(Mark One) SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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.(SM)
(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.)
4295 San Felipe
Houston, Texas 77027
(Address of principal executive offices, including zip code)
(713) 693-9300
(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 May 10, 2002, there were 8,122,035 shares of the registrant's Common
Stock, par value $1.00 per share, outstanding.
1
PROSPERITY BANCSHARES, INC.(SM) AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1. Interim Financial Statements........................................................ 3
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001................................................................ 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2002 and 2001 (unaudited)........................................ 4
Consolidated Statements of Shareholders' Equity for the Year Ended December 31,
2001 and for the Three Months Ended March 31, 2002 (unaudited)................... 5
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2002 and 2001 (unaudited)........................................................ 6
Notes to Interim Consolidated Financial Statements................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 18
Item 2. Changes in Securities and Use of Proceeds.......................................... 18
Item 3. Defaults upon Senior Securities.................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................................ 18
Item 5. Other Information.................................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................................... 18
Signatures.................................................................................. 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
PROSPERITY BANCSHARES, INC.(SM) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
--------- -----------
(unaudited)
(Dollars in thousands,
except share data)
ASSETS
Cash and due from banks ..................................................... $ 26,131 $ 41,005
Federal funds sold .......................................................... 693 715
----------- -----------
Total cash and cash equivalents ....................................... 26,824 41,720
Interest-bearing deposits in financial institutions ......................... 198 198
Available for sale securities, at fair value (amortized cost
of $460,450 (unaudited) and $481,899, respectively) ...................... 461,349 482,233
Held to maturity securities, at cost (fair value of $339,667
(unaudited) and $274,227, respectively) .................................. 336,170 270,089
Loans ....................................................................... 420,916 424,400
Less allowance for credit losses ............................................ (6,126) (5,985)
----------- -----------
Loans, net .................................................... 414,790 418,415
Accrued interest receivable ................................................. 8,784 8,466
Goodwill (net of accumulated amortization of $6,354
(unaudited) and $6,354, respectively) .................................... 22,641 22,641
Bank premises and equipment, net ............................................ 15,415 15,077
Other assets ................................................................ 3,466 3,486
----------- -----------
TOTAL ....................................................................... $ 1,289,637 $ 1,262,325
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing .................................................. $ 179,010 $ 188,832
Interest-bearing ..................................................... 963,351 934,565
----------- -----------
Total deposits ................................................ 1,142,361 1,123,397
Other borrowings ......................................................... 19,142 18,080
Accrued interest payable ................................................. 2,384 2,869
Other liabilities ........................................................ 5,969 2,254
----------- -----------
Total liabilities ............................................. 1,169,856 1,146,600
COMPANY-OBLIGATED MANDATORILY
REDEEMABLE TRUST PREFERREED SECURITIES
OF SUBSIDIARY TRUSTS .................................................... 27,000 27,000
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 50,000,000 shares authorized; 8,123,611
(unaudited) and 8,109,011 shares issued at March 31, 2002 and
December 31, 2001, respectively; 8,120,035 (unaudited) and
8,105,435 shares outstanding at March 31, 2002
and December 31, 2001, respectively .................................... 8,124 8,109
Capital surplus .......................................................... 25,005 24,955
Retained earnings ........................................................ 59,060 55,462
Accumulated other comprehensive income -- net unrealized
gains on available for sale securities, net of tax
of $328 (unaudited) and $117, respectively ............................ 610 217
Less treasury stock, at cost, 3,576 shares at March 31,
2002 (unaudited) and December 31, 2001, respectively .................. (18) (18)
----------- -----------
Total shareholders' equity .................................... 92,781 88,725
----------- -----------
TOTAL ....................................................................... $ 1,289,637 $ 1,262,325
=========== ===========
See notes to interim consolidated financial statements.
3
PROSPERITY BANCSHARES, INC.(SM) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
---------------------------
2002 2001
--------- --------
(Dollars in thousands,
except per share data)
INTEREST INCOME:
Loans, including fees................................. $ 7,756 $ 8,873
Securities:
Taxable.............................................. 9,816 8,778
Nontaxable........................................... 390 378
70% nontaxable preferred dividends................... 352 311
Federal funds sold.................................... 64 965
Deposits in financial institutions.................... 2 15
--------- --------
Total interest income................................ 18,380 19,320
--------- --------
INTEREST EXPENSE:
Deposits............................................ 6,149 9,766
Note payable and other borrowings................... 207 170
--------- --------
Total interest expense............................ 6,356 10,019
--------- --------
NET INTEREST INCOME............................... 12,024 9,301
PROVISION FOR CREDIT LOSSES........................... 120 --
--------- --------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES................................... 11,904 9,301
--------- --------
NONINTEREST INCOME:
Customer service fees............................... 1,858 1,788
Other............................................... 303 247
--------- --------
Total noninterest income........................... 2,161 2,035
-------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits...................... 3,909 3,335
Net occupancy expense............................... 479 516
Data processing..................................... 457 505
Goodwill amortization............................... -- 341
Depreciation expense................................ 373 415
Minority interest trust preferred securities........ 498 288
Merger related expenses............................. -- 2,425
Other............................................... 1,946 1,304
--------- --------
Total noninterest expense.......................... 7,662 9,129
--------- --------
INCOME BEFORE INCOME TAXES............................ 6,403 2,207
PROVISION FOR INCOME TAXES............................ 1,912 540
--------- --------
NET INCOME............................................ $ 4,491 $ 1,667
========= ========
EARNINGS PER SHARE
Basic................................................. $ 0.55 $ 0.21
========= ========
Diluted............................................... $ 0.54 $ 0.20
========= ========
See notes to interim consolidated financial statements.
4
PROSPERITY BANCSHARES, INC.(SM) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Comprehensive
Income -- Net
Common Stock Unrealized Gain
------------------- (Loss) on Avail- Total
Capital Retained able for Sale Treasury Shareholders'
Shares Amount Surplus Earnings Securities Stock Equity
-------- -------- ------- -------- ---------------- --------- -------------
(Amounts in thousands, except share data)
BALANCE AT JANUARY 1, 2001................. 8,075,486 $ 8,075 $ 26,006 $ 45,665 $ 605 $ (18) $ 80,333
Net income................................. 12,958 12,958
Net change in unrealized gain on
available for sale securities....... (388) (388)
------------
Total comprehensive income............ 12,570
------------
Cash paid to dissenting shareholders in
connection with the issuance of common
stock in exchange for common stock of
Commercial Bancshares, Inc.......... (31,775) (32) (815) (847)
Trust preferred issuance costs...... (476) (476)
Sale of common stock.................. 65,300 66 240 306
Cash dividends declared............... (3,161) (3,161)
--------- -------- -------- -------- ----------- --------- ------------
BALANCE AT DECEMBER 31, 2001............... 8,109,011 $ 8,109 $ 24,955 $ 55,462 $ 217 $ (18) $ 88,725
Net income (unaudited)................ 4,491 4,491
Net change in unrealized gain on
available for sale securities
(unaudited) ........................ 393 393
------------
Total comprehensive income
(unaudited) ........................ 4,884
------------
Sale of common stock (unaudited)...... 14,600 15 50 65
Cash dividends declared (unaudited)... (893) (893)
--------- -------- -------- -------- ----------- --------- ------------
BALANCE AT MARCH 31, 2002
(unaudited).......................... 8,123,611 $ 8,124 $ 25,005 $ 59,060 $ 610 $ (18) $ 92,781
========== ======== ======== ======== =========== ========= ============
See notes to interim consolidated financial statements.
5
PROSPERITY BANCSHARES, INC.(SM) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
2002 2001
----------- ----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................... $ 4,491 $ 1,667
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................ 373 757
Provision for credit losses .................. 120 --
Net amortization (accretion) of
discount/premium on investments ............ 785 (88)
(Loss) gain on sale of premises and
equipment ................................. (31) 241
(Increase) decrease in other assets and
accrued interest receivable ................ (298) 517
Increase in accrued interest payable
and other liabilities ...................... 3,019 1,193
--------- ---------
Total adjustments .......................... 3,968 2,620
--------- ---------
Net cash provided by operating activities .. 8,459 4,287
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal
paydowns of held to maturity securities ...... 26,035 96,743
Purchase of held to maturity securities ........ (92,401) --
Proceeds from maturities and principal
paydowns of available for sale securities .... 36,839 18,322
Purchase of available for sale securities ...... (15,849) (190,525)
Net decrease (increase) in loans ............... 3,484 (7,445)
Purchase of bank premises and equipment ........ (863) (778)
Net proceeds acquired from sale of bank premises
and equipment ............................. 202 557
--------- ---------
Net cash used in investing activities ........ (42,553) (83,126)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in noninterest-bearing
deposits ..................................... (9,822) (3,128)
Net increase in interest-bearing deposits ...... 28,786 23,575
Net proceeds (repayments) of line of credit .... 1,062 (153)
Cash paid to dissenting shareholders .......... -- (667)
Proceeds from sale of common stock ............. 65 210
Payments of cash dividends ..................... (893) (731)
--------- ---------
Net cash provided by financing activities ... 19,198 19,106
--------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS .................................... $ (14,896) $ (59,733)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ...................................... 41,720 99,163
--------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD ......................................... $ 26,824 $ 39,430
========= =========
See notes to interim consolidated financial statements.
6
PROSPERITY BANCSHARES, INC.(SM) AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements include the accounts of
Prosperity Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries,
Prosperity Bank (the "Bank") and Prosperity Holdings, Inc. These financial
statements give retroactive effect to the merger of Commercial Bancshares, Inc.,
a Texas corporation ("Commercial") with and into the Company which was effective
on February 23, 2001 and accounted for as a pooling of interests. All
significant inter-company transactions and balances have been eliminated.
The accompanying unaudited interim 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 Annual Report on Form 10-K for the year ended December 31, 2001.
Operating results for the three month period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
2. INCOME PER COMMON SHARE
The following table illustrates the computation of basic and diluted
earnings per share.
Three Months Ended
March 31,
------------------------
2002 2001
-------- ---------
Net income available to common shareholders ........ $ 4,491 $ 1,667
Weighted average common shares outstanding ......... 8,111 8,087
Potential dilutive common shares ................... 165 171
-------- ---------
Weighted average common shares and equivalents
outstanding .................................... 8,276 8,258
-------- ---------
Basic earnings per common share .................... $ 0.55 $ 0.21
======== =========
Diluted earnings per common share .................. $ 0.54 $ 0.20
======== =========
7
PROSPERITY BANCSHARES, INC. (SM) AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets," which addresses the accounting for goodwill and other
intangible assets. SFAS 142 specifies that, among other things, intangible
assets with an indefinite useful life and goodwill will no longer be amortized.
The standard requires goodwill to be periodically tested for impairment and
written down to fair value if considered impaired. The provisions of SFAS 142
were effective for fiscal years beginning after December 15, 2001. For the
quarter ended March 31, 2002, the Company did not record $341,000 in goodwill
amortization that would have been recorded prior to adoption of SFAS 142.
In July 2001, FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. The statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after September 15, 2002, with earlier
application encouraged. The adoption this statement is not expected to have a
material impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-lived Assets. SFAS 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. It supersedes, with exceptions, SFAS 121, Accounting for the
Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of, and is
effective for fiscal years beginning after December 15, 2001. Management
believes the adoption of this statement will not have a material impact on the
Company's financial position or results of operations.
4. RECENT MERGER ACTIVITY
On May 8, 2002, the Company acquired Texas Guaranty Bank, N.A. for $11.8
million in cash. Texas Guaranty Bank, N.A. operated three (3) offices in the
western portion of Houston, Texas, all of which became full service banking
centers of Prosperity Bank. As of March 31, 2002, Texas Guaranty Bank, N.A.
reported total assets of $79.2 million, total loans of $60.8 million and total
deposits of $62.3 million.
On May 2, 2002, the Company announced that it had entered into a definitive
agreement pursuant to which Paradigm Bancorporation, Inc. ("Paradigm") will be
merged into Prosperity and Paradigm's subsidiary bank, Paradigm Bank Texas, will
be merged into Prosperity Bank. Under terms of the agreement, Prosperity will
issue approximately 2.58 million shares of its common stock for all outstanding
shares of Paradigm (giving effect to the two for one stock split). Paradigm
operates a total of eleven (11) banking offices - six (6) in metropolitan
Houston and five (5) in the nearby Southeast Texas cities of Dayton, Galveston,
Mont Belvieu, and Winnie. As of March 31, 2002, Paradigm had total assets of
$256.7 million, total loans of $170.6 million, total deposits of $230.3 million
and shareholders' equity of $18.4 million. The transaction is expected to close
before September 30, 2002 and is subject to approval by Paradigm shareholders,
approval by regulators and certain closing conditions.
On April 26, 2002, the Company announced that it had entered into a
definitive agreement to acquire The First State Bank in Needville, Texas in a
cash transaction. The First State Bank operates one (1) office in Needville,
Texas, which will be consolidated (upon completion of the transaction) with
Prosperity Bank's full service banking center in Needville. On March 31, 2002,
The First State Bank reported total assets of $17.3 million, total deposits of
$15.1 million and total loans of $5.3 million. The proposed transaction is
subject to approval by The First State Bank shareholders, approval by regulators
and certain closing conditions.
8
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 this 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. Forward-looking statements are based on assumptions and involve a number
of risks and uncertainties, many of which are beyond the Company's control. The
important factors that could cause actual results to differ materially from the
forward-looking statements include, without limitation:
... changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense expectations;
... changes in the levels of loan prepayments and the resulting effects on the
value of the Company's loan portfolio;
... changes in local economic and business conditions which adversely affect
the Company's customers and their ability to transact profitable business
with the company, including the ability of the Company's borrowers to repay
their loans according to their terms or a change in the value of the
related collateral;
... increased competition for deposits and loans adversely affecting rates and
terms;
... the timing, impact and other uncertainties of future acquisitions,
including the Company's ability to identify suitable future acquisition
candidates, the success or failure in the integration of their operations,
and the ability to enter new markets successfully and capitalize on growth
opportunities;
... increased credit risk in the Company's 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 failure of assumptions underlying the establishment of and provisions
made to the allowance for credit losses;
... changes in the availability of funds resulting in increased costs or
reduced liquidity;
... increased asset levels and changes in the composition of assets and the
resulting impact on the Company's capital levels and regulatory capital
ratios;
... the Company's ability to acquire, operate and maintain cost effective and
efficient systems without incurring unexpectedly difficult or expensive but
necessary technological changes;
... the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation levels;
... changes in statutes and government regulations or their interpretations
applicable to financial holding companies and the Company's present and
future banking and other subsidiaries, including changes in tax
requirements and tax rates; and
... other risks and uncertainties listed from time to time in the Company's
reports filed with the Securities and Exchange Commission.
The Company undertakes no obligation to publicly update or otherwise revise
any forward-looking statements, whether as a result of new information, future
events or otherwise, unless the securities laws require the Company to do so.
9
RECENT DEVELOPMENTS
On May 8, 2002, the Company acquired Texas Guaranty Bank, N.A. for $11.8
million in cash. Texas Guaranty Bank, N.A. operated three (3) offices in the
western portion of Houston, Texas, all of which became full service banking
centers of Prosperity Bank. As of March 31, 2002, Texas Guaranty Bank, N.A.
reported total assets of $79.2 million, total loans of $60.8 million and total
deposits of $62.3 million.
On May 8, 2002, the Company announced a two for one stock split to be
effected in the form of a 100 percent stock dividend to shareholders of record
on May 20, 2002 and payable on May 31, 2002.
On May 2, 2002, the Company announced that it had entered into a definitive
agreement pursuant to which Paradigm Bancorporation, Inc. ("Paradigm") will be
merged into Prosperity and Paradigm's subsidiary bank, Paradigm Bank Texas, will
be merged into Prosperity Bank. Under terms of the agreement, Prosperity will
issue approximately 2.58 million shares of its common stock for all outstanding
shares of Paradigm (giving effect to the two for one stock split). Paradigm
operates a total of eleven (11) banking offices - six (6) in metropolitan
Houston and five (5) in the nearby Southeast Texas cities of Dayton, Galveston,
Mont Belvieu, and Winnie. As of March 31, 2002, Paradigm had total assets of
$256.7 million, total loans of $170.6 million, total deposits of $230.3 million
and shareholders' equity of $18.4 million. The transaction is expected to close
before September 30, 2002 and is subject to approval by Paradigm shareholders,
approval by regulators and certain closing conditions.
On April 26, 2002, the Company announced that it had entered into a
definitive agreement to acquire The First State Bank in Needville, Texas in a
cash transaction. The First State Bank operates one (1) office in Needville,
Texas, which will be consolidated (upon completion of the transaction) with
Prosperity Bank's full service banking center in Needville. On March 31, 2002,
The First State Bank reported total assets of $17.3 million, total deposits of
$15.1 million and total loans of $5.3 million. The proposed transaction is
subject to approval by the First State Bank shareholders, approval by regulators
and certain closing conditions.
OVERVIEW
Prosperity Bancshares, Inc. (SM) (the "Company") is a registered financial
holding company that derives substantially all of its revenues and income from
the operation of Prosperity Bank (SM) (the "Bank"). The Bank, which changed its
name from First Prosperity Bank(SM) on May 1, 2001, is a full-service bank that
provides a broad line of financial products and services to small and
medium-sized businesses and consumers through 29 full-service banking locations
with eighteen locations in the Greater Houston CMSA and an additional eleven
locations in eight contiguous counties located south and southwest of Houston.
The Greater Houston CMSA includes Brazoria, Fort Bend, Galveston, Harris,
Liberty, and Montgomery counties.
Total assets were $1.29 billion at March 31, 2002 compared with $1.26
billion at December 31, 2001. Total loans decreased to $420.9 million at March
31, 2002 from $424.4 million at December 31, 2001, a decrease of $3.5 million,
or 0.82%. Total deposits were $1.14 billion at March 31, 2002 compared with
$1.12 billion at December 31, 2001, an increase of $19.0 million, or 1.7%.
Shareholders' equity increased $4.1 million or 4.6%, to $92.8 million at March
31, 2002 compared with $88.7 million at December 31, 2001.
RESULTS OF OPERATIONS AS REPORTED
Net income available to common shareholders was $4.5 million ($0.54 per
common share on a diluted basis) for the quarter ended March 31, 2002 compared
with $1.7 million ($0.20 per common share on a diluted basis) for the quarter
ended March 31, 2001, an increase of $2.8 million, or 169.4%. The Company posted
returns on average common equity of 19.36% and 8.11%, returns on average assets
of 1.40% and 0.58% and efficiency ratios of 52.34% and 80.02% for the quarters
ended March 31, 2002 and 2001, respectively. The increase in earnings per share,
ROAA, ROAE and the efficiency ratio for the quarter ended March 31, 2002
compared with the same period in 2001 was primarily due to $2.4 million in
pre-tax merger-related expenses and other charges incurred in the first quarter
of 2001 in connection with the merger of Commercial Bancshares, Inc. into the
Company.
RESULTS OF OPERATIONS EXCLUDING MERGER RELATED EXPENSES
Net operating income available to common shareholders, excluding
merger-related expenses, was $4.5 million ($0.54 per common share on a diluted
basis) for the quarter ended March 31, 2002 compared with net operating income
of $3.2 million ($0.39 per common share on a diluted basis) for the quarter
ended March 31, 2001, an increase of $1.2 million, or 38.4%. The Company posted
returns on average common equity of 19.36% and
10
15.79%, returns on average assets of 1.40% and 1.12% and efficiency ratios of
52.34% and 58.07% for the quarters ended March 31, 2002 and 2001, respectively.
Net Interest Income
Net interest income was $12.0 million for the quarter ended March 31, 2002
compared with $9.3 million for the quarter ended March 31, 2001, an increase of
$2.7 million, or 29.3%. Net interest income increased as a result of an increase
in average interest-earning assets to $1.21 billion for the quarter ended March
31, 2002 from $1.08 billion for the quarter ended March 31, 2001, an increase of
$135.7 million, or 12.7%. The net interest margin on a tax equivalent basis
increased to 4.15% from 3.65% for the same periods, principally due to a 198
basis point decrease in the rate paid on interest-bearing liabilities from 4.59%
for the quarter ended March 31, 2001 to 2.61% for the quarter ended March 31,
2002, partially offset by a 112 basis point decrease in the yield on earning
assets from 7.21% for the quarter ended March 31, 2001 to 6.09% for the quarter
ended March 31, 2002.
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."
11
The following table sets 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, 2002 and 2001. The table also sets 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. Except as
indicated in the footnotes, no tax equivalent adjustments were made and all
average balances are daily average balances. Any nonaccruing loans have been
included in the table as loans carrying a zero yield.
Three Months Ended March 31,
----------------------------------------------------------------------------------
2002 2001
----------------------------------------- ---------------------------------------
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............................... $ 417,098 $ 7,756 7.44% $ 407,471 $ 8,873 8.71%
Securities(1)....................... 774,623 10,558 5.45 594,526 9,467 6.37
Federal funds sold and other temporary
investments........................ 16,290 66 1.62 70,339 980 5.57
---------- -------- ---------- --------
Total interest-earning assets..... 1,208,011 18,380 6.09% 1,072,336 19,320 7.21%
-------- -------
Less allowance for credit losses.... (6,043) (5,528)
---------- ----------
Total interest-earning assets, net
of allowance..................... 1,201,968 1,066,808
Noninterest-earning assets........ 78,359 88,417
---------- ---------
Total assets...................... $1,280,327 $1,155,225
========== ==========
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits.... $ 239,166 $ 793 1.33% $ 197,504 $ 1,489 3.02%
Savings and money market accounts... 277,795 1,249 1.80 248,346 2,369 3.82
Certificates of deposit............. 442,152 4,107 3.72 409,791 5,908 5.77
Federal funds purchased and other
borrowings......................... 13,933 207 5.94 16,706 253 6.06
---------- -------- ---------- --------
Total interest-bearing
liabilities...................... 973,046 6,356 2.61% 872,347 10,019 4.59%
---------- -------- ---------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 180,491 179,400
Company obligated mandatorily redeemable
trust preferred securities of subsidiary
trusts............................ 27,000 12,000
Other liabilities.................. 7,023 9,282
---------- ----------
Total liabilities................. 1,187,560 1,073,029
---------- ----------
Shareholders' equity.................. 92,767 82,196
---------- ----------
Total liabilities and shareholders'
equity............................ $1,280,327 $1,155,225
========== ==========
Net interest rate spread.............. 3.47% 2.62%
Net interest income and margin (2).... $ 12,024 3.98% $ 9,301 3.47%
======== ========
Net interest income and margin
(tax-equivalent basis) (3)........... $ 12,531 4.15% $ 9,782 3.65%
======== ========
- -----------
(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 35%.
(4) Annualized.
12
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,
2002 vs. 2001
-----------------------------------
Increase
(Decrease)
Due to
----------------------
Volume Rate Total
--------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans......................................... $ 210 $ (1,327) $ (1,117)
Securities.................................... 2,868 (1,777) 1,091
Federal funds sold and other temporary
investments................................. (753) (161) (914)
--------- --------- ---------
Total increase (decrease) in interest
income.................................... 2,325 (3,265) (940)
--------- --------- ---------
Interest-bearing liabilities:
Interest-bearing demand deposits.............. 314 (1,010) (696)
Savings and money market accounts............. 281 (1,401) (1,120)
Certificates of deposit....................... 467 (2,268) (1,801)
Federal funds purchased and other borrowings.. (42) (4) (46)
--------- --------- ---------
Total increase (decrease) in interest
expense................................... 1,020 (4,683) (3,663)
--------- --------- ---------
Increase in net interest income................. $ 1,305 $ 1,418 $ 2,723
========= ========= =========
Provision for Credit Losses
Management actively monitors the Company's asset quality and provides
specific loss provisions when necessary. 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 credit loss experience, industry diversification of the commercial
loan portfolio, the amount of nonperforming loans and related collateral, the
volume growth and composition of the loan portfolio, current economic conditions
that may affect the borrower's ability to pay and the value of collateral, the
evaluation of the loan portfolio through the internal loan review function and
other relevant factors.
Loans are charged-off against the allowance for credit losses when
appropriate. Although management believes it uses the best information available
to make determinations with respect to the provision for credit losses, future
adjustments may be necessary if economic conditions differ from the assumptions
used in making the initial determinations.
The Company made a $120,000 provision for credit losses for the quarter
ended March 31, 2002 compared with no provision for the quarter ended March 31,
2001. For the quarter ended March 31, 2002, net recoveries were $21,000.
Noninterest Income
The Company's primary sources of noninterest income are service charges on
deposit accounts and other banking service related fees. Noninterest income
totaled $2.2 million for the three months ended March 31, 2002 compared with
$2.0 million for the same period in 2001, an increase of $126,000, or 6.19%.
13
The following table presents, for the periods indicated, the major
categories of noninterest income:
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
(Dollars in thousands)
Service charges on deposit accounts............. $1,858 $ 1,788
Other noninterest income........................ 303 247
------ ------
Total noninterest income...................... $2,161 $ 2,035
====== =======
Noninterest Expense
Noninterest expense totaled $7.7 million for the quarter ended March 31,
2002 compared with $9.1 million for the quarter ended March 31, 2001, a decrease
of $1.5 million, or 16.1%. The decrease was primarily due to the $2.4 million in
merger-related expenses and other charges incurred in connection with the merger
of Commercial with the Company in February 2001. The $2.4 million in merger-
related charges include closing costs, legal fees, accounting fees, broker fees,
employee related costs, and contract terminations. Had the Company not incurred
the $2.4 million in merger-related expenses in 2001, noninterest expense for the
quarter ended March 31, 2002 would have increased $958,000 or 14.3% compared
with the same period in 2001. This increase is principally due to increases in
salaries and employee benefits and increases in minority interest expense-trust
preferred securities. The following table presents, for the periods indicated,
the major categories of noninterest expense:
Three Months Ended March 31,
----------------------------
2002 2001
---------- ----------
(Dollars in thousands)
Salaries and employee benefits....................... $3,909 $3,335
Non-staff expenses:
Net occupancy expense........................... 479 516
Depreciation.................................... 373 415
Data processing................................. 457 505
Regulatory assessments and FDIC insurance....... 73 51
Ad valorem and franchise taxes.................. 121 126
Goodwill amortization........................... -- 341
Minority interest expense-trust preferred
securities................................... 498 288
Merger related expenses......................... -- 2,425
Other........................................... 1,752 1,127
------- -------
Total non-staff expenses............................. 3,753 5,794
Total noninterest expense............................ $7,662 $9,129
====== ======
Salaries and employee benefit expenses were $3.9 million for the quarter
ended March 31, 2002 compared with $3.3 million for the quarter ended March 31,
2001, an increase of $574,000, or 17.2%. The change was principally due to
annual employee salary increases and additional accumulations for 2002
anticipated incentive compensation.
Non-staff expenses decreased $2.0 million, or 35.2%, to $3.8 million for
the quarter ended March 31, 2002 compared with the same period in 2001. The
decrease was principally due to the $2.4 million one-time merger-related
charges. In addition, as a result of a recent accounting change, goodwill
amortization decreased from $341,000 to zero for the three months ended March
31, 2002 compared with the same period in 2001.
Goodwill Amortization
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS No. 142
14
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144 after
its adoption.
The Company adopted the provisions of SFAS No. 142 as of January 1, 2002.
Goodwill and intangible assets determined to have an indefinite useful life
acquired in a purchase business combination completed after June 30, 2001 are no
longer amortized. For the quarter ended March 31, 2002, the Company did not
record $341,000 in goodwill amortization that would have been recorded prior to
the adoption of SFAS 142.
Income Taxes
Income tax expense increased $1.4 million to $1.9 million for the quarter
ended March 31, 2002 from $540,000 for the same period in 2001. The increase was
primarily attributable to higher pretax net earnings which resulted from an
increase in the net interest margin and lower net interest expense for the
quarter ended March 31, 2002 when compared to the same period in 2001. In
addition, the Company incurred $2.4 million in merger-related expenses during
the quarter ended March 31, 2001 which had a tax benefit of approximately
$849,000.
FINANCIAL CONDITION
Loan Portfolio
Total loans were $420.9 million at March 31, 2002, a decrease of $3.5
million, or 0.82% from $424.4 million at December 31, 2001. Period end loans
comprised 34.8% of average earning assets at March 31, 2002 compared with 38.0%
at December 31, 2001.
The following table summarizes the loan portfolio of the Company by type of
loan as of March 31, 2002 and December 31, 2001:
March 31, December 31,
2002 2001
------------------ -------------------
Amount Percent Amount Percent
--------- ------- -------- -------
(Dollars in thousands)
Commercial and industrial........ $ 45,774 10.9% $ 46,986 11.1%
Real estate:
Construction and land
development............... 21,205 5.0 20,963 4.9
1-4 family residential......... 174,946 41.6 175,253 41.3
Home equity.................... 21,142 5.0 20,541 4.8
Commercial mortgages........... 82,410 19.6 78,446 18.5
Farmland....................... 11,810 2.8 10,686 2.5
Multifamily residential........ 10,164 2.4 9,694 2.3
Agriculture...................... 16,863 4.0 15,757 3.7
Other............................ 1,026 0.2 953 0.2
Consumer......................... 35,576 8.5 45,121 10.7
-------- ----- -------- ----
Total loans................. $420,916 100.0% $ 424,400 100.0%
======== ===== ========= =====
Nonperforming Assets
The Company had $68,000 in nonperforming assets at March 31, 2002 and
$1,000 in nonperforming assets at December 31, 2001.
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.
15
The following table presents information regarding nonperforming assets as
of the dates indicated.
March 31, December 31,
2002 2001
----------- ---------
(Dollars in thousands)
Nonaccrual loans................................. $ 1 $ 1
Accruing loans 90 or more days past due.......... 67 --
------ -------
Total nonperforming loans........................ 68 -
Other real estate................................ -- --
------ -------
Total nonperforming assets....................... $ 68 $ 1
====== =======
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 credit 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, 2002, the allowance for credit losses amounted
to $6.1 million, or 1.46% of total loans compared with $6.0 million, or 1.41% of
total loans at December 31, 2001.
Set forth below is an analysis of the allowance for credit losses for the
three months ended March 31, 2002 and the year ended December 31, 2001:
Three Months Ended Year Ended
March 31, 2002 December 31, 2001
---------------------- -----------------
(Dollars in thousands)
Average loans outstanding.......................... $ 417,098 $ 419,553
========== =========
Gross loans outstanding at end of period........... $ 420,916 $ 424,400
========== =========
Allowance for credit losses at
beginning of period.............................. $ 5,985 $ 5,523
Provision for credit losses........................ 120 700
Charge-offs:
Commercial and industrial........................ (6) (180)
Real estate and agriculture...................... (--) (175)
Consumer......................................... (17) (74)
Recoveries:
Commercial and industrial........................ 11 15
Real estate and agriculture...................... 5 121
Consumer......................................... 28 55
---------- =========
Net recoveries (charge-offs)....................... 21 (238)
Allowance for credit losses at end of period....... $ 6,126 $ 5,985
========== =========
Ratio of allowance to end of period
loans............................................ 1.46% 1.41%
Ratio of net (recoveries) charge-offs to average
loans............................................ (0.01)% 0.06%
Ratio of nonperforming loans to end of
period loans..................................... 0.02 % n/m(1)
- ----------
(1) Amount not meaningful. Nonperforming loans totaled $1,000 at December 31,
2001.
16
Securities
Securities totaled $797.5 million at March 31, 2002 compared with $752.3
million at December 31 2001, an increase of $45.2 million, or 6.0%. At March 31,
2002, securities represented 61.8% of total assets compared with 59.6% of total
assets at December 31, 2001.
Premises and Equipment
Premises and equipment, net of accumulated depreciation, totaled $15.4
million and $15.1 million at March 31, 2002 and December 31, 2001, respectively.
Deposits
Total deposits were $1.14 billion at March 31, 2002 compared with $1.12
billion at December 31, 2001, an increase of $19.0 million or 16.7%. At March
31, 2002, non-interest bearing deposits accounted for approximately 15.7% of
total deposits compared with 16.8% of total deposits at December 31, 2001.
Interest-bearing demand deposits totaled $963.4 million, or 84.3%, of total
deposits at March 31, 2002 compared with $934.6 million, or 83.2%, of total
deposits at December 31, 2001.
Other Borrowings
Deposits are the primary source of funds for the Company's lending and
investment activities. Occasionally, the Company obtains additional funds from
the Federal Home Loan Bank ("FHLB") and correspondent banks. At March 31, 2002,
the Company had $19.1 million in FHLB borrowings, of which $13.1 million
consisted of FHLB notes payable and $6.0 million consisted of FHLB advances. The
FHLB advances are secured by a blanket lien on the Bank's first mortgage loans
against one-to-four family residential properties. The maturity dates on the
FHLB notes payable range from the years 2004 to 2018 and have interest rates
ranging from 5.95% to 6.48%. At December 31, 2001, the Company had $18.1 million
in FHLB borrowings of which $13.3 million consisted of FHLB notes payable and
$4.8 million consisted of FHLB advances.
At March 31, 2002 and December 31, 2001, the Company had no outstanding
borrowings under a revolving line of credit extended by a commercial bank.
Trust Preferred Securities
At March 31, 2002 and December 31, 2001, the Company's subsidiary trusts
had outstanding $27.0 million in trust preferred securities.
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. The 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, 2002, the Company had
cash and cash equivalents of $27.0 million, down from $41.7 million at December
31, 2001.
Capital Resources
Total shareholders' equity was $92.8 million at March 31, 2002 compared
with $88.7 million at December 31, 2001, an increase of $4.1 million, or 4.6%.
The increase was due primarily to net earnings of $4.5 million, partially offset
by dividends paid of $893,000 for the three months ended March 31, 2002.
17
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, 2002, the Company's Tier 1 risk-based capital, total risk-based
capital and leverage capital ratios were 18.66%, 19.85% and 7.68%, respectively.
As of March 31, 2002, 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 risk-based capital, total risk-based capital and leverage capital ratios
of 16.14%, 17.33% and 6.64%, respectively.
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 Annual Report on Form 10-K filing on March 8, 2002. See Form 10-K,
Item 7 "Management's Discussion and Analysis and Results of Operations-Interest
Rate Sensitivity and Liquidity".
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:
The following exhibits are filed with this quarterly report on Form 10Q.
2.1 Stock Purchase Agreement dated as of February 22, 2002 by and between
Prosperity Bancshares, Inc. and American Bancorp of Oklahoma, Inc.
2.2 Agreement and Plan of Reorganization dated as of April 26, 2002 by and
among Prosperity Bancshares, Inc., Prosperity Bank and The First State
Bank
18
b. (i) The Company filed a Current Report on Form 8-K under Item 5 of
Form 8-K on January 16, 2002 to report the announcement of 2001 fourth
quarter and 2001 year-end earnings.
(ii) The Company filed a Current Report on Form 8-K under Item 5 of
Form 8-K on February 22, 2002 to announce that it had entered into a
Stock Purchase Agreement with American Bancorp of Oklahoma, Inc. to
acquire its wholly-owned subsidiary, Texas Guaranty Bank, N.A., for
cash.
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.(SM)
(Registrant)
Date: 05/15/02 /s/ David Zalman
-------------------------------------
David Zalman
Chief Executive Officer/President
Date: 05/15/02 /s/ David Hollaway
-------------------------------------
David Hollaway
Chief Financial Officer
19