<PAGE> 1
================================================================================
FORM 10-Q
UNITED STATES
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, 1998
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: 0-23113
PRIME BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 76-0088973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
12200 NORTHWEST FREEWAY
HOUSTON, TEXAS 77092
(Address of principal executive offices, including zip code)
(713) 209-6000
(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 7, 1998, there were 9,437,020 shares of the registrant's Common Stock,
par value $.25 per share outstanding.
================================================================================
<PAGE> 2
PRIME BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997.....................2
Consolidated Statements of Earnings for the Three Months Ended March 31, 1998 and 1997 (unaudited).....3
Consolidated Statement of Changes in Shareholders' Equity..............................................4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (unaudited)............................................................5
Consolidated Statements of Comprehensive Income for the Three Months
Ended March 31, 1998 and 1997 (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..............................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................16
Item 2. Changes in Securities...................................................................................16
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
</TABLE>
1
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks ..................................................................... $ 28,609 $ 18,263
Federal funds sold and other temporary investments .......................................... 29,204 29,478
-------- --------
Total cash and cash equivalents ......................................................... 57,813 47,741
-------- --------
Securities:
Available-for-sale .......................................................................... 160,884 188,048
Held-to-maturity ............................................................................ 276,826 273,387
-------- --------
Total securities ........................................................................ 437,710 461,435
-------- --------
Loans, net of allowance for loan losses of $4,928 and $4,938 ................................ 457,202 417,880
Premises and equipment, net ................................................................. 14,885 15,268
Accrued interest receivable ................................................................. 6,459 6,747
Other assets ................................................................................ 8,973 9,289
======== ========
Total assets ............................................................................ $983,042 $958,360
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ......................................................................... $160,660 $152,154
Interest-bearing deposits ................................................................... 726,482 712,918
-------- --------
Total deposits .......................................................................... 887,142 865,072
-------- --------
Federal funds purchased and securities purchased
under repurchase agreements ............................................................. 17,005 17,132
Other liabilities ........................................................................... 5,262 4,683
-------- --------
Total liabilities ....................................................................... 909,409 886,887
-------- --------
Shareholders' equity:
Preferred stock ............................................................................. --- 1,000
Common stock ................................................................................ 3,033 3,003
Additional capital .......................................................................... 9,576 9,368
Retained earnings ........................................................................... 62,553 59,585
Accumulated other comprehensive income ...................................................... 726 772
-------- --------
75,888 73,728
Less common stock held in treasury--at cost ................................................. 2,255 2,255
-------- --------
Total shareholders' equity .............................................................. 73,633 71,473
-------- --------
Total liabilities & shareholders' equity ................................................ $983,042 $958,360
======== ========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
2
<PAGE> 4
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1998 1997
------- -------
<S> <C> <C>
Interest income:
Loans ............................................... $ 9,878 $ 7,421
Securities .......................................... 7,260 7,510
Federal funds sold and other temporary investments .. 363 241
------- -------
Total interest income ........................... 17,501 15,172
Interest expense .................................... 7,674 6,922
------- -------
Net interest income ............................. 9,827 8,250
Provision for loan losses ........................... 200 375
------- -------
Net interest income after provision for loan
losses .......................................... 9,627 7,875
------- -------
Noninterest income:
Service charges ..................................... 1,872 1,620
Other operating income .............................. 464 437
------- -------
Total noninterest income ........................ 2,336 2,057
------- -------
Noninterest expense:
Employee compensation and benefits .................. 4,410 4,070
Net bank premises expense ........................... 314 285
Equipment rentals, depreciation and maintenance ..... 326 301
Other operating expenses ............................ 1,688 1,573
------- -------
Total noninterest expenses ...................... 6,738 6,229
------- -------
Earnings before income taxes .................... 5,225 3,703
Provision for income taxes .......................... 1,860 1,263
------- -------
Net earnings before preferred stock dividends ... 3,365 2,440
Preferred stock dividends ....................... 25 175
------- -------
Net earnings available to common shareholders ... $ 3,340 $ 2,265
======= =======
Basic earnings per common share ................. $ 0.36 $ 0.25
======= =======
Diluted earnings per common share ............... $ 0.34 $ 0.25
======= =======
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
3
<PAGE> 5
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
other Total
compre- Common share-
Preferred Common Additional Retained hensive stock in holders'
stock stock capital earnings income treasury equity
--------- -------- ---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 .......... $ 7,000 $ 2,980 $ 3,824 $ 50,113 $ 1,934 $ (3,882) $ 61,969
Purchase of treasury stock .......... ---- ---- ---- ---- ---- (408) (408)
Sale of treasury stock .............. ---- ---- 5,745 ---- ---- 2,035 7,780
Sale of common stock ................ ---- 23 131 ---- ---- ---- 154
Stock issuance cost ................. ---- ---- (332) ---- ---- ---- (332)
Dividends ........................... ---- ---- ---- (1,891) ---- ---- (1,891)
Redemption of preferred stock ....... (6,000) ---- ---- ---- ---- ---- (6,000)
Net change in unrealized gain
(loss) on available-for-sale
securities, net of tax of $598 .. ---- ---- ---- ---- (1,162) ---- (1,162)
Net earnings for the year ........... ---- ---- ---- 11,363 ---- ---- 11,363
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ........ $ 1,000 $ 3,003 $ 9,368 $ 59,585 $ 772 ($ 2,255) $ 71,473
Sale of common stock(1) ............. ---- 30 233 ---- ---- ---- 263
Stock issuance cost(1) .............. ---- ---- (5) ---- ---- ---- (5)
Dividends(1) ........................ ---- ---- ---- (397) ---- ---- (397)
Redemption of preferred stock(1) .... (1,000) ---- (20) ---- ---- ---- (1,020)
Net change in unrealized gain
(loss) on available-for-sale
securities, net of tax of
$25(1) .......................... ---- ---- ---- ---- (46) ---- (46)
Net earnings(1) ..................... ---- ---- ---- 3,365 ---- ---- 3,365
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1998(1) ........ $ ---- $ 3,033 $ 9,576 $ 62,553 $ 726 ($ 2,255) $ 73,633
======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Unaudited
See accompanying Notes to Interim Consolidated Financial Statements.
4
<PAGE> 6
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ...................................................................... $ 3,365 $ 2,440
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Depreciation and amortization ..................................................... 619 460
Accretion of discounts, net of amortization of premiums on securities ............. (130) (181)
Provision for loan losses ......................................................... 200 375
Gain on sale of premises, equipment and other real estate ......................... (219) --
Change in assets and liabilities, net of effects resulting from the
acquisition of a bank, and the purchase of certain branch
assets and liabilities:
Decrease (increase) in accrued interest receivable .............................. 288 (858)
Decrease in other assets ........................................................ 132 8,325
Increase (decrease) in other liabilities ........................................ 603 (30,144)
-------- --------
Net cash provided (used) by operating activities ............................. 4,858 (19,583)
Cash flows from investing activities:
Purchases of held-to-maturity securities .......................................... (15,077) (86,837)
Proceeds from sales and maturities of available-for-sale securities ............... 27,383 31,525
Proceeds from maturities of held-to-maturity securities ........................... 11,479 9,780
Increase in loans, net of the effects resulting from the acquisition of a
bank, and the purchase of certain branch assets and liabilities ................... (39,522) (15,345)
Purchases of premises and equipment ............................................... (265) (348)
Proceeds from sale of premises, equipment and other real estate ................... 432 --
Net decrease in cash resulting from the acquisition of a bank ..................... -- (3,573)
Net increase in cash resulting from the acquisition of certain branch assets and
the assumption of certain liabilities ........................................... -- 96,500
-------- --------
Net cash (used) provided by investing activities ............................. (15,570) 31,702
Cash flows from financing activities:
Change in deposits, net of the effects resulting from the acquisition of a bank,
and the purchase of certain branch assets and liabilities ....................... 22,070 24,842
Change in fed funds purchased and securities sold under repurchase
Agreements ...................................................................... (127) (9,700)
Stock issuance cost ............................................................... (5) --
Redemption of preferred stock ..................................................... (1,020) --
Sale of common stock .............................................................. 263 154
Dividends paid .................................................................... (397) (469)
-------- --------
Net cash provided from financing activities .................................. 20,784 14,827
-------- --------
Net increase in cash and cash equivalents .................................... 10,072 26,946
Cash and cash equivalents at beginning of period ...................................... 47,741 34,006
-------- --------
Cash and cash equivalents at end of period ............................................ $ 57,813 $ 60,952
======== ========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
5
<PAGE> 7
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Net earnings ................................... $ 3,365 $ 2,440
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized losses arising during the period .. (46) (1,065)
------- -------
Comprehensive income ........................... $ 3,319 $ 1,375
======= =======
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
6
<PAGE> 8
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Prime
Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries, IBID, Inc.
(IBID) and Prime Bank (the "Bank"). All significant intercompany transactions
and balances have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance 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. Operating results for the three month period ended March
31, 1998, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
(2) INCOME PER COMMON SHARE
Income per common share was computed based on the following:
<TABLE>
<CAPTION>
For the quarter ended
March 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net earnings available to common shareholders ..... $ 3,340 $ 2,265
Weighted average common shares used in basic EPS .. 9,339,553 8,884,700
Potential dilutive common shares .................. 502,919 196,560
---------- ----------
Weighted average common and potential dilutive
common shares used in dilutive EPS ............ 9,842,472 9,081,260
========== ==========
Basic earnings per common share ................... $ 0.36 $ 0.25
========== ==========
Diluted earnings per common share ................. $ 0.34 $ 0.25
========== ==========
</TABLE>
7
<PAGE> 9
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the company has adopted Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which requires the reporting
of comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology which includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net earnings.
The tax effects for components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
Before Tax Net of Before Tax Net of
Tax (Expense)/ Tax Tax (Expense)/ Tax
Amount Benefit Amount Amount Benefit Amount
-------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized losses on securities
arising during the period.......... $ (71) $ 25 $ (46) $ (1,638) $ 573 $(1,065)
-------------------------------- --------------------------------
Other comprehensive income.......... $ (71) $ 25 $ (46) $ (1,638) $ 573 $(1,065)
================================ ================================
</TABLE>
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Prime Bancshares, Inc. (the "Company") is a registered bank holding
company that derives substantially all of its revenues and income from the
operation of Prime 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 18 full-service banking locations,
10 of which are located in the greater Houston metropolitan area. The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations may contain certain forward-looking statements regarding future
financial condition, results of operations, and the Company's business
operations. Such statements involve risks, uncertainties and assumptions,
including, but not limited to, monetary policy and general economic conditions
in Texas and the Houston metropolitan area, the actions of competitors and
customers, the success of the Company in implementing its strategic plan, and
the effects of regulatory restrictions imposed on banks and bank holding
companies generally, as discussed in the Company's Annual Report on Form 10-K
with the Securities and Exchange Commission. Should one or more of these risks
or uncertainties materialize, or should these underlying assumptions prove
incorrect, actual outcomes may vary materially from outcomes expected or
anticipated by the Company.
OVERVIEW
Net earnings available to common shareholders were $3.3 million ($0.34
per common share on a diluted basis) for the quarter ended March 31, 1998
compared with $2.3 million ($0.25 per common share on a diluted basis) for the
quarter ended March 31, 1997, an increase of $1.1 million or 47.5%. The Company
posted returns on average common equity of 18.80% and 16.46% and returns on
assets of 1.41% and 1.13% for the quarters ended March 31, 1998 and 1997,
respectively. The increase in net earnings resulted primarily from higher net
interest income, which in turn, was due mostly to higher average earning assets.
During the quarter ended March 31, 1997, the Company acquired approximately
$99.2 million in deposits related to three branch locations of a commercial bank
and approximately $60.2 million in deposits of First Northwestern Bank, N.A.,
the transactions referred to herein as the "Acquisitions."
The quarter ended March 31, 1998 was marked by strong loan growth.
Total loans increased to $462.1 million at March 31, 1998 from $422.8 million at
December 31, 1997, an increase of $39.3 million or 9.3%. Total assets were
$983.0 million at March 31, 1998 compared with $958.4 million at December 31,
1997. The increase in total assets resulted mainly from an increase in total
deposits to $887.1 million at March 31, 1998 from $865.1 million at December 31,
1997, an increase of $22.1 million or 2.6%. Common shareholders' equity was
$73.6 million at March 31, 1998 compared with $70.5 million at December 31,
1997, an increase of $3.2 million or 4.5%. On January 2, 1998 the Company
retired all of its outstanding preferred stock in the amount of $1.0 million.
RESULTS OF OPERATIONS
Interest Income
Interest income for the quarter ended March 31, 1998 was $17.5 million,
an increase of $2.3 million or 15.4% from the quarter ended March 31, 1997. The
increase in interest income was due primarily to higher interest income on
loans. Average loans were $442.4 for the quarter ended March 31, 1998 compared
with $334.4 million for the quarter ended March 31, 1997, an increase of $108.1
million or 32.3%. Internal growth accounted for approximately $88.1 million of
the increase in average loans, while the Acquisitions accounted for the
remainder.
Interest Expense
Interest expense on deposits and other interest-bearing liabilities was
$7.7 million for the quarter ended March 31, 1998 compared with $6.9 million for
the quarter ended March 31, 1997, an increase of $752,000 or 10.9%. The increase
in interest expense was due primarily to an increase in average interest-bearing
liabilities, which resulted mainly from the Acquisitions, to $739.9 million for
the quarter ended March 31, 1998 from $675.9 million for the quarter ended March
31, 1997. In addition, the interest rate on average interest-bearing liabilities
increased to 4.21% from 4.15% for the same periods.
9
<PAGE> 11
Net Interest Income
Net interest income was $9.8 million for the quarter ended March 31,
1998 compared with $8.3 million for the quarter ended March 31, 1997, an
increase of $1.6 million or 19.1%. The increase in net interest income resulted
primarily from growth in average earning assets to $920.3 million for the
quarter ended March 31, 1998 from $817.8 million for the quarter ended March 31,
1997, an increase of $102.5 million or 12.5%. Also, the net interest margin
increased to 4.33% from 4.09% for the same periods, due primarily to loan
growth.
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, 1998 and
1997. The tables also set forth the average rate earned on total
interest-earning assets, the average rate paid on total interest-bearing
liabilities, and the net interest margin on average total interest-earning
assets for the same periods.
<TABLE>
<CAPTION>
Three months Ended March 31,
-----------------------------------------------------------------------------------
1998 1997
------------------------------------ -------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-----------------------------------------------------------------------------------
ASSETS: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................ $ 442,415 $ 9,878 9.06% $ 334,360 $ 7,421 9.00%
Securities ........................... 450,854 7,260 6.53% 465,294 7,510 6.55%
Fed funds sold and other temporary
Investments ..................... 27,061 363 5.44% 18,150 241 5.39%
------------------------------------ ------------------------------------
Total interest-earning assets ... 920,330 $ 17,501 7.71% 817,804 $ 15,172 7.52%
Less allowance for loan losses ............. (4,926) (4,721)
--------- ---------
Total interest-earning assets, net
of allowance ............................ 915,404 813,083
Nonearning assets .......................... 55,445 58,905
--------- ---------
Total assets .................... $ 970,849 $ 871,988
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits ..... $ 124,135 $ 562 1.84% $ 122,945 $ 640 2.11%
Savings and money market accounts .... 167,010 1,239 3.01% 149,519 1,026 2.78%
Certificates of deposit .............. 431,516 5,666 5.33% 401,754 5,232 5.28%
Fed funds purchased and securities
sold under repurchase agreements .. 17,258 207 4.86% 1,722 24 5.65%
------------------------------------ ------------------------------------
Total interest-bearing
liabilities ..................... 739,919 7,674 4.21% 675,940 6,922 4.15%
------------------------------------ ------------------------------------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits .. 153,407 126,686
Other liabilities .................... 5,471 6,547
--------- ---------
Total liabilities ............... 898,797 809,173
Shareholders' equity ....................... 72,052 62,815
--------- ---------
Total liabilities and
shareholders' equity ............ $ 970,849 $ 871,988
========= =========
Net interest income ........................ $ 9,827 $ 8,250
========= =========
Net interest spread ........................ 3.50% 3.37%
==== ====
Net interest margin ........................ 4.33% 4.09%
==== ====
</TABLE>
10
<PAGE> 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
can be segregated have been allocated.
<TABLE>
<CAPTION>
Three months Ended March 31,
---------------------------------
1998 vs. 1997
---------------------------------
Increase (Decrease)
Due to
---------------------------------
Volume Rate Total
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans ........................................ $ 2,398 $ 59 $ 2,457
Securities ................................... (233) (17) (250)
Federal funds sold and other temporary
Investments ............................... 118 4 122
------- ------- -------
Total increase in interest income ....... 2,283 46 2,329
------- ------- -------
Interest-bearing liabilities:
Interest-bearing demand deposits ............. 6 (84) (78)
Savings and money market accounts ............ 120 93 213
Certificates of deposit ...................... 388 46 434
Federal funds purchased and securities sold
under repurchase agreements ............... 217 (34) 183
------- ------- -------
Total increase in interest expense ...... 731 21 752
------- ------- -------
Increase in net interest income .............. $ 1,552 $ 25 $ 1,577
======= ======= =======
</TABLE>
Provision and Allowance for Loan Losses
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The Company maintains an allowance
for loan losses based upon, among other things, such factors as historical
experience, the volume and type of lending conducted by the Company, the amount
of nonperforming assets, regulatory policies, generally accepted accounting
principles, general economic conditions, and other factors related to the
collectibility of loans in the Company's portfolio. In addition to unallocated
allowances, specific allowances are provided for individual loans when ultimate
collection is considered questionable by management after reviewing the current
status of loans which are contractually past due and considering the net
realizable value of the collateral for the loan.
Management actively monitors the Company's asset quality and provides
specific loss allowances when necessary. Loans are charged-off against the
allowance for loan losses when appropriate. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. As of March 31, 1998, the allowance for loan losses amounted to
$4.9 million or 1.07% of total loans. The allowance for loan losses as a
percentage of nonperforming loans was 607.64% at March 31, 1998.
Provisions for loan losses are charged to income to bring the total
allowance for loan losses to a level deemed appropriate by management of the
Company based on such factors as historical experience, the volume and type of
lending conducted by the Company, the amount of nonperforming assets, regulatory
policies, generally accepted accounting principles, general economic conditions,
and other factors related to the collectibility of loans in the Company's
portfolio.
11
<PAGE> 13
The provision for loan losses for the quarter ended March 31, 1998 was
$200,000 compared with $375,000 for the quarter ended March 31, 1997. The
decline related to continued strong credit quality. For the quarter ended March
31, 1998, net charge-offs were $210,000 or 0.19% of average loans.
Set forth below is an analysis of the allowance for loan losses for the
three months ended March 31, 1998:
<TABLE>
<CAPTION>
Three months
ended
March 31, 1998
--------------
(Dollars in
thousands)
<S> <C>
Average loans outstanding .................................. $ 442,415
Gross loans outstanding at end of period ................... 462,130
Allowance for loan losses at beginning of period ........... 4,938
Provision for loan losses .................................. 200
Charge-offs:
Commercial and industrial .............................. (53)
Real estate ............................................ (2)
Consumer ............................................... (267)
Recoveries:
Commercial and industrial .............................. 11
Real estate ............................................ 12
Consumer ............................................... 89
---------
Net loan (charge-offs) recoveries .......................... (210)
---------
Allowance for loan losses at end of period ................. $ 4,928
=========
Ratio of allowance to end of period loans .................. 1.07%
Ratio of net charge-offs to average loans .................. .19%
Ratio of allowance to end of period nonperforming loans .... 607.64%
</TABLE>
Noninterest Income
The Company's primary sources of noninterest income are service charges
on deposit accounts and other banking service related fees. Noninterest income
for the quarter ended March 31, 1998 increased to $2.3 million from $2.1 million
for the quarter ended March 31, 1997, an increase of $279,000 or 13.6%. The
following table presents, for the periods indicated, the major categories of
noninterest income:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1998 1997
------- ------
(Dollar in thousands)
<S> <C> <C>
Service charges on deposit accounts .................................. $1,872 $1,620
Retail services income ............................................... 338 287
Mortgage banking ..................................................... 26 39
Investment services .................................................. 55 43
Securities lending ................................................... 10 22
Other noninterest income ............................................. 35 46
------ ------
Total noninterest income ......................................... $2,336 $2,057
====== ======
</TABLE>
The increase in noninterest income resulted primarily from increased
service charges on deposit accounts, which was driven mainly by a greater number
of transaction accounts and a pricing change on insufficient check charges.
12
<PAGE> 14
Mortgage banking fees declined despite increased loans originated, due generally
to the timing of fees earned. Securities lending fees were down from last year
as maturing securities were used to fund loans.
Noninterest Expenses
Noninterest expenses totaled $6.7 million for the quarter ended March 31,
1998 compared with $6.2 million for the quarter ended March 31, 1997, an
increase of $509,000 or 8.2%. The following table presents, for the periods
indicated, the major categories of noninterest expenses:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1998 1997
------- -------
(Dollars in thousands)
<S> <C> <C>
Employee compensation and benefits ... $ 4,410 $ 4,070
Non-staff expenses:
Net bank premises expense ........ 314 285
Equipment rentals, depreciation
and maintenance ................ 326 301
Data processing .................. 388 523
Professional fees ................ 191 155
Regulatory assessments ........... 74 (105)
Ad valorem and franchise taxes ... 146 86
Other ............................ 889 914
------- -------
Total non-staff expenses .... 2,328 2,159
======= =======
Total noninterest expenses .. $ 6,738 $ 6,229
======= =======
</TABLE>
The increase in noninterest expenses resulted mainly from having the
Acquisitions for a full three months in 1998 compared with approximately half of
that period in 1997. In addition, the Company received a refund in FDIC
insurance premiums of $169,000 in the quarter ended March 31, 1997, resulting
from insured deposit rate adjustments. The remainder of the increase occurred
mostly in employee compensation and benefits, professional fees, goodwill
amortization and franchise tax expense.
Employee compensation and benefits expense for the quarter ended March 31,
1998 was $4.4 million, an increase of $340,000 or 8.4% over the same period in
1997. The increase was due primarily to the Acquisitions and normal salary
increases. The number of full-time equivalent employees was 425.5 at March 31,
1998 compared with 426.0 at March 31, 1997.
Non-staff expenses were $2.3 million for the quarter ended March 31, 1998
compared with $2.2 million for the same period in 1997, an increase of 7.8%. Net
bank premises expense increased $29,000 or 10.2% to $314,000, due primarily to
owning (and occupying a large portion of) the Company's headquarters building
for a full three months in 1998 compared with one month in 1997. Data processing
expense declined $135,000 or 25.8% to $388,000, due mainly to expenses of
approximately $132,000 in 1997 related to the Acquisitions. Professional fees
increased $36,000 or 23.2%, resulting primarily from settlement of legal
matters, mortgage related services, and greater guard service expense due to the
Acquisitions. The increase in regulatory assessments of $179,000 reflected a
$169,000 FDIC refund in the quarter ended March 31, 1997. Ad valorem and
franchise taxes were $60,000 or 69.8% greater in the quarter ended March 31,
1998 compared with the same period in 1997. Other expenses included goodwill
amortization which was $65,000 greater for the quarter ended March 31, 1998
compared with the same period in 1997, due to having the Acquisitions for a full
three months in 1998. Also, included in other expenses for 1998 was a gain on
the sale of fixed assets of $219,000.
Income Taxes
Income tax expense increased approximately $597,000 to $1.9 million for
the quarter ended March 31, 1998 from $1.3 million for the same period in 1997.
The increase was primarily attributable to higher pretax net earnings.
13
<PAGE> 15
FINANCIAL CONDITION
Loan Portfolio
Total loans were $462.1 million at March 31, 1998, an increase of $39.3
million or 9.3% from $422.8 million at December 31, 1997. Loan growth occurred
primarily in commercial and residential real estate. Loans comprised 49.7% of
total earning assets at March 31, 1998 compared with 46.3% at December 31, 1997.
The following table summarizes the loan portfolio of the Company by
type of loan as of March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
March 31,1998 December 31, 1997
--------------------- ---------------------
Amount Percent Amount Percent
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial ....... $ 39,565 8.56% $ 40,581 9.60%
Real estate:
Construction and land
Development .......... 32,024 6.93 27,579 6.52
1-4 family residential .... 88,694 19.19 75,996 17.97
Commercial mortgages ...... 138,408 29.95 114,576 27.10
Farmland .................. 692 .15 666 .16
Multi-family residential .. 6,371 1.38 6,404 1.51
Consumer:
Indirect .................. 102,060 22.08 101,540 24.02
Direct .................... 54,316 11.76 55,476 13.12
-------- -------- -------- --------
Total loans .......... $462,130 100.00% $422,818 100.00%
======== ======== ======== ========
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets were $1.2 million at March 31, 1998 compared with
$1.3 million at December 31, 1997, reflecting continued strong asset quality.
The ratio of nonperforming assets to total loans and other real estate was 0.25%
and 0.32% at March 31, 1998 and December 31, 1997, respectively.
The following table presents information regarding nonperforming assets
as of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans ............................................................... $ 811 $ 865
Restructured loans ............................................................. ---- ----
------ ------
Total nonperforming loans ...................................................... 811 865
Other real estate .............................................................. 339 477
------ ------
Total nonperforming assets ..................................................... $1,150 $1,342
====== ======
Accruing loans 90 or more days past due ........................................ $ 102 $ 96
</TABLE>
14
<PAGE> 16
SECURITIES
Securities totaled $437.7 million at March 31, 1998, a decline of $23.7
million from $461.4 million at December 31, 1997. The decline occurred as
maturing securities were used to fund loans. At March 31, 1998, securities
represented 44.5% of total assets compared with 48.1% of total assets at
December 31, 1997. The yield on average securities for the quarter ended March
31, 1998 was 6.53% compared with 6.55% for the same period in 1997. At March 31,
1998, securities included $191.1 million in U.S. Treasury securities, $220.1
million in mortgage-backed securities, $25.5 million in collateralized mortgage
obligations, and $1.0 million in municipal securities. The average life of the
securities portfolio at March 31, 1998 was approximately two years and five
months.
PREMISES AND EQUIPMENT
Premises and equipment totaled $14.9 million at March 31, 1998, a
decline of $383,000 from $15.3 million at December 31, 1997. The decline was due
primarily to depreciation of existing premises and equipment.
DEPOSITS
At March 31, 1998, demand and savings deposits accounted for
approximately 51.1% of total deposits, while certificates of deposit made up
48.9%. Noninterest-bearing demand deposits totaled $160.1 million or 18.1% of
total deposits at March 31, 1998 compared with $152.2 million or 17.6% of total
deposits at December 31, 1997. The average cost of deposits, including
noninterest-bearing demand deposits, was 3.46% for the quarter ended March 31,
1998 compared with 3.49% for the same period in 1997. The decline in average
cost of deposits was due mainly to the increased share of noninterest-bearing
deposits.
BORROWINGS
Securities sold under repurchase agreements totaled $17.0 million at
March 31, 1998. These short-term borrowings represent customers' funds.
Separately, the Company has access to purchased funds from correspondent banks.
While purchased funds have been utilized on occasion to take advantage of
investment opportunities, the Company does not generally rely on external
funding sources.
LIQUIDITY
The Company's Asset/Liability Management Policy is intended to maintain
adequate liquidity for the Company and thereby enhance its ability to raise
funds to support asset growth, meet deposit withdrawals and lending needs,
maintain reserve requirements and otherwise sustain operations. The Company
accomplishes this primarily through management of the maturities of its
interest-earning assets and interest-bearing liabilities. The Company believes
that its present liquidity position is adequate to meet current and future
needs.
Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. As of March 31, 1998, the
Company had cash and cash equivalents of $57.8 million, down from $61.0 million
at March 31, 1997. The decline was due primarily to a decline in cash balances
at correspondent banks.
The Company's cash flows are composed of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided (used) by operating
activities was $4.9 million and $(19.6) million for the quarters ended March 31,
1998 and 1997, respectively. The difference related mainly to paying for
securities that were purchased in 1996, in the quarter ended March 31, 1997.
Net cash (used) provided by investing activities was $(15.6) million
and $31.7 million for the quarters ended March 31, 1998 and 1997, respectively.
In the quarter ended March 31, 1998, the Company funded more loans than it
received in maturing investments. In the quarter ended March 31, 1997, the
Acquisitions provided funds in excess of maturing investments.
Net cash provided by financing activities was $20.8 million and $14.8
million for the quarters ended March 31, 1998 and 1997, respectively. The
difference was due primarily to a greater decline in fed funds purchased and
securities sold under repurchase agreements during the quarter ended March 31,
1997.
15
<PAGE> 17
CAPITAL RESOURCES
Total shareholders' equity as of March 31, 1998 was $73.6 million, an
increase of $2.2 million or 3.0% compared with shareholders' equity of $71.5
million at December 31, 1997. The increase was largely attributable to net
earnings, less common and preferred dividends, for the quarter ended March 31,
1998 of $3.3 million.
Both the Board of Governors of the Federal Reserve System, with respect to
the Company, and the Federal Deposit Insurance Corporation, with respect to the
Bank, have established certain minimum risk-based capital standards that apply
to bank holding companies and federally insured banks. The Company's risk-based
capital ratios remain above the levels designated as "Well Capitalized" on March
31, 1998, with Tier 1 Capital, Total Risk-Based Capital and Leverage Capital
Ratios of 13.24%, 14.21% and 7.04%, respectively. The Bank's risk-based capital
ratios remain above the levels designated as "Well Capitalized" on March 31,
1998, with Tier-1 Capital, Total Risk-Based Capital and Leverage Capital Ratios
of 13.25%, 14.22% and 6.96%, respectively.
YEAR 2000
The Company established a Year 2000 Task Force in January 1996 to ensure
there will be no material adverse effect on customers or disruption to business
operations as a result of a failure of the Company or third parties to properly
process any data, on or after January 1, 2000. The project plan consists of five
phases - Awareness, Assessment, Renovation, Validation, and Implementation. The
Awareness and Assessment phases are substantially complete and the Renovation
and Validation phases are currently in process and on schedule. The inventory of
systems has been performed and the risk assessment and prioritizing of those
systems is complete. The Company does not utilize any in-house developed
software. All software utilized has been provided by established software
companies who retain the responsibility for Year 2000 compliance. These
respective vendors have been contacted and requested to provide the current
compliance status of their respective software and hardware systems. Their
responses are being actively monitored and testing schedules are being developed
and deployed based on the responses. It is anticipated that the validation phase
will be complete by late 1998 or the first quarter 1999. Incremental costs for
causing computer applications to be Year 2000 compliant is presently estimated
to be immaterial. While the Company's efforts to obtain appropriate
representations and assurances from third party vendors and other organizations
that such entities will be able to meet all of their obligations to the Company
without disruption as a result of the Year 2000 issues, there can be no
assurance that the Company will not be adversely impacted by the failure of such
third-party entities to achieve Year 2000 compliance.
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 Investment Committee. Senior officers and
directors of the Company and the Bank compose the Investment Committee, and they
periodically get advice from external sources to assist in the management of
market risk. The Investment Committee functions 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. At March 31, 1998, the Company estimated that a 200
basis point rise or decline in market interest rates over the next twelve months
would affect its net interest income for the same period by less than 3.0%.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
16
<PAGE> 18
(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) The following exhibit is filed with this report:
Exhibit 27. Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the three
months ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME BANCSHARES, INC.
Registrant
Date: May 7, 1998 By: /s/ FREDRIC M. SAUNDERS
-------------------------------------
Fredric M. Saunders
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: May 7, 1998 By: /s/ L. ANDERSON CREEL
-------------------------------------
L. Anderson Creel
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
17
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 28,609
<INT-BEARING-DEPOSITS> 726,482
<FED-FUNDS-SOLD> 29,204
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 160,884
<INVESTMENTS-CARRYING> 276,826
<INVESTMENTS-MARKET> 278,434
<LOANS> 462,130
<ALLOWANCE> (4,928)
<TOTAL-ASSETS> 983,042
<DEPOSITS> 887,142
<SHORT-TERM> 17,005
<LIABILITIES-OTHER> 5,262
<LONG-TERM> 0
0
0
<COMMON> 3,033
<OTHER-SE> 70,600
<TOTAL-LIABILITIES-AND-EQUITY> 983,042
<INTEREST-LOAN> 0
<INTEREST-INVEST> 7,260
<INTEREST-OTHER> 363
<INTEREST-TOTAL> 17,501
<INTEREST-DEPOSIT> 7,467
<INTEREST-EXPENSE> 7,674
<INTEREST-INCOME-NET> 9,827
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,738
<INCOME-PRETAX> 5,225
<INCOME-PRE-EXTRAORDINARY> 3,365
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,365
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 7.71
<LOANS-NON> 811
<LOANS-PAST> 102
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,938
<CHARGE-OFFS> 322
<RECOVERIES> 112
<ALLOWANCE-CLOSE> 4,928
<ALLOWANCE-DOMESTIC> 4,928
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
