1
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, 2000
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 May 1, 2000, there were 5,217,825 shares of the registrant's Common
Stock, par value $1.00 per share, outstanding.
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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, 2000 (unaudited ) and
December 31,1999................................................................ 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and 1999 (unaudited)....................................... 4
Consolidated Statements of Shareholders' Equity for the Year Ended December 31,
1999 and for the Three Months Ended March 31, 2000 (unaudited)................... 5
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 2000 and 1999 (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................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................17
Item 2. Changes in Securities and Use of Proceeds.................................................17
Item 3. Defaults upon Senior Securities...........................................................17
Item 4. Submission of Matters to a Vote of Security Holders.......................................17
Item 5. Other Information.........................................................................17
Item 6. Exhibits and Reports on Form 8-K..........................................................17
Signatures.........................................................................................17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
---------- ---------
(unaudited)
(Dollars in thousands, except share data)
ASSETS
Cash and due from banks ....................................... $ 15,896 $ 20,658
Federal Funds sold............................................. 1,509 16,100
---------- ---------
Total cash and cash equivalents.......................... 17,405 36,758
Available for sale securities, at fair value (amoritized cost
of $238,766 (unaudited) and $228,850, respectively)....... 233,025 224,782
Held to maturity securities, at cost (fair value of $85,033
(unaudited) and $115,021, respectively).................... 86,213 87,889
Loans.......................................................... 225,498 223,505
Less allowance for credit losses............................... (2,851) (2,753)
---------- ---------
Loans, net..................................... 222,647 220,752
Accrued interest receivable.................................... 5,436 5,013
Goodwill (net of accumulated amortization of $4,056
(unaudited) and $3,792, respectively)...................... 18,966 19,229
Bank premises and equipment, net............................... 9,647 9,751
Other assets................................................... 5,116 4,499
--------- ---------
TOTAL.......................................................... $598,455 $608,673
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing.................................... $ 112,095 $ 113,514
Interest-bearing....................................... 418,761 421,242
--------- ---------
Total deposits................................. 530,856 534,756
Federal funds purchased ................................... -- 10,000
Other borrowings........................................... 8,145 5,700
Accrued interest payable................................... 1,467 1,554
Other liabilities.......................................... 2,229 1,397
--------- ---------
Total liabilities.............................. 542,697 553,407
COMPANY-OBLIGATED MANDATORILY
REDEEMABLE TRUST PREFERREED SECURITIES
OF SUBSIDIARY TRUST........................................ 12,000 12,000
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 50,000,000 shares
authorized; 5,221,401 (unaudited) and 5,198,901,
shares issued at March 31, 2000 and December
31, 1999, respectively; 5,217,825 (unaudited) and
5,195,325 shares outstanding at March 31, 2000
and December 31, 1998, respectively.................... 5,221 5,199
Capital surplus............................................ 15,957 15,880
Retained earnings.......................................... 26,387 24,889
Accumulated other comprehensive income -- net unrealized
gains on available for sale securities, net of tax
benefit of $1,952 (unaudited) and $1,383,
respectively........................................ (3,789) (2,684)
Less treasury stock, at cost, 3,576 shares at March 31,
2000 (unaudited) and 3,576 shares at December 31,
1999, respectively..................................... (18) (18)
--------- ---------
Total shareholders' equity..................... 43,758 43,266
--------- ---------
TOTAL.......................................................... $598,455 $608,673
========= =========
See notes to consolidated financial statements.
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PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
--------------------
2000 1999
----------- ----------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees......................... $ 4,796 $ 3,593
Securities:
Taxable...................................... 4,564 3,117
Nontaxable................................... 258 235
70% nontaxable preferred dividends........... 67 --
Federal funds sold............................ 39 300
----------- ----------
Total interest income........................ 9,724 7,245
----------- ----------
INTEREST EXPENSE:
Deposits.................................... 4,110 3,106
Note payable and federal funds
purchased................................ 2 --
Other....................................... 37 5
----------- ----------
Total interest expense................... 4,149 3,111
----------- ----------
NET INTEREST INCOME...................... 5,575 4,134
PROVISION FOR CREDIT LOSSES................... 75 65
----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES........................... 5,500 4,069
----------- ----------
NONINTEREST INCOME:
Customer service fees....................... 1,055 608
Other....................................... 193 95
----------- ----------
Total noninterest income.................. 1,248 703
----------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits.............. 1,837 1,423
Net occupancy expense....................... 188 204
Data processing............................. 289 211
Goodwill amortization....................... 264 161
Depreciation expense........................ 234 86
Minority interest trust preferred securities 287 --
Other....................................... 870 589
----------- ----------
Total noninterest expense................. 3,969 2,674
----------- ----------
INCOME BEFORE INCOME TAXES.................... 2,779 2,098
PROVISION FOR INCOME TAXES.................... 812 664
----------- ----------
NET INCOME.................................... $ 1,967 $ 1,434
=========== ==========
EARNINGS PER SHARE
Basic........................................ $ 0.38 $ 0.28
=========== ==========
Diluted....................................... $ 0.36 $ 0.27
=========== ==========
See notes to consolidated financial statements.
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PROSPERITY BANCSHARES, INC. 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, 1999.................. 5,176,401 $ 5,176 $ 16,477 $ 19,452 $ 348 $ (18) $ 41,435
Net income ............................... 6,474 6,474
Net change in unrealized gain (loss)
on available for sale securities........ (3,032) (3,032)
------------
Total comprehensive income................ 3,442
------------
Sale of common stock ................... 22,500 23 76 99
Trust preferred issuance costs............ (560) (560)
Initial public offering costs............. (113) (113)
Cash dividends declared, $0.20
per share............................... (1,037) (1,037)
----------- --------- ---------- ---------- --------- ------- ------------
BALANCE AT DECEMBER 31, 1999................ 5,198,901 $ 5,199 $ 15,880 $ 24,889 $ (2,684) $ (18) $ 43,266
Net income (unaudited).................... 1,967 1,967
Net change in unrealized gain (loss) on
available for sale securities(unaudited) (1,105) (1,105)
------------
Total comprehensive income (unaudited).... 862
------------
Sale of common stock...................... 22,500 22 77 99
Cash dividends declared, $.09
per share (unaudited)................... (469) (469)
----------- --------- --------- ---------- --------- ------- ------------
BALANCE AT MARCH 31, 2000
(unaudited)............................. 5,221,401 $ 5,221 $ 15,957 $ 26,387 $ (3,789) $ (18) $ 43,758
=========== ========= ========= ========== ========= ======= ============
See notes to consolidated financial statements
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PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
----------------------------------
2000 1999
------------- -------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 1,967 $ 1,434
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................. 498 312
Provision for credit losses................... 75 65
Net (accretion)amortization of premium/
discount on investments.................... (20) 90
Increase in accrued interest receivable....... (423) (190)
Increase in other assets...................... (48) (335)
Increase in accrued interest payable
and other liabilities....................... 745 613
------------- -------------
Total adjustments........................... 827 555
------------- -------------
Net cash provided by operating activities... 2,794 1,989
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal
paydowns of held to maturity securities....... 5,754 19,884
Purchase of held to maturity securities.......... (4,103) (295)
Proceeds from maturities and principal
paydowns of available for sale securities..... 5,790 4,705
Purchase of available for sale securities........ (15,661) (28,712)
Net increase in loans............................ (1,993) (7,532)
Purchase of bank premises and equipment.......... (108) (172)
Net decrease in interest-bearing
deposits in financial institutions............ -- 99
------------- ------------
Net cash (used in) investing activities.......... (10,321) (12,023)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in noninterest-bearing
deposits...................................... (1,419) (3,319)
Net (decrease ) increase in interest-bearing
deposits...................................... (2,481) 29,924
Repayments of line of credit..................... (7,556) (2,435)
Stock issuance costs............................ -- (112)
Proceeds from sale of common stock............... 99 --
Payments of cash dividends....................... (469) (260)
------------- -------------
Net cash (used in) provided by
financing activities.................... (11,826) 23,798
-------------- -------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................................. $ (19,353) $ 13,764
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD........................................ 36,758 18,342
------------- -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD........................................... $ 17,405 $ 32,106
============= =============
See notes to consolidated financial statements.
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PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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 8, 2000. Operating results for the three
month period ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
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,
----------------------------
2000 1999
---------- ----------
Net income available to common shareholders $ 1,967 $ 1,434
Weighted average common shares outstanding 5,204 5,173
Potential dilutive common shares 200 198
---------- ----------
Weighted average common shares and equivalents
outstanding 5,404 5,371
---------- ----------
Basic earnings per common share $ 0.38 $ 0.28
========== ==========
Diluted earnings per common share $ 0.36 $ 0.27
========== ==========
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PROSPERITY BANCSHARES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
RECENT ACCOUNTING STANDARDS
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,
2000. 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 15 full-service banking locations
in the greater Houston metropolitan area and nine contiguous counties situated
south and southwest of Houston and extending into South Texas.
Statements and financial discussion and analysis contained in the
Form 10-Q that are not historical facts are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. 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:
o changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;
o changes in the levels of loan prepayments and the resulting effects on
the value of the Company's loan portfolio;
o 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.
o increased competition for deposits and loans adversely affecting rates
and terms;
o 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;
o 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;
o the failure of assumptions underlying the establishment of and provisions
made to the allowance for credit losses;
o changes in the availability of funds resulting in increased costs or
reduced liquidity;
o increased asset levels and changes in the composition of assets and the
resulting impact on the Company's capital levels and regulatory capital
ratios;
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o the Company's ability to acquire, operate and maintain cost effective and
efficient systems without incurring unexpectedly difficult or expensive
but necessary technological changes;
o the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation
levels; and
o changes in statutes and government regulations or their interpretations
applicable to bank holding companies and the Company's present and future
banking and other subsidiaries, including changes in tax requirements and
tax rates.
OVERVIEW
The Company showed positive earnings growth for the quarter ended
March 31, 2000 due to the increase in loan volume and the acquisition of South
Texas Bancshares and its wholly-owned subsidiary, The Commercial National Bank
of Beeville, with three locations in Beeville, Goliad and Mathis, Texas (the
"South Texas Acquisition") in the fourth quarter of 1999. Net income available
to common shareholders was $2.0 million ($0.36 per common share on a diluted
basis) for the quarter ended March 31, 2000 compared with $1.4 million ($0.27
per common share on a diluted basis) for the quarter ended March 31, 1999, an
increase of $533,000, or 38.1%. The Company posted returns on average common
equity of 18.41% and 13.91% and returns on average assets of 1.33% and 1.26%
for the quarters ended March 31, 2000 and 1999, respectively.
Total assets were $598.5 million at March 31, 2000 compared with
$608.7 million at December 31, 1999. Total loans increased to $225.5 million at
March 31, 2000 from $223.5 million at December 31, 1999, an increase of $2.0
million, or 0.9%. Total deposits were $530.9 million at March 31, 2000 compared
with $534.8 million at December 31, 1999, a decrease of $3.9 million, or 0.7%.
Shareholders' equity increased $492,000 or 1.14%, to $43.8 million at March 31,
2000 compared with $43.3 million at December 31, 1999.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income was $5.6 million for the quarter ended March 31,
2000 compared with $4.1 million for the quarter ended March 31, 1999, an
increase of $1.5 million, or 36.6%. Net interest income increased as a result
of an increase in average interest-earning assets to $547.7 million for the
quarter ended March 31, 2000 from $426.1 million for the quarter ended March
31, 1999, an increase of $121.6 million, or 28.5%. The net interest margin on a
tax equivalent basis increased to 4.27% from 4.02% for the same periods,
principally due to a 27 basis point increase in the yield on interest-earning
assets and a 14 basis point increase in the yield on interest-bearing
liabilities and in December of 1999, the Company purchased a Qualified Zone
Academy Bond ("QZAB") which generates a tax credit of 7.18% which is included
in income.
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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, 2000 and 1999. 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,
---------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
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..................................... $ 223,683 $ 4,796 8.62% $ 173,732 $ 3,593 8.39%
Securities(1)............................. 321,160 4,889 6.09 227,746 3,352 5.89
Federal funds sold and other temporary
investments.............................. 2,896 39 5.33 24,663 300 4.93
---------- --------- ---------- ---------
Total interest-earning assets........... 547,739 9,724 7.12% 426,141 7,245 6.85%
---------- ---------
Less allowance for credit losses.......... (2,805) (1,887)
----------- -----------
Total interest-earning assets, net
of allowance........................... 544,934 424,254
Noninterest-earning assets............. 48,549 35,685
-------- ----------
Total assets............................ $ 593,483 $ 459,939
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.......... $ 71,182 $ 301 1.70% $ 52,138 $ 196 1.52%
Savings and money market accounts......... 151,972 1,348 3.57 123,110 1,.011 3.33
Certificates of deposit................... 200,648 2,461 4.93 159,612 1,899 4.83
Federal funds purchased and other
borrowings............................... 2,692 39 5.73 459 5 4.42
---------- --------- ---------- ---------
Total interest-bearing
liabilities............................ 426,494 4,149 3.90% 335,319 3,111 3.76%
---------- --------- ---------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits....... 110,366 80,739
Company obligated mandatorily redeemable
trust preferred securities of subsidiary 12,000 --
trust
Other liabilities......................... 1,647 2,084
---------- ----------
Total liabilities....................... 550,507 418,142
---------- ----------
Shareholders' equity......................... 42,976 41,797
---------- ----------
Total liabilities and shareholders'
equity................................ $ 593,483 $ 459,939
========== ==========
Net interest rate spread..................... 3.22% 3.09%
Net interest income and margin(2)............ $ 5,575 4.09% $ 4.134 3.93%
========== ==========
Net interest income and margin
(tax-equivalent basis)(3).................. $ 5,820 4.27% $ 4.222 4.02%
========== ===========
- ------------------------------------------
(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.
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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,
------------------------------------------
2000 vs. 1999
------------------------------------------
Increase
(Decrease)
Due to
-------------------------
Volume Rate Total
---------- ---------- ------------
(Dollars in thousands)
Interest-earning assets:
Loans.................................................$ 1,069 $ 134 $ 1,203
Securities............................................ 1,375 162 1,537
Federal funds sold and other temporary
investments......................................... (268) 7 (261)
----------- ------------ ------------
Total increase (decrease) in interest income........ 2,176 303 2,479
----------- ------------ ------------
Interest-bearing liabilities:
Interest-bearing demand deposits...................... 73 32 105
Savings and money market accounts..................... 242 95 337
Certificates of deposit............................... 499 63 562
Federal funds purchased and other borrowings.......... 25 9 34
---------- ------------ -----------
Total increase (decrease) in interest expense....... 839 199 1,038
---------- ------------ -----------
Increase (decrease) in net interest income...............$ 1,337 $ 104 $ 1,441
========== ============ ===========
Provision for Credit Losses
Management actively monitors the Company's asset quality and
provides specific loss provisions when necessary. Loans are charged-off against
the provision for loan 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. As of March 31, 2000, the allowance for credit losses amounted
to $2.9 million, or 1.26% of total loans compared with $2.8 million, or 1.23%
of total loans at December 31, 1999.
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 loan 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.
The provision for credit losses for the quarter ended March 31, 2000
was $75,000 compared with $65,000 for the quarter ended March 31, 1999. For the
quarter ended March 31, 2000, net recoveries were $23,000.
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 $1.2 million for the three months ended March 31, 2000 compared
with $703,000 for the same period in 1999, an increase of $545,000, or 77.5%.
The increase in service charges on deposit accounts was principally due to the
South Texas Acquisition.
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The following table presents, for the periods indicated, the major
categories of noninterest income:
Three Months Ended March 31,
----------------------------
2000 1999
------- --------
(Dollars in thousands)
Service charges on deposit accounts........... $ 1,055 $ 608
Other noninterest income...................... 193 95
------- --------
Total noninterest income.................... $ 1,248 $ 703
======= ========
Noninterest Expense
Noninterest expense totaled $4.0 million for the quarter ended March
31, 2000 compared with $2.7 million for the quarter ended March 31, 1999, an
increase of $1.3 million, or 48.1%. The increase was primarily due to the South
Texas Acquisition and the minority interest related to trust preferred
securities acquired in November of 1999. The following table presents, for the
periods indicated, the major categories of noninterest expense:
Three Months Ended March 31,
----------------------------
2000 1999
--------- --------
(Dollars in thousands)
Salaries and employee benefits................. $1,837 $1,423
Non-staff expenses:
Net occupancy expense..................... 188 204
Depreciation.............................. 234 86
Data processing........................... 289 211
Professional fees......................... 58 39
Regulatory assessments and FDIC insurance. 42 21
Ad valorem and franchise taxes............ 72 48
Goodwill amortization..................... 264 161
Minority interest expense-trust preferred
securities............................. 287 --
Other..................................... 698 481
-------- --------
Total non-staff expenses....................... 2,132 1,251
Total noninterest expense...................... $3,969 $2,674
======== ========
Salaries and employee benefit expenses were $1.8 million for the
quarter ended March 31, 2000 compared with $1.4 million for the quarter ended
March 31, 1999, an increase of $414,000, or 29.6%. The change was due primarily
to an increase in the number of employees due to the South Texas Acquisition
and annual employee salary increases.
Non-staff expenses increased $881,000, or 70.4%, to $2.1 million for
the quarter ended March 31, 2000 compared with the same period in 1999. The
increase was principally due to the South Texas Acquisition.
Income Taxes
Income tax expense increased $148,000 to $812,000 for the quarter
ended March 31, 2000 from $664,000 for the same period in 1999. The increase
was primarily attributable to higher pretax net earnings.
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FINANCIAL CONDITION
Loan Portfolio
Total loans were $225.5 million at March 31, 2000, an increase of
$2.0 million, or 0.9% from $223.5 million at December 31, 1999. Period end
loans comprised 41.2% of average earning assets at March 31, 2000 compared with
49.7% at December 31, 1999.
The following table summarizes the loan portfolio of the Company by
type of loan as of March 31, 2000 and December 31, 1999:
March 31, December 31,
2000 1999
--------------------- ---------------------
Amount Percent Amount Percent
---------- ------- --------- -------
(Dollars in thousands)
Commercial and industrial............. $ 25,795 11.4% $ 28,279 12.7%
Real estate:
Construction and land
development.................... 4,575 2.0 4,015 1.8
1-4 family residential.............. 97,646 43.3 97,359 43.5
Home Equity......................... 12,531 5.6 11,343 5.1
Commercial mortgages................ 40,153 17.8 38,752 17.3
Farmland............................ 7,649 3.4 7,404 3.3
Multifamily residential............. 1,802 0.8 1,837 0.8
Agriculture........................... 13,440 6.0 12,735 5.7
Consumer.............................. 21,907 9.7 21,781 9.8
-------- ----- ---------- -----
Total loans...................... $225,498 100.0% $ 223,505 100.0%
======== ===== ========== =====
Nonperforming Assets
The Company had no nonperforming assets for the periods ended March
31, 2000 and December 31, 1999, 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,
2000 1999
------------- --------
(Dollars in thousands)
Nonaccrual loans................................ $ -- $ --
Accruing loans 90 or more days past due......... -- --
------- --------
Total nonperforming loans....................... -- --
Other real estate............................... -- --
------- --------
Total nonperforming assets...................... $ -- $ --
======= ========
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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, 2000, the allowance for credit losses amounted
to $2.9 million, or 1.28% of total loans compared with $2.8 million, or 1.23%
of total loans at December 31, 1999.
Set forth below is an analysis of the allowance for credit losses
for the three months ended March 31, 2000 and the year ended December 31, 1999:
Three Months Ended Year Ended
March 31, 2000 December 31, 1999
-------------------- --------------------
(Dollars in thousands)
Average loans outstanding......................... $ 223,683 $ 193,687
=========== ==========
Gross loans outstanding at end of period.......... $ 225,498 $ 223,505
=========== ==========
Allowance for credit losses at
beginning of period............................. $ 2,753 $ 1,850
Balance acquired with South Texas
Acquisition..................................... -- 566
Provision for credit losses....................... 75 280
Charge-offs:
Commercial and industrial....................... (--) (13)
Real estate and agriculture..................... (15) (43)
Consumer........................................ (4) (55)
Recoveries:
Commercial and industrial....................... 1 34
Real estate and agriculture..................... 31 117
Consumer........................................ 10 17
--------- ----------
Net (charge-offs) recoveries...................... 23 57
Allowance for credit losses at end of period...... $ 2,851 $ 2,753
========= ==========
Ratio of allowance to end of period
loans........................................... 1.26% 1.23%
Ratio of net charge-offs (recoveries) to average
loans........................................... (0.01)% (0.03)%
Ratio of allowance to end of period
nonperforming loans........................ -- --
Securities
Securities totaled $319.2 million at March 31, 2000 compared with
$312.7 million at December 31, 1999, an increase of $6.5 million, or 2.1%. At
March 31, 2000, securities represented 53.3% of total assets compared with
51.4% of total assets at December 31, 1999.
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Premises and Equipment
Premises and equipment, net of accumulated depreciation, totaled
$9.6 million and $9.8 million at March 31, 2000 and December 31, 1999,
respectively.
Deposits
Total deposits were $530.9 million at March 31, 2000 compared with
$534.8 million at December 31, 1999, a decrease of $3.9 million. At March 31,
2000, non-interest bearing deposits accounted for approximately 21.1% of total
deposits compared with 21.2% of total deposits at December 31, 1999.
Interest-bearing demand deposits totaled $418.8 million, or 78.9%, of total
deposits at March 31, 2000 compared with $421.2 million, or 78.9%, of total
deposits at December 31, 1999.
Other Borrowings
The Company had no notes payable and $8.1 million in Federal Home
Loan Bank ("FHLB") advances at March 31, 2000, compared with no notes payable
and $5.7 million in FHLB advances at December 31, 1999. In addition, the
Company had no federal funds purchased on March 31, 2000 compared with $10.0
million in federal funds purchased on December 31, 1999.
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, 2000, the
Company had cash and cash equivalents of $17.4 million, down from $36.8 million
at December 31, 1999. The decline was due primarily to a decrease in federal
funds sold of $14.6 million and an increase in loans of $2.0 million.
Capital Resources
Total shareholders' equity was $43.8 million at March 31, 2000
compared with $43.3 million at December 31, 1999, an increase of $492,000, or
1.14%. The increase was due primarily to net earnings of $2.0 million (less a
change in unrealized gain on available for sale securities of $1.1 million) for
the three months ended March 31, 2000.
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, 2000, the Company's Tier 1 risk-based capital, total risk-based
capital and leverage capital ratios were 15.18%, 17.30% and 6.63%,
respectively. As of March 31, 2000, 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-1risk-based capital, total risk-based capital and
leverage capital ratios of 15.18%, 16.32% and 6.63%, respectively.
YEAR 2000 COMPLIANCE
The Company suffered no failures of any system or product through
the end of the year 1999 and into the year 2000. During 2000, the Company's
Year 2000 project team will continue to monitor the Company's computer
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systems and products and the Year 2000 compliance of the third parties with
which the Company transacts business in an attempt to identify and potential
problems.
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 8, 2000. See Form 10-K, Item 7
"Management's Discussion and Analysis and Results of Operations-Interest Rate
Sensitivity and Liquidity".
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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, 2000.
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, 2000 /s/ DAVID ZALMAN
--------------- ---------------------------
David Zalman
Vice President/Secretary
Date: May 12, 2000 /s/ DAVID HOLLAWAY
--------------- ---------------------------
David Hollaway
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
- ---------- -----------
Exhibit 27 Financial Data Schedule