<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 0-23113
PRIME BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0088973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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, 1999, there were 9,804,483 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>
<S> <C>
PART I - FINANCIAL INFORMATION Page
-----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998.....................2
Consolidated Statements of Earnings for the Three Months Ended March 31, 1999 and 1998 (unaudited).....3
Consolidated Statement of Changes in Shareholders' Equity..............................................4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited)............................................................5
Notes to Interim Consolidated Financial Statements.....................................................6
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...................................................................................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
</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,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks ......................................... $ 31,133 $ 33,424
Federal funds sold and other temporary investments .............. 23,895 48,472
------------ ------------
Total cash and cash equivalents ............................. 55,028 81,896
------------ ------------
Securities:
Available-for-sale .............................................. 41,869 70,406
Held-to-maturity ................................................ 510,818 366,908
------------ ------------
Total securities ............................................ 552,687 437,314
Loans, net of allowance for loan losses of $6,291 and $6,184 .... 549,722 526,220
Premises and equipment, net ..................................... 16,255 16,566
Accrued interest receivable ..................................... 6,400 6,151
Other assets .................................................... 9,284 10,185
------------ ------------
Total assets ................................................ $ 1,189,376 $ 1,078,332
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ............................................. $ 186,239 $ 188,689
Interest-bearing deposits ....................................... 795,433 776,984
------------ ------------
Total deposits .............................................. 981,672 965,673
------------ ------------
Federal funds purchased and securities purchased
under repurchase agreements ................................. 18,246 18,743
Other borrowings ................................................ 100,000 --
Other liabilities ............................................... 4,969 4,596
------------ ------------
Total liabilities ........................................... 1,104,887 989,012
------------ ------------
Shareholders' equity:
Common stock .................................................... 3,063 3,060
Additional capital .............................................. 14,436 14,402
Retained earnings ............................................... 76,257 73,323
Accumulated other comprehensive income .......................... (12) 160
------------ ------------
93,744 90,945
Less common stock held in treasury--at cost ..................... 9,255 1,625
------------ ------------
Total shareholders' equity .................................. 84,489 89,320
------------ ------------
Total liabilities & shareholders' equity .................... $ 1,189,376 $ 1,078,332
============ ============
</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,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest income:
Loans ...................................................... $ 11,712 $ 11,180
Securities ................................................. 6,980 7,527
Federal funds sold and other temporary investments ......... 760 516
---------- ----------
Total interest income .................................. 19,452 19,223
Interest expense ........................................... 8,373 8,268
---------- ----------
Net interest income .................................... 11,079 10,955
Provision for loan losses .................................. 256 200
---------- ----------
Net interest income after provision for loan ........... 10,823 10,755
losses
---------- ----------
Noninterest income:
Service charges ............................................ 1,933 1,989
Other operating income ..................................... 588 518
---------- ----------
Total noninterest income ............................... 2,521 2,507
---------- ----------
Noninterest expense:
Employee compensation and benefits ......................... 4,937 4,882
Net bank premises expense .................................. 504 428
Equipment rentals, depreciation and maintenance ............ 445 375
Other operating expenses ................................... 1,973 1,961
---------- ----------
Total noninterest expenses ............................. 7,859 7,646
---------- ----------
Earnings before income taxes ........................... 5,485 5,616
Provision for income taxes ................................. 1,934 1,993
---------- ----------
Net earnings before preferred stock dividends .......... 3,551 3,623
Preferred stock dividends .............................. -- 25
---------- ----------
Net earnings available to common shareholders .......... $ 3,551 $ 3,598
========== ==========
Basic earnings per common share ........................ $ 0.35 $ 0.36
========== ==========
Diluted earnings per common share ...................... $ 0.34 $ 0.34
========== ==========
</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, 1998 .... $ 1,000 $ 3,003 $ 13,781 $ 61,498 $ 770 $ (1,625) $ 78,427
Comprehensive income:
Net earnings ............... -- -- -- 13,824 -- -- 13,824
Unrealized losses on
securities,
net of tax and
reclassification
adjustment ............... -- -- -- -- (610) -- (610)
----------
Comprehensive income .......... -- -- -- -- -- -- 13,214
Sale of common stock .......... -- 57 327 -- -- -- 384
Stock issuance costs .......... -- -- (22) -- -- -- (22)
Redemption of preferred stock . (1,000) -- (20) -- -- -- (1,020)
Dividends ..................... -- -- -- (1,999) -- -- (1,999)
Benefits received related to
employee stock options ..... -- -- 336 -- -- -- 336
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 .. -- 3,060 14,402 73,323 160 (1,625) $ 89,320
Comprehensive income:
Net earnings(1) ............ -- -- -- 3,551 -- -- 3,551
Unrealized losses
on securities(1) ........... -- -- -- -- (172) -- (172)
----------
Comprehensive income .......... -- -- -- -- -- -- 3,379
Sale of common stock(1) ....... -- 3 34 -- -- -- 37
Purchase of treasury stock(1) . -- -- -- -- -- (7,630) (7,630)
Dividends(1) .................. -- -- -- (617) -- -- (617)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999(1) .. $ -- $ 3,063 $ 14,436 $ 76,257 $ (12) $ (9,255) $ 84,489
========== ========== ========== ========== ========== ========== ==========
</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,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ........................................................... $ 3,551 $ 3,623
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization .......................................... 602 658
Amortization of premiums, net of accretion of discounts on securities .. 178 (126)
Provision for loan losses .............................................. 256 200
Loss (gain) on sale of premises, equipment and other real estate ....... 2 (219)
Dividends on Federal Home Loan Bank stock .............................. (45) --
Change in assets and liabilities:
Decrease in accrued interest receivable ............................. (249) (710)
Decrease in other assets ............................................ 663 91
Increase (decrease) in other liabilities ............................ 465 (81)
------------ ------------
Net cash provided by operating activities ......................... 5,423 3,436
Cash flows from investing activities:
Purchases of held-to-maturity securities ............................... (167,277) (15,695)
Purchases of available-for-sale securities ............................. (5,000) --
Proceeds from maturities of available-for-sale securities .............. 33,377 27,383
Proceeds from maturities of held-to-maturity securities ................ 23,130 13,082
Increase in loans ...................................................... (23,758) (36,739)
Purchases of premises and equipment .................................... (148) (268)
Proceeds from sale of premises, equipment and other real estate ........ 93 432
------------ ------------
Net cash used by investing activities ............................. (139,583) (11,805)
Cash flows from financing activities:
Change in deposits ..................................................... 15,999 15,463
Borrowing from the Federal Home Loan Bank .............................. 100,000
Change in federal funds purchased and securities sold under repurchase
agreements .......................................................... (497) 473
Stock issuance cost .................................................... -- (5)
Purchase of treasury stock ............................................. (7,630) --
Redemption of preferred stock .......................................... -- (1,020)
Sale of common stock ................................................... 37 260
Dividends paid ......................................................... (617) (397)
------------ ------------
Net cash provided by financing activities ......................... 107,292 14,774
------------ ------------
Net (decrease) increase in cash and cash equivalents .............. (26,868) 6,405
Cash and cash equivalents at beginning of period ........................... 81,896 67,721
------------ ------------
Cash and cash equivalents at end of period ................................. $ 55,028 $ 74,126
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
5
<PAGE> 7
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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, 1999, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
(2) INCOME PER COMMON SHARE
Income per common share was computed based on the following:
<TABLE>
<CAPTION>
For the quarter ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net earnings available to common shareholders ...... $ 3,551 $ 3,598
Weighted average common shares used in basic EPS ... 10,215,416 10,087,016
Potential dilutive common shares ................... 284,615 502,919
------------ ------------
Weighted average common and potential dilutive
common shares used in dilutive EPS ............. 10,500,031 10,589,935
------------ ------------
Basic earnings per common share .................... $ 0.35 $ 0.36
============ ============
Diluted earnings per common share .................. $ 0.34 $ 0.34
============ ============
</TABLE>
6
<PAGE> 8
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(3) COMPREHENSIVE INCOME
Comprehensive income is a more inclusive financial reporting
methodology than net earnings and 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,
------------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
Before Net of Before Net of
Tax Tax Tax Tax Tax Tax
Amount Benefit Amount Amount Benefit Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unrealized losses on securities
arising during the period ...... $ (265) $ 93 $ (172) $ (68) $ 24 $ (44)
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income ...... $ (265) $ 93 $ (172) $ (68) $ 24 $ (44)
========== ========== ========== ========== ========== ==========
</TABLE>
(4) BORROWINGS
During the first quarter of 1999, the Company borrowed $100,000 from
the Federal Home Loan Bank at a weighted average interest rate of 4.84
percent. The principal matures in 10 years and contains certain call
provisions.
7
<PAGE> 9
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 21 full-service banking
locations, 13 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 $3.6 million ($0.34
per common share on a diluted basis) for the quarters ended March 31, 1999 and
March 31, 1998. The Company posted returns on average common equity of 16.16%
and 18.47% and returns on average assets of 1.28% and 1.39% for the quarters
ended March 31, 1999 and 1998, respectively. The decrease in returns on assets
and average common equity resulted primarily from slow growth in net interest
income.
Total loans increased to $556.0 million at March 31, 1999 from $532.4
million at December 31, 1998, an increase of $23.6 million, or 4.4%. Total
assets were $1.2 billion at March 31, 1999 compared with $1.1 billion at
December 31, 1998. The increase in total assets resulted mainly from utilizing
external funding sources to take advantage of investment opportunities. Common
shareholders' equity was $84.5 million at March 31, 1999 compared with $89.3
million at December 31, 1998, a decrease of $4.8 million, or 5.4%. The decrease
in shareholders' equity resulted mainly from a stock repurchase program in
which the Company bought 500,000 shares of its common stock during the first
quarter of 1999.
RESULTS OF OPERATIONS
Interest Income
Interest income for the quarter ended March 31, 1999 was $19.5
million, an increase of $229,000, or 1.2%, from the quarter ended March 31,
1998. The increase in interest income was due to a 7.1% increase in average
earning assets. This was partially offset by a decline in the yield on average
earning assets, which decreased 43 basis points from the first quarter of 1998
due to declining market interest rates.
Interest Expense
Interest expense on deposits and other interest-bearing liabilities
was $8.4 million for the quarter ended March 31, 1999 compared with $8.3
million for the quarter ended March 31, 1998, an increase of $105,000, or 1.3%.
The increase in interest expense was due primarily to an increase in average
interest-bearing liabilities to $851.6 million for the quarter ended March 31,
1999 from $794.3 million for the quarter ended March 31, 1998. This was offset
by the interest rate on average interest-bearing liabilities decreasing to
3.99% from 4.22% for the same periods.
Net Interest Income
Net interest income was $11.1 million for the quarter ended March 31,
1999 compared with $11.0 million for the quarter ended March 31, 1998, an
increase of $124 thousand, or 1.1%. The increase in net interest income
resulted primarily from growth in average earning assets to $1.1 billion for
the quarter ended March 31, 1999 from $1.0 billion for the quarter ended March
31, 1998, an increase of $70.8 million, or 7.1%. This was partially offset by a
decrease in the net interest margin of 25 basis points from the same period a
year ago.
8
<PAGE> 10
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred
to as a "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a "rate change." The following tables set forth,
for each category of interest-earning assets and interest-bearing liabilities,
the average amounts outstanding, the interest earned or paid on such amounts,
and the average rate earned or paid for the quarters ended March 31, 1999 and
1998. The tables also set forth the average rate 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,
------------------------------------------------------------------------------------
1999 1998
----------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS: (Dollars in thousands)
Interest-earning assets:
Loans .............................. $ 544,051 $ 11,712 8.73% $ 493,248 $ 11,180 9.19%
Securities ......................... 466,401 6,980 6.07% 469,049 7,527 6.51%
Federal funds sold and other
temporary investments .......... 61,144 760 5.04% 38,531 516 5.43%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets . 1,071,596 $ 19,452 7.36% 1,000,828 $ 19,223 7.79%
Less allowance for loan losses ........... (6,267) (5,864)
----------- -----------
Total interest-earning assets, net
of allowance............................ 1,065,329 994,964
Nonearning assets.......................... 60,731 63,780
----------- -----------
Total assets..................... $ 1,126,060 $ 1,058,744
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits...... $ 135,996 $ 607 1.81% $ 130,661 $ 581 1.80%
Savings and money market accounts..... 190,874 1,361 2.89% 182,579 1,383 3.07%
Certificates of deposit............... 467,101 5,735 4.98% 463,420 6,091 5.33%
Federal funds purchased and securities
sold under repurchase agreements... 18,709 196 4.25% 17,258 207 4.86%
Other borrowings....................... 38,889 474 4.94% 380 6 6.40%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 851,569 8,373 3.99% 794,298 8,268 4.22%
----------- ----------- ----------- ----------- ----------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 181,091 178,463
Other liabilities..................... 4,276 6,977
----------- -----------
Total liabilities................ 1,036,936 979,738
Shareholders' equity....................... 89,124 79,006
Total liabilities and
shareholders'
equity..........................$ 1,126,060 $ 1,058,744
=========== ===========
Net interest income........................ $ 11,079 $ 10,955
=========== ===========
Net interest spread........................ 3.37% 3.57%
=========== ===========
Net interest margin........................ 4.19% 4.44%
=========== ===========
</TABLE>
9
<PAGE> 11
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
that can be segregated have been allocated.
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------
1999 vs. 1998
--------------------------------------
Increase (Decrease)
Due to
--------------------------------------
Volume Rate Total
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans ........................................ $ 1,152 $ (620) $ 532
Securities ................................... (42) (505) (547)
Federal funds sold and other temporary
Investments ................................ 303 (59) 244
---------- ---------- ----------
Total increase in interest income ........ 1,413 (1,184) 229
---------- ---------- ----------
Interest-bearing liabilities:
Interest-bearing demand deposits ............. 24 2 26
Savings and money market accounts ............ 63 (85) (22)
Certificates of deposit ...................... 48 (404) (356)
Federal funds purchased and securities sold
under repurchase agreements ................ 17 (28) (11)
Other Borrowings ............................. 608 (140) 468
---------- ---------- ----------
Total increase in interest expense ....... 760 (655) 105
---------- ---------- ----------
Increase in net interest income .............. $ 653 $ (529) $ 124
========== ========== ==========
</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, 1999, the allowance for loan losses amounted to
$6.3 million, or 1.13%, of total loans. The allowance for loan losses as a
percentage of nonperforming loans was 576.10% at March 31, 1999.
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.
10
<PAGE> 12
The provision for loan losses for the quarter ended March 31, 1999 was
$256,000 compared with $200,000 for the quarter ended March 31, 1998. The
higher provision reflects an increase in total average loans. For the quarter
ended March 31, 1999, net charge-offs were $149,000, or 0.11%, of average
loans.
Set forth below is an analysis of the allowance for loan losses for
the three months ended March 31, 1999:
<TABLE>
<CAPTION>
Three months
ended
March 31, 1999
----------------------
(Dollars in thousands)
<S> <C>
Average loans outstanding ....................................... $ 544,051
Gross loans outstanding at end of period ........................ 556,013
Allowance for loan losses at beginning of period ................ 6,184
Provision for loan losses ....................................... 256
Charge-offs:
Commercial and industrial ................................... (11)
Real estate ................................................. --
Consumer .................................................... (212)
Recoveries:
Commercial and industrial ................................... 3
Real estate ................................................. 9
Consumer .................................................... 62
---------------
Net loan (charge-offs) recoveries ............................... (149)
---------------
Allowance for loan losses at end of period ...................... $ 6,291
===============
Ratio of allowance to end of period loans ....................... 1.13%
Ratio of net charge-offs to average loans ....................... 0.11%
Ratio of allowance to end of period nonperforming loans ......... 576.10%
</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, 1999 was $2.5 million for the quarters
ended March 31, 1999 and 1998. The following table presents, for the periods
indicated, the major categories of noninterest income:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1999 1998
--------------- ---------------
(Dollar in thousands)
<S> <C> <C>
Service charges on deposit accounts .............. $ 1,933 $ 1,989
Retail services income ........................... 411 354
Mortgage banking ................................. 56 26
Investment services .............................. 48 59
Securities lending ............................... 10 10
Other noninterest income ......................... 63 69
--------------- ---------------
Total noninterest income ..................... $ 2,521 $ 2,507
=============== ===============
</TABLE>
The increase in noninterest income resulted primarily from increases in
retail services and mortgage banking fees. Retail services income increased
primarily due to increased usage of ATM and debit cards. Loan processing fees
account for the majority of the increase in mortgage banking fees. These
increases are offset by the decrease in service charges collected, which was
due primarily to lower insufficient check fees.
11
<PAGE> 13
Noninterest Expenses
Noninterest expenses totaled $7.9 million for the quarter ended March 31,
1999 compared with $7.6 million for the quarter ended March 31, 1998, an
increase of $213,000, or 2.8%. The following table presents, for the periods
indicated, the major categories of noninterest expenses:
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1999 1998
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Employee compensation and benefits ..... $ 4,937 $ 4,882
Non-staff expenses:
Net bank premises expense .......... 504 428
Equipment rentals, depreciation
and maintenance ................. 445 375
Data processing .................... 355 464
Professional fees .................. 266 268
Regulatory assessments ............. 77 85
Ad valorem and franchise taxes ..... 86 178
Other .............................. 1,189 966
---------- ----------
Total non-staff expenses ...... 2,922 2,764
---------- ----------
Total noninterest expenses ..... $ 7,859 $ 7,646
========== ==========
</TABLE>
Employee compensation and benefits expense for the quarter ended March
31, 1999 was $4.9 million, an increase of $55,000, or 1.1%, over the same
period in 1998. The increase was primarily due to normal salary increases. The
number of full-time equivalent employees was 470.0 at March 31, 1999 and 1998.
Non-staff expenses were $2.9 million for the quarter ended March 31, 1999
compared with $2.8 million for the same period in 1998, an increase of 5.7%.
Net bank premises expense increased $76,000, or 17.8%, to $504,000, due to the
addition of the Clear Lake branch as well as general increases in utilities,
cleaning costs, and repairs. Equipment rentals, depreciation and maintenance
increased $70,000, or 18.7%, due primarily to a larger number of repairs needed
in the first quarter of 1999, as well as increased depreciation expense
resulting from purchases made over the last year. Data processing expense
declined $109,000, or 23.5%, to $355,000, due mainly to the consolidation of
computer systems after the first quarter of 1998, as well as a decrease in the
depreciation expense of computers and computer software, as many of these items
became fully depreciated. Ad valorem and franchise taxes were $92,000, or
51.7%, lower in the quarter ended March 31, 1999 compared with the same period
in 1998.
Income Taxes
Income tax expense decreased approximately $59,000 to $1.9 million for
the quarter ended March 31, 1999 from $2.0 million for the same period in 1998.
The decrease was primarily attributable to lower pretax net earnings.
12
<PAGE> 14
FINANCIAL CONDITION
Loan Portfolio
Total loans were $556.0 million at March 31, 1999, an increase of
$23.6 million, or 4.4%, from $532.4 million at December 31, 1998. Loan growth
occurred primarily in commercial and residential real estate. Loans comprised
49.1% of total earning assets at March 31, 1999 compared with 52.3% at December
31, 1998.
The following table summarizes the loan portfolio of the Company by
type of loan as of March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------- -----------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial ......... $ 61,851 11.12% $ 50,644 9.51%
Real estate:
Construction and land
Development ............ 42,242 7.60 38,673 7.26
1-4 family residential ...... 110,327 19.85 105,882 19.89
Commercial mortgages ........ 180,331 32.43 174,668 32.81
Farmland .................... 634 0.11 722 0.14
Multi-family residential .... 6,735 1.21 7,363 1.38
Consumer:
Indirect .................... 95,670 17.21 96,243 18.08
Direct ...................... 58,223 10.47 58,209 10.93
---------- ---------- ---------- ----------
Total loans ............ $ 556,013 100.00% $ 532,404 100.00%
========== ========== ========== ==========
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets were $1.8 million at March 31, 1999 compared with
$1.7 million at December 31, 1998, reflecting continued strong asset quality.
The ratio of nonperforming assets to total loans and other real estate was
0.32% and 0.31% at March 31, 1999 and December 31, 1998, respectively.
The following table presents information regarding nonperforming
assets as of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans ............................ $ 1,030 $ 808
Restructured loans .......................... 62 69
---------- ----------
Total nonperforming loans ................... 1,092 877
Other real estate ........................... 679 774
---------- ----------
Total nonperforming assets .................. $ 1,771 $ 1,651
========== ==========
Accruing loans 90 or more days past due ..... $ 138 $ 699
</TABLE>
13
<PAGE> 15
SECURITIES
Securities totaled $552.7 million at March 31, 1999, an increase of
$115.4 million from $437.3 million at December 31, 1998. The increase occurred
primarily due to an increase in available funds resulting from Federal Home
Loan Bank borrowings. At March 31, 1999, securities represented 48.8% of total
earning assets compared with 42.9% of total earning assets at December 31,
1998. The yield on average securities for the quarter ended March 31, 1999 was
6.07% compared with 6.51% for the same period in 1998. At March 31, 1999,
securities included $84.1 million in U.S. Treasury securities, $441.1 million
in mortgage-backed securities, $12.9 million in collateralized mortgage
obligations, and $9.5 million in municipal securities. The average life of the
securities portfolio at March 31, 1999 was approximately five years and six
months.
PREMISES AND EQUIPMENT
Premises and equipment totaled $16.3 million at March 31, 1999, a
decline of $311,000 from $16.6 million at December 31, 1998. The decline was
due primarily to depreciation of existing premises and equipment.
DEPOSITS
At March 31, 1999, demand and savings deposits accounted for
approximately 52.2% of total deposits, while certificates of deposit made up
47.8%. Noninterest-bearing demand deposits totaled $186.2 million, or 19.0%, of
total deposits at March 31, 1999 compared with $188.7 million, or 19.5%, of
total deposits at December 31, 1998. The average cost of deposits, including
noninterest-bearing demand deposits, was 3.20% for the quarter ended March 31,
1999 compared with 3.42% for the same period in 1998. The decline in average
cost of deposits was due mainly to the declining market interest rates.
BORROWINGS
Federal Funds Purchased and securities sold under repurchase
agreements totaled $18.2 million at March 31, 1999. These short-term borrowings
represent customers' funds. Separately, the Company has access to purchased
funds from correspondent banks. During the first quarter of 1999, the Company
borrowed $100 million from the Federal Home Loan Bank in order to take
advantage of investment opportunities.
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, 1999, the
Company had cash and cash equivalents of $55.0 million, down from $74.1 million
at March 31, 1998. The decline was due primarily to a decline in federal funds
sold and other temporary investments.
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 by operating activities was
$5.4 million and $3.4 million for the quarters ended March 31, 1999 and 1998,
respectively.
Net cash used by investing activities was $139.6 million and $11.8
million for the quarters ended March 31, 1999 and 1998, respectively. The
difference related mainly to the purchase of securities with the cash borrowed
from the Federal Home Loan Bank.
Net cash provided by financing activities was $107.3 million and $14.8
million for the quarters ended March 31, 1999 and 1998, respectively. The
difference primarily relates to the borrowing from the Federal Home Loan Bank.
14
<PAGE> 16
CAPITAL RESOURCES
Total shareholders' equity as of March 31, 1999 was $84.5 million, a
decrease of $4.8 million, or 5.4%, compared with shareholders' equity of $89.3
million at December 31, 1998. The decrease was primarily due to a stock
repurchase by the Company of 500,000 shares, as well as dividends paid on
common stock. This was partially offset by net income of $3.6 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, 1999, with Tier 1 Capital, Total Risk-Based Capital
and Leverage Capital Ratios of 12.58%, 13.57% and 7.14%, respectively. The
Bank's risk-based capital ratios remain above the levels designated as "Well
Capitalized" on March 31, 1999, with Tier-1 Capital, Total Risk-Based Capital
and Leverage Capital Ratios of 12.44%, 13.43% and 7.06%, respectively.
YEAR 2000 COMPLIANCE
General.
The Company continues to monitor and revise its Year 2000 project plan
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.
State of Readiness
The Company has in place a task force, established in January, 1996,
to address the millennium change issues and to ensure there will be no material
adverse effect on customers or disruption to business operations as a result of
a failure of the Bank or third parties to properly process any data on or after
January 1, 2000. The task force has executive sponsorship from, and reports to,
the Data Processing Steering Committee, which in turn reports to the Board of
Directors. The task force consists of the project manager and the respective
task force members. This group meets periodically to review the project
schedule and its progress.
The project plan consists of five phases: Awareness, Assessment,
Renovation, Validation, and Implementation. This plan has been patterned after
the FFIEC interagency statement of May 5, 1997. The Awareness, Assessment,
Renovation, and Validation phases are substantially complete; the
Implementation phase is currently in process and on schedule.
The Company has drafted a Year 2000 business recovery contingency and
testing plan in accordance with FFIEC directives. All mission critical software
utilized has been provided by established software companies who retain the
responsibility for Year 2000 compliance. The core application processing
systems (demand and time deposit accounting, loan accounting, general ledger
accounting, and the customer information processing systems) of the Company,
and the hardware upon which it is processed, were tested during the fourth
quarter 1998 and, based upon the results, the Company believes these systems to
be compliant. These applications comprise 81.25% of the mission critical
systems of the Company. As of March 31, 1999, 100% of the mission critical
systems have been either validated through testing, or have been represented as
compliant by the respective vendor and coupled with an appropriate recovery
contingency plan in the unlikely event of non-compliance.
The FDIC examined the Company's overall compliance efforts,
specifically regarding Year 2000 issues, in March 1998 and March 1999. An
outside consulting firm was engaged in November 1998 to review the Company's
testing plan and again in March 1999 to review the business recovery
contingency plans.
The Company will concentrate its efforts on customer communications
and business resumption contingency plan testing during the remainder of 1999.
15
<PAGE> 17
Costs of Compliance
Management has prepared an estimate of costs necessary to validate
and/or remediate mission critical systems. Based upon this estimate, management
does not expect that costs for bringing the Company's computer applications
into Year 2000 compliance will have a materially adverse effect on the
Company's financial condition, results of operations or liquidity. The
estimated costs of validation and remediation is $256,000, of which
approximately 75% has been expended with another 25% to be expended during the
first half of 1999. However, management's ability to predict the cost
associated with Year 2000 compliance is subject to some uncertainties. While
the Company has made 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.
Risk Related to Third Parties
The Company has performed due diligence with respect to the impact of
Year 2000 noncompliance by funds takers, funds providers, and other third
parties. This impact cannot be accurately gauged. The Company has identified
and contacted customers with borrowing relationships of $1.0 million or more to
evaluate their readiness compliance efforts and will continue to monitor any
potential impact to the Company. Management does not believe the amounts
identified through this process are material in amount to adjust its current
methodology for making provisions to the allowance for loan losses although
there are no assurances that this amount will not be substantially higher than
management's estimate. Contingency Plans
The Company is in the process of testing its business recovery
contingency plans with respect to the Year 2000 date change, and believes that
it will be able to process its own mission critical systems even in the event
of a failure of third parties such as electricity or telecommunications for an
extended period of time and without significant losses. In addition, the
Company has formulated plans for providing funds necessary for liquidity needs
of its customers through funding arrangements with other financial
institutions.
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, 1999, 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
5.0%.
16
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
(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) 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, 1999.
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, 1999 By: /s/ FREDRIC M. SAUNDERS
----------------------------------
Fredric M. Saunders
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: May 7, 1999 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 31,133
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,895
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,869
<INVESTMENTS-CARRYING> 510,818
<INVESTMENTS-MARKET> 511,076
<LOANS> 556,013
<ALLOWANCE> 6,291
<TOTAL-ASSETS> 1,189,376
<DEPOSITS> 981,672
<SHORT-TERM> 18,246
<LIABILITIES-OTHER> 4,969
<LONG-TERM> 100,000
0
0
<COMMON> 3,063
<OTHER-SE> 81,426
<TOTAL-LIABILITIES-AND-EQUITY> 1,189,376
<INTEREST-LOAN> 11,712
<INTEREST-INVEST> 6,980
<INTEREST-OTHER> 760
<INTEREST-TOTAL> 19,452
<INTEREST-DEPOSIT> 7,703
<INTEREST-EXPENSE> 8,373
<INTEREST-INCOME-NET> 11,079
<LOAN-LOSSES> 256
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,859
<INCOME-PRETAX> 5,485
<INCOME-PRE-EXTRAORDINARY> 5,485
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,551
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 7.36
<LOANS-NON> 1,030
<LOANS-PAST> 138
<LOANS-TROUBLED> 62
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,184
<CHARGE-OFFS> 223
<RECOVERIES> 74
<ALLOWANCE-CLOSE> 6,291
<ALLOWANCE-DOMESTIC> 6,291
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
