (unaudited) .............. 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (unaudited) ......... 6
Notes to Consolidated Financial Statements ....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 19
Item 2. Changes in Securities and Use of Proceeds ........................ 19
Item 3. Defaults upon Senior Securities .................................. 19
Item 4. Submission of Matters to a Vote of Security Holders .............. 19
Item 5. Other Information ................................................ 19
Item 6. Exhibits and Reports on Form 8-K ................................. 19
Signatures ................................................................ 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
(unaudited)
(Dollars in thousands,
except share data)
ASSETS
Cash and due from banks .............................. $ 11,906 $ 18,243
Interest-bearing deposits in financial institutions .. -- 99
Federal Funds sold ................................... 20,200 --
--------- ---------
Total cash and cash equivalents .................... 32,106 18,342
Available for sale securities, at fair value
(amoritized cost of $137,297 (unaudited)
and $113,000, respectively) ........................ 137,471 113,828
Held to maturity securities, at
cost (fair value of $94,941(unaudited)
and $115,021, respectively) ........................ 94,247 113,916
Loans ................................................ 178,012 170,478
Less allowance for credit losses ..................... (1,916) (1,850)
--------- ---------
Loans, net ................................. 176,096 168,628
Accrued interest receivable .......................... 4,155 3,990
Goodwill (net of accumulated amortization of $3,239
(unaudited) and $3,077, respectively) .............. 9,528 9,690
Bank premises and equipment, net ..................... 6,126 6,105
Other assets ......................................... 2,174 1,813
--------- ---------
TOTAL ................................................ $ 461,903 $ 436,312
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing ............................. $ 81,656 $ 84,976
Interest-bearing ................................ 335,707 305,683
--------- ---------
Total deposits ............................. 417,363 390,659
Other borrowings ................................... -- 2,437
Accrued interest payable ........................... 1,014 1,081
Other liabilities .................................. 1,263 700
--------- ---------
Total liabilities .......................... 419,640 394,877
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 50,000,000
shares authorized; 5,176,401
(unaudited) and 5,176,401, shares
issued at March 31, 1999 and December 31,
1998, respectively; 5,172,825
(unaudited) and 5,172,825 shares
outstanding at March 31, 1999
and December 31, 1998, respectively ............. 5,176 5,176
Capital surplus .................................... 16,365 16,477
Retained earnings .................................. 20,626 19,452
Accumulated other comprehensive income -- net
unrealized gains on available for sale
securities, net of tax of $59
(unaudited) and $179, respectively .............. 114 348
Less treasury stock, at cost, 3,576
shares at March 31, 1999 (unaudited)
and 3,576 shares at December 31,
1998, respectively .............................. (18) (18)
--------- ---------
Total shareholders' equity ................. 42,263 41,435
--------- ---------
TOTAL ................................................ $ 461,903 $ 436,312
========= =========
See notes to consolidated financial statements.
3
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
(Dollars in thousands,
except per share data)
INTEREST INCOME:
Loans, including fees ....................... $3,593 $2,644
Securities:
Taxable .................................... 3,117 2,398
Nontaxable ................................. 235 140
Federal funds sold .......................... 300 72
Deposits in financial institutions ........ -- 3
------ ------
Total interest income ..................... 7,245 5,257
------ ------
INTEREST EXPENSE:
Deposits .................................. 3,106 2,274
Note payable and federal funds
purchased ................................ -- 1
Other ..................................... 5 26
------ ------
Total interest expense ................... 3,111 2,301
------ ------
NET INTEREST INCOME ...................... 4,134 2,956
PROVISION FOR CREDIT LOSSES ................. 65 70
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES ......................... 4,069 2,886
------ ------
NONINTEREST INCOME:
Customer service fees ..................... 608 528
Other ..................................... 95 105
------ ------
Total noninterest income ................. 703 633
------ ------
NONINTEREST EXPENSE:
Salaries and employee benefits ............ 1,423 1,028
Net occupancy expense ..................... 204 181
Data processing ........................... 211 188
Goodwill amortization ..................... 161 116
Depreciation expense ...................... 86 67
Other ..................................... 589 528
------ ------
Total noninterest expense ................ 2,674 2,108
------ ------
INCOME BEFORE INCOME TAXES .................. 2,098 1,411
PROVISION FOR INCOME TAXES .................. 664 440
------ ------
NET INCOME .................................. $1,434 $ 971
====== ======
EARNINGS PER SHARE
Basic ....................................... $ 0.28 $ 0.24
====== ======
Diluted ..................................... $ 0.27 $ 0.24
====== ======
See notes to consolidated financial statements.
4
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
------------------------- CAPITAL RETAINED
SHARES AMOUNT SURPLUS EARNINGS
--------- ----------- ---------- ------------
(Amounts in thousands, except share data)
BALANCE AT JANUARY 1, 1998 ....................... 3,993,884 $ 3,993 $ 4,818 $ 16,049
Net income ................................. 4,460
Net change in unrealized gain (loss)
on available for sale securities .........
Total comprehensive income .................
Sale of common stock ....................... 1,182,517 1,183 11,659
Cash dividends declared, $0.20
per share ................................ (1,057)
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 ..................... 5,176,401 $ 5,176 $ 16,477 $ 19,452
Net income (unaudited) ..................... 1,434
Net change in unrealized gain (loss) on
available for sale securities(unaudited) .
Total comprehensive income (unaudited) .....
Stock issuance cost (unaudited) ............ (112)
Cash dividends declared, $.05
per share (unaudited) .................... (260)
---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 1999
(unaudited) .............................. 5,176,401 $ 5,176 $ 16,365 $ 20,626
========== ========== ========== ==========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME -- NET
UNREALIZED GAIN
(LOSS) ON AVAIL- TOTAL
ABLE FOR SALE TREASURY SHAREHOLDERS'
SECURITIES STOCK EQUITY
---------------- ----------- --------------
BALANCE AT JANUARY 1, 1998 ....................... $ (24) $ (18) $ 24,818
Net income ................................. 4,460
Net change in unrealized gain (loss)
on available for sale securities ......... 372 372
----------
Total comprehensive income ................. 4,832
----------
Sale of common stock ....................... 12,841
Cash dividends declared, $0.20
per share ................................ (1,057)
---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 ..................... $ 348 $ (18) $ 41,435
Net income (unaudited) ..................... 1,434
Net change in unrealized gain (loss) on
available for sale securities(unaudited) . (234) (234)
----------
Total comprehensive income (unaudited) ..... 1,200
----------
Stock issuance cost (unaudited) ............ (112)
Cash dividends declared, $.05
per share (unaudited) .................... (260)
---------- ---------- ----------
BALANCE AT MARCH 31, 1999
(unaudited) .............................. $ 114 $ (18) $ 42,263
========== ========== ==========
See notes to consolidated financial statements.
5
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
--------- ----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................... $ 1,434 $ 971
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................ 312 240
Provision for credit losses .................. 65 70
Net amortization of premium/discount
on investments ............................ 90 3
Increase in accrued interest receivable ...... (190) (72)
Increase in other assets ..................... (335) (196)
Increase in accrued interest payable
and other liabilities ...................... 613 564
-------- --------
Total adjustments .......................... 555 609
-------- --------
Net cash provided by operating activities .. 1,989 1,580
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal
paydowns of held to maturity securities ...... 19,884 12,471
Purchase of held to maturity securities ......... (295) (8,712)
Proceeds from maturities and principal
paydowns of available for sale securities .... 4,705 5,041
Purchase of available for sale securities ....... (28,712) --
Net increase in loans ........................... (7,532) (6,715)
Purchase of bank premises and equipment ......... (172) (53)
Net decrease in interest-bearing
deposits in financial institutions ........... 99 --
Premium paid for West Columbia branch ........... -- (250)
-------- --------
Net cash (used in) provided by
investing activities ................... (12,023) 1,782
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing
deposits ..................................... (3,319) 8,419
Net increase in interest-bearing deposits ...... 29,924 11,837
Repayments of line of credit .................... (2,435) (2,800)
Stock issuance costs ............................ (112) --
Payments of cash dividends ...................... (260) (200)
-------- --------
Net cash provided by
financing activities ................... 23,798 17,256
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS ................................ $ 13,764 $ 20,618
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ....................................... 18,342 17,372
-------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD .......................................... $ 32,106 $ 37,990
======== ========
See notes to consolidated financial statements.
6
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Prosperity
Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries, First
Prosperity Bank (the "Bank") and Prosperity Holdings, Inc. All significant
inter-company transactions and balances have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the statements reflect all
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows of the Company on a consolidated basis, and all
such adjustments are of a normal recurring nature. These financial statements
and the notes thereto should be read in conjunction with the Company's Form 10-K
filed on March 24, 1999. Operating results for the three month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
INCOME PER COMMON SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- -------
Net income available to common shareholders ...... $ 1,434 $ 971
Weighted average common shares outstanding ....... 5,173 3,990
Potential dilutive common shares ................. 198 83
-------- -------
Weighted average common shares and equivalents
outstanding ................................... 5,371 4,073
-------- -------
Basic earnings per common share .................. $ 0.28 $ 0.24
======== =======
Diluted earnings per common share ................ $ 0.27 $ 0.24
======== =======
7
PROSPERITY BANCSHARES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
RECENT ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires that all
components of comprehensive income and total comprehensive income be reported on
one of the following: (1) the statement of operations, (2) the statement of
shareholders' equity, or (3) a separate statement of comprehensive income.
Comprehensive income is comprised of net income and all changes to shareholders'
equity, except those due to investments by owners (changes in capital surplus)
and distributions to owners (dividends). The Company is reporting comprehensive
income on its statement of changes in shareholders' equity.
Other comprehensive income consists of unrealized gains and losses on
available for sale securities. The Company is reporting other comprehensive
income on its statement of changes in shareholders' equity.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes new standards for public companies to report
information about their operating segments, products and services, geographic
areas and major customers. The statement is effective for financial statements
issued for periods beginning after December 15, 1997. The Company has adopted
SFAS No. 131 effective January 1, 1998. Adoption had no material effect on the
Consolidated Financial Statements.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. This statement is effective for periods beginning after June 15, 1999.
Management believes the implementation of this pronouncement will not have a
material effect on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Prosperity Bancshares, Inc. (the "Company") is a registered bank holding
Company that derives substantially all of its revenues and income from the
operation of First Prosperity Bank (the "Bank"). The Bank is a full-service bank
that provides a broad line of financial products and services to small and
medium-sized businesses and consumers through 12 full-service banking locations,
three of which are located in the greater Houston metropolitan area. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain certain forward-looking statements regarding
future financial conditions, results of operations and the Company's business
operations. Such statements involve risks, uncertainties and assumptions,
including, but not limited to, monetary policy and general economic conditions
in Texas and the Houston metropolitan area, the risks of changes in interest
rates on the level and composition of deposits, loan demand and the values of
loan collateral securities and interest rate protection agreements, the actions
of competitors and customers, the success of the Company in implementing its
strategic plan, the failure of the assumptions underlying the reserves for loan
losses and the estimations of values of collateral and various financial assets
and liabilities, that the costs of technological changes, including "Year 2000"
data systems and compliance issues, are more difficult or expensive than
anticipated, the effects of regulatory restrictions imposed on banks and bank
holding companies generally, and other uncertainties discussed in the Company's
other public reports and filings and public statements. Should one or more of
these risks or uncertainties materialize, or should these underlying assumptions
prove incorrect, actual outcomes may vary materially from outcomes expected or
anticipated by the Company.
8
OVERVIEW
The Company showed positive earnings growth for the quarter ended March
31, 1999 due to the increase in loan volume and the acquisition of Union State
Bank in East Bernard, Texas (the "Union Acquisition") in the fourth quarter of
1998. Net income available to common shareholders was $1.4 million ($0.27 per
common share on a diluted basis) for the quarter ended March 31, 1999 compared
with $971,000 ($0.24 per common share on a diluted basis) for the quarter ended
March 31, 1998, an increase of $463,000, or 47.7%. The Company posted returns on
average common equity of 13.91% and 15.64% and returns on average assets of
1.26% and 1.22% for the quarters ended March 31, 1999 and 1998, respectively.
Total assets were $461.9 million at March 31, 1999 compared with $436.3
million at December 31, 1998. Total loans increased to $178.0 million at March
31, 1999 from $170.5 million at December 31, 1998, an increase of $7.5 million,
or 4.4%. Total deposits were $417.4 million at March 31, 1999 compared with
$390.7 million at December 31, 1998, an increase of $26.7 million, or 6.84%.
Shareholders' equity increased $828,000 or 2.0%, to $42.3 million at March 31,
1999 compared with $41.4 million at December 31, 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $4.1 million for the quarter ended March 31, 1999
compared with $3.0 million for the quarter ended March 31, 1998, an increase of
$1.1 million, or 39.9%. Net interest income increased as a result of an increase
in average interest-earning assets to $426.1 million for the quarter ended March
31, 1999 from $297.9 million for the quarter ended March 31, 1998, an increase
of $128.2 million, or 43.0%. The net interest margin on a tax equivalent basis
decreased to 4.02% from 4.11% for the same periods, principally due to a 31
basis point decrease in the yield on interest-earning assets and a 20 basis
point decrease in the yield on interest-bearing liabilities.
9
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
a "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a "rate change." The following tables set forth,
for each 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 for the quarters ended March 31, 1999 and
1998. The tables also set forth the average rate paid on total interest-bearing
liabilities, and the net interest margin on average total interest-earning
assets for the same periods.
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
1999 1998
---------------------------------------- --------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD
BALANCE PAID RATE(4) BALANCE PAID RATE(4)
------------ ----------- --------- ------------ ---------- ---------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans ...................................... $ 173,732 $ 3,593 8.39% $ 123,360 $ 2,644 8.69%
Securities(1) .............................. 227,746 3,352 5.89 169,089 2,538 6.00
Federal funds sold and other temporary
investments ............................... 24,663 300 4.93 5,474 75 5.56
--------- --------- --------- ---------
Total interest-earning assets ............ 426,141 7,245 6.85% 297,923 5,257 7.16%
--------- ------- --------- ------
Less allowance for credit losses ........... (1,887) (1,022)
Total interest-earning assets, net ---------
of allowance ............................ 424,254 296,901
Noninterest-earning assets .............. 35,685 27,055
--------- ---------
Total assets ............................. $ 459,939 $ 323,956
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ........... $ 52,138 $ 196 1.52% $ 43,523 $ 176 1.64%
Savings and money market accounts .......... 123,110 1,011 3.33 76,925 668 3.52
Certificates of deposit .................... 159,612 1,899 4.83 113,082 1,430 5.13
Federal funds purchased and other
borrowings ................................ 459 5 4.42 1,878 27 5.83
--------- --------- --------- ---------
Total interest-bearing
liabilities ............................. 335,319 3,111 3.76% 235,408 2,301 3.96%
--------- --------- ------- --------- --------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits ........ 80,739 61,957
Other liabilities .......................... 2,084 1,419
--------- ---------
Total liabilities ........................ 418,142 298,784
--------- ---------
Shareholders' equity .......................... 41,797 25,172
--------- ---------
Total liabilities and shareholders'equity $ 459,939 $ 323,956
========= =========
Net interest rate spread ...................... 3.09% 3.20%
======= ======
Net interest income and margin(2) ............. $ 4,134 3.93% $ 2,956 4.02%
========= ======= ========= ======
Net interest income and margin
(tax-equivalent basis)(3) ................... $ 4,222 4.02% $ 3,017 4.11%
========= ======= ========= ======
- ------------------------------
(1) Yield is based on amortized cost and does not include any component of
unrealized gains or losses.
(2) The net interest margin is equal to net interest income divided by average
interest-earning assets.
(3) In order to make pretax income and resultant yields on tax-exempt
investments and loans comparable to those on taxable investments and loans,
a tax-equivalent adjustment has been computed using a federal income tax
rate of 34%.
(4) Annualized.
10
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates.
For purposes of this table, changes attributable to both rate and volume which
cannot be segregated have been allocated to rate.
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 VS. 1998
------------------------------
INCREASE
(DECREASE)
DUE TO
------------------
VOLUME RATE TOTAL
------- ------- -------
(Dollars in thousands)
Interest-earning assets:
Loans ......................................... $ 1,080 $ (131) $ 949
Securities .................................... 880 (66) 814
Federal funds sold and other temporary
investments ................................. 263 (38) 225
------- ------- -------
Total increase (decrease) in interest income 2,223 (235) 1,988
------- ------- -------
Interest-bearing liabilities:
Interest-bearing demand deposits .............. 35 (15) 20
Savings and money market accounts ............. 401 (58) 343
Certificates of deposit ....................... 588 (119) 469
Federal funds purchased and other borrowings .. (20) (2) (22)
------- ------- -------
Total increase (decrease) in interest expense 1,004 (194) 810
------- ------- -------
Increase (decrease) in net interest income ....... $ 1,219 $ (41) $ 1,178
======= ======= =======
ALLOWANCE FOR CREDIT LOSSES
Management actively monitors the Company's asset quality and provides
specific loss allowances when necessary. Loans are charged-off against the
allowance for loan losses when appropriate. Although management believes it uses
the best information available to make determinations with respect to the
allowance for credit losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. As of March 31, 1999, the allowance for credit losses amounted
to $1.9 million, or 1.08% of total loans compared with $1.9 million, or .09% of
total loans at December 31, 1998.
Provisions for credit losses are charged to income to bring the total
allowance for credit losses to a level deemed appropriate by management of the
Company based on such factors as historical experience, the volume and type of
policies, general economic conditions and other factors related to the
collectibility of loans in the Company's portfolio.
The provision for credit losses for the quarter ended March 31, 1999 was
$65,000 compared with $70,000 for the quarter ended March 31, 1998. For the
quarter ended March 31, 1999, net recoveries were $1,000.
11
Set forth below is an analysis of the allowance for credit losses for the
three months ended March 31, 1999.
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
--------- ---------
(Dollars in thousands)
Average loans outstanding ...................... $ 173,732 $ 123,360
========= =========
Gross loans outstanding at end of period ....... $ 178,012 $ 127,265
========= =========
Allowance for credit losses at
beginning of period .......................... $ 1,850 $ 1,016
Provision for credit losses .................... 65 70
Charge-offs:
Commercial and industrial .................... (--) (1)
Real estate and agriculture .................. (4) (12)
Consumer ..................................... (7) (19)
Recoveries:
Commercial and industrial .................... 1 1
Real estate and agriculture .................. 8 --
Consumer ..................................... 3 3
--------- ---------
Net (charge-offs) recoveries ................... 1 (28)
Allowance for credit losses at end of period ... $ 1,916 $ 1,058
========= =========
Ratio of allowance to end of period
loans ........................................ 1.08% .83%
Ratio of net charge-offs to average
loans ........................................ -- .02
Ratio of allowance to end of period
nonperforming loans .......................... -- --
NONINTEREST INCOME
The Company's primary sources of noninterest income are service charges on
deposit accounts and other banking service related fees. The following table
presents, for the periods indicated, the major categories of noninterest income:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
(Dollars in thousands)
Service charges on deposit accounts ....... $ 608 $ 528
Other noninterest income .................. 95 105
-------- --------
Total noninterest income ................ $ 703 $ 633
======== ========
Noninterest income totaled $703,000 for the three months ended March 31,
1999 compared with $633,000 for the same period in 1998, an increase of $70,000,
or 11.1%. The increase in service charges on deposit accounts was principally
due to the Union Acquisition.
12
NONINTEREST EXPENSE
Noninterest expense totaled $2.7 million for the quarter ended March 31,
1999 compared with $2.1 million for the quarter ended March 31, 1998, an
increase of $566,000, or 26.9%. The increase was primarily due to the Union
Acquisition. The following table presents, for the periods indicated, the major
categories of noninterest expense:
Three Months Ended March 31,
----------------------------
1999 1998
------ ------
(Dollars in thousands)
Salaries and employee benefits ................ $1,423 $1,028
Non-staff expenses:
Net occupancy expense ...................... 204 181
Equipment depreciation ..................... 86 67
Data processing ............................ 211 188
Professional fees .......................... 39 19
Regulatory assessments and FDIC insurance .. 21 18
Ad valorem and franchise taxes ............. 48 43
Goodwill amortization ...................... 161 116
Other ...................................... 481 448
------ ------
Total non-staff expenses ...................... 1,251 1,080
------ ------
Total noninterest expense ..................... $2,674 $2,108
====== ======
Salaries and employee benefit expenses were $1.4 million for the quarter
ended March 31, 1999 compared with $1.0 million for the quarter ended March 31,
1998, an increase of $395,000, or 38.4%, The change was due primarily to an
increase in the number of employees due to the Union Acquisition and annual
employee salary increases.
Non-staff expenses increased $171,000, or 15.8%, to $1.2 million for the
quarter ended March 31, 1999 compared to the same period in 1998. The increase
was principally due to the Union Acquisition.
INCOME TAXES
Income tax expense increased $224,000 to $664,000 for the quarter ended
March 31, 1999 from $440,000 for the same period in 1998. The increase was
primarily attributable to higher pretax net earnings.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans were $178.0 million at March 31, 1999, an increase of $7.5
million, or 4.4% from $170.5 million at December 31, 1998. Loan growth occurred
primarily in 1-4 family residential and home equity loans. Period end loans
comprised 41.8% of average earning assets at March 31, 1999 compared with 51.9%
at December 31, 1998.
13
The following table summarizes the loan portfolio of the Company by type
of loan as of March 31, 1999 and December 31, 1998:
MARCH 31, DECEMBER 31,
1999 1998
---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- --------- ---------- --------
(Dollars in thousands)
Commercial and industrial .... $ 18,855 10.6% $ 16,972 10.0%
Real estate:
Construction and land
development ........... 2.422 1.4 1,727 1.0
1-4 family residential ..... 83,287 46.8 80,062 46.9
Home Equity ................ 8,486 4.7 8,077 4.7
Commercial mortgages ....... 23,800 13.4 22,240 13.1
Farmland ................... 6,102 3.4 6,148 3.6
Multifamily residential .... 1,155 0.7 1,090 0.6
Agriculture .................. 14,646 8.2 14,107 8.3
Consumer ..................... 19,259 10.8 20,055 11.8
-------- -------- -------- --------
Total loans ............. $178,012 100.0% $170,478 100.0%
======== ======== ======== ========
NONPERFORMING ASSETS
The Company had $131,000 and $140,000 in nonperforming assets for the
periods ended March 31, 1999 and December 31, 1998, respectively. The Company
generally places a loan on nonaccrual status and ceases accruing interest when
the payment of principal or interest is delinquent for 90 days, or earlier in
some cases, unless the loan is in the process of collection and the underlying
collateral fully supports the carrying value of the loan. The Company generally
charges off all loans before attaining nonaccrual status.
The following table presents information regarding nonperforming assets as
of the dates indicated:
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(Dollars in thousands)
Nonaccrual loans ............................ $ -- $ 5
Accruing loans 90 or more days past due ..... -- --
---------- ------------
Total nonperforming loans ................... -- 5
Other real estate ........................... 131 135
---------- ------------
Total nonperforming assets .................. $ 131 $ 140
========== ============
SECURITIES
Securities totaled $231.7 million at March 31, 1999 compared with $227.7
million at December 31, 1998, an increase of $4.0 million, or 1.7%. The increase
was primarily due to an increase in deposits. At March 31, 1999, securities
represented 50.2% of total assets compared with 52.2% of total assets at
December 31, 1998.
PREMISES AND EQUIPMENT
Premises and equipment, net of accumulated depreciation, totaled $6.1
million at March 31, 1999 and December 31, 1998, respectively.
DEPOSITS
Total deposits were $417.4 million at March 31, 1999 compared with $390.7
million at December 31, 1998, an increase of $26.7 million. At March 31, 1999,
non-interest bearing deposits accounted for approximately
14
19.6% of total deposits compared with 21.8% of total deposits at December 31,
1998. Interest-bearing demand deposits totaled $335.7 million, or 80.4%, of
total deposits at March 31, 1999 compared with $305.7 million, or 78.2%, of
total deposits at December 31, 1998.
BORROWINGS
The Company had no notes payable and no Federal Home Loan Bank ("FHLB")
advances at March 31, 1999, compared with $2.4 million in FHLB advances at
December 31, 1998.
LIQUIDITY
Effective management of balance sheet liquidity is necessary to fund
growth in earning assets and to pay liability maturities, depository customers'
withdrawal requirements and shareholders' dividends. Thc Company has numerous
sources of liquidity including a significant portfolio of shorter-term assets,
marketable investment securities (excluding those presently classified as
"held-to-maturity"), increases in customers' deposits, and access to borrowing
arrangements. Available borrowing arrangements maintained by the Company include
federal funds lines with other commercial banks and an advancement arrangement
with the FHLB.
Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. As of March 31, 1999, the
Company had cash and cash equivalents of $32.1 million, down from $18.3 million
at December 31, 1998. The decline was due primarily to an increase in loans.
CAPITAL RESOURCES
Total shareholders' equity was $42.3 million at March 31, 1999 compared
with $41.4 million at December 31, 1998, an increase of $828,000, or 2.0%. The
increase was due primarily to net earnings of $1.4 million (less dividends of
$260,000 and change in unrealized gain on available for sale securities of
$234,000) for the three months ended March 31, 1999.
Both the Board of Governors of the Federal Reserve System, with respect to
the Company, and the Federal Deposit Insurance Corporation ("FDIC"), with
respect to the Bank, have established certain minimum risk-based capital
standards that apply to bank holding companies and federally insured banks. As
of March 31, 1999 the Company's risk-based capital ratios were above the levels
required for the Company to be designated as "well capitalized", with Tier 1
capital, total risk-based capital and leverage capital ratios of 17.58%, 18.62%
and 7.24%, respectively. As of March 31, 1999, the bank's risk-based capital
ratios were above the levels required for the Bank to be designated as "well
capitalized" by the FDIC, with Tier-1 capital, total risk-based capital and
leverage capital ratios of 13.08%, 14.11% and 5.38%, respectively.
YEAR 2000 COMPLIANCE
GENERAL. The Year 2000 risk involves computer programs and computer
software that are not able to perform without interruption into the Year 2000.
If computer systems do not correctly recognize the date change from December 31,
1999 to January 1, 2000, computer applications that rely on the date field could
fail or create erroneous results. Such erroneous results could affect interest,
payment or due dates or cause the temporary inability to process transactions,
send invoices or engage in similar normal business activities. If these issues
are not addressed by the Company, its suppliers and its borrowers, there could
be a material adverse impact on the Company's financial condition or results of
operations.
STATE OF READINESS. The Company formally initiated its Year 2000 project
and plan in November 1997 to insure that its operational and financial systems
will not be adversely affected by year problems. The Company has formed a Year
2000 project team and the Board of Directors and management are supporting all
compliance efforts and allocating the necessary resources to ensure completion.
An inventory of all systems and products (including both information technology
("IT") and non-informational technology ("non-IT") systems) that could be
affected by the Year 2000 date change has been developed, verified and
categorized as to its importance to the Company and an
15
assessment of all major IT and critical non-IT systems has been completed. This
assessment involved inputting test data which simulates the Year 2000 date
change into such IT systems and reviewing the system output for accuracy. The
Company's assessment of critical non-IT systems involved reviewing such systems
to determine whether they were date dependent. Based on such assessment, the
Company believes that none of its critical non-IT systems are date dependent.
The software for the Company's systems is provided through service bureaus and
software vendors. The Company has contacted all of its third party vendors and
software providers and is requiring them to demonstrate and represent that the
products provided are or will be Year 2000 compliant and has planned a program
of testing compliance. The Company's service bureau, which performs
substantially all of the Company's data processing functions, has warranted in
writing that its software is Year 2000 compliant and pursuant to applicable
regulatory guidelines the Company has reviewed the results of user group tests
performed by the service provider to verify this assertion. The Company believes
it would have recourse against the service provider for actual damages incurred
by the Company in the event the service provider breaches this warranty. In
addition, the Company's compliance with Year 2000 issues has been reviewed by
the FDIC twice.
The Company has completed the following phases of its Year 2000 plan: (i)
recognizing Year 2000 issues, (ii) assessing the impact of Year 2000 issues on
the Company's critical systems and (iii) upgrading systems as necessary to
resolve those Year 2000 issues which have been identified. The Company has
implemented and tested all of its mission critical systems.
COSTS OF COMPLIANCE. Management does not expect the costs of bringing the
Company's systems into Year 2000 compliance will have a material adverse effect
on the Company's financial conditions, results of operations or liquidity. The
Company has budgeted $10,000 to address Year 2000 issues. As of March 31, 1999,
the Company has not incurred any significant costs in relation to Year 2000. The
largest potential risk to the Company concerning Year 2000 is the malfunction of
its data processing system. In the event its data processing system does not
function properly, the Company is prepared to perform functions manually. The
Company believes it is in compliance with regulatory guidelines regarding Year
2000 compliance, including the timetable for achieving compliance.
RISKS RELATED TO THIRD PARTIES. The impact of Year 2000 non-compliance by
third parties with which the Company transacts business cannot be accurately
gauged. The Company identified its largest dollar deposit (aggregate deposits
over $500,000) and loan ($250,000 or more) customers and, based on information
available to the Company, conducted a preliminary evaluation to determine which
of those customers are likely to be affected by Year 2000 issues. The Company
then surveyed those customers deemed at risk to determine their readiness with
respect to Year 2000 issues, including their awareness of Year 2000 issues,
plans to address such issues and progress with respect to such plans. The survey
included approximately 71% of all depositors with average balances of $500,000
or greater, which is approximately 10 % of its total dollar deposit base , and
approximately 53% of its borrowers of $250,000 or more, which is approximately
13% of its total dollar loan base. As of the date hereof, the responses show
that the customers are aware of Year 2000 issues, are in the process of updating
their systems and have informed the Company that they believe they will be ready
for the Year 2000 date change by the end of 1999. The Company will continue to
review such responses and will encourage customers to resolve any identified
problems. To the extent a problem is identified, the Company intends to monitor
the customer's progress in resolving such problem. In the event that Year 2000
noncompliance adversely affects a borrower, the Company may be required to
charge-off the loan to that borrower. For a discussion of possible effects of
such charge-offs, see "--Contingency Plans" below. In the event that Year 2000
noncompliance causes a depositor to withdraw funds, the Company plans to
maintain additional cash on hand. The Company also has access to the FHLB and
Federal Reserve Discount Windows to address any additional liquidity needs. With
respect to its borrowers, the Company includes in its loan documents a Year 2000
disclosure form and an addendum to the loan agreement in which the borrower
represents and warrants its Year 2000 compliance to the Company.
CONTINGENCY PLANS. The Company has finalized its contingency planning with
respect to the Year 2000 date change and believes that if its own systems should
fail, the company could convert to a manual entry system for a period of up to
six months without significant losses. The Company believes that any mission
critical systems could be recovered and operating within seven days. In the
event that the Federal Reserve is unable to handle-electronic funds transfers
and check clearing, the Company does not expect the impact to be material to its
financial
16
condition or results of operations as long as the Company is able to utilize an
alternative electronic funds transfer and clearing source. As part of its
contingency planning, the Company has reviewed its loan customer base and the
potential impact on capital of Year 2000 noncompliance. Based upon such review,
using what it considers to be a reasonable worst case scenario, the Company has
assumed that certain of its commercial borrowers whose businesses are most
likely to be affected by Year 2000 noncompliance would be unable to repay their
loans, resulting in charge-offs of loan amounts in excess of collateral values.
If such were the case, the Company believes that it is unlikely that its
exposure would exceed $300,000, although there are no assurances that this
amount will not be substantially higher. The Company does not believe that this
amount is material enough for the Company to adjust it current methodology for
making provisions to the allowance for credit losses. In addition, the Company
plans to maintain additional cash on hand to meet any unusual deposit withdrawal
activity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manages market risk, which for the Company is primarily
interest rate risk, through its Asset Liability Committee which is composed of
senior officers of the Company, in accordance with policies approved by the
Company's Board of Directors.
The Company uses simulation analysis to examine the potential effects of
market changes on net interest income and market value. It considers
macroeconomic variables, Company strategy, liquidity and other factors as it
quantifies market risk. There have been no material changes of this nature since
the Company's Form 10-K filing on March 24, 1999. See Form 10-K, Item 7,
"Management's Discussion and Analysis and Results of Operations-Interest Rate
Sensitivity and Liquidity".
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Not applicable
c. Not applicable
d. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit 27 Financial Data Schedule
b. No reports on Form 8-K were filed by the Company during the three
months ended March 31, 1999.
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.
PROSPERITY BANCSHARES, INC.
(Registrant)
Date: May 12, 1999 /s/ DAVID ZALMAN
David Zalman
Vice President/Secretary
Date: May 12, 1999 /s/ DAVID HOLLAWAY
David Hollaway
Chief Financial Officer
18
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- ----------
27 Financial Data Schedule