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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
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TEXAS 76-0088973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12200 NORTHWEST FREEWAY 77092
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 209-6000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value
$0.25 per share
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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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 19, 1999, the number of outstanding shares of Common Stock
was 10,304,483. As of such date, the aggregate market value of the shares of
Common Stock held by non-affiliates, based on the closing price of the Common
Stock on the Nasdaq National Market System on such date, was approximately $78.3
million.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders (Part III, Items 10-13).
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PRIME BANCSHARES, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I...................................................................... 1
Item 1 Business.................................................... 1
General..................................................... 1
Business.................................................... 1
Competition................................................. 3
Employees................................................... 3
Supervision and Regulation.................................. 3
Item 2 Properties.................................................. 10
Item 3 Legal Proceedings........................................... 11
Item 4 Submission of Matters to a Vote of Security Holders......... 11
PART II..................................................................... 11
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 11
Description of Capital Stock................................ 12
Recent Sales of Unregistered Securities..................... 12
Item 6 Selected Financial Data..................................... 13
Special Cautionary Notice Regarding Forward-Looking
Statements.................................................. 15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Overview.................................................... 15
Results of Operations....................................... 16
Financial Condition......................................... 20
Year 2000 Compliance........................................ 32
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 33
Item 8 Financial Statements and Supplementary Data................. 34
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 34
PART III.................................................................... 35
Item 10 Directors and Executive Officers of the Registrant.......... 35
Item 11 Executive Compensation...................................... 35
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 35
Item 13 Certain Relationships and Related Transactions.............. 35
PART IV..................................................................... 35
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 35
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PART I
ITEM 1. BUSINESS
GENERAL
Prime Bancshares, Inc. (the "Company") was incorporated as a business
corporation under the laws of the State of Texas in 1984 to serve as a bank
holding company for Prime Bank (the "Bank"), which was chartered in 1958. The
Company's headquarters are located at 12200 Northwest Freeway, Houston, Texas
77092, and its telephone number is (713) 209-6000.
From its inception until 1988, the Bank primarily served individuals and
small businesses in and around its original principal location in the town of
Channelview, located in the northeastern part of the Houston metropolitan area.
In the mid to late 1980s, the record number of bank and savings and loan
failures caused by a severe downturn in the Texas economy presented the Company
with an opportunity to expand its branch network in the greater Houston area and
expand geographically to other parts of the state, as well as enhance its core
deposit base. From 1988 to 1991, the Company acquired the deposits and certain
assets of seven failed financial institutions, five of which were located in the
Houston area, with the others located in Brenham and San Antonio. In 1994, the
Company acquired the deposits and certain assets of nine branch locations from
First Heights Bank fsb, five of which were subsequently sold, with the Company
retaining branches in Orange, Beaumont, Nederland and Houston. In early 1997,
the Company purchased from a commercial bank the deposits and certain assets
related to three additional branches in Beaumont, Port Arthur and Port Neches,
and acquired by merger First Northwestern Bank, N.A. in Houston. During the
second quarter of 1998, the Company completed a merger with Sunbelt National
Bank. The merger was accounted for as a pooling of interests in which the
Company issued 747,463 shares of its common stock, $0.25 par value per share,
valued at approximately $20.0 million. Since the beginning of 1996, the Company
has also established two new full-service branches in the Houston area and two
loan production offices in San Antonio. As a result of this expansion activity,
the Company has grown from an organization with two banking locations and assets
of $81.2 million at December 31, 1987 to its current 21 full-service banking
locations and assets of $1.1 billion at December 31, 1998.
The Company has developed a supercommunity banking network, with most of
its offices located either in separate communities or portions of urban areas
that function as distinct communities. Lending and investment activities are
funded from a strong core deposit base consisting of approximately 98,000
deposit accounts from approximately 55,000 households. Each of the Company's
offices has a manager with the authority and flexibility to make pricing
decisions within overall ranges developed by the Company as a form of quality
control. The Company believes that its responsiveness to local customers and
ability to adjust deposit rates and price loans at each location gives it a
distinct competitive advantage. Adequate staffing is provided at each location
to ensure that customers needs are well addressed, and employees are committed
to quality service and developing long-term customer relationships. The Company
provides economic incentives to its officers to develop additional business for
the Company and to cross sell additional products and services to existing
customers.
The Company continues to look for additional expansion opportunities,
either through acquisitions of existing financial institutions or by
establishing de novo branches or loan production offices. The Company intends to
consider various strategic acquisitions of banks, banking assets or financial
service entities related to banking in those areas that management believes
would complement and help grow the Company's existing business.
BUSINESS
In connection with the geographic expansion, market diversification and
deposit acquisitions discussed above, over the past several years the Company
began to seek new lines of business to diversify its asset mix and further
enhance its profitability. While each new line of business reflects the
Company's efforts to enrich its asset mix, each of these lines of business is an
outgrowth of the community banking and small to medium-sized business lending
that the Company has performed so profitably over the years. Reflective of the
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Company's conservative philosophy, each of these businesses has been developed
deliberately by the Company and is subject to various quality controls. The
Company's principal lines of business are the following:
Community Banking. The Company has historically extended credit
through its branch network to owner-operated small to medium-sized
businesses and consumers. The Company offers businesses a wide variety of
lending products including term loans, lines of credit and fixed asset
loans, including real estate and equipment financing. These loans, most of
which are collateralized, are made available to businesses for working
capital (including inventory and receivables), business expansion
(including acquisitions of real estate and improvements) and the purchase
of equipment and machinery. As a general practice, the Company takes as
collateral a lien on any available real estate, equipment or other assets
and obtains the personal guaranty of the owner or owners of the business.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans and personal loans (both
collateralized and uncollateralized).
Mortgage Banking. The Company uses its existing branch network to
offer a complete line of single family residential mortgage products. The
Company generally retains mortgage loans with shorter terms or variable
rates and sells into the secondary market longer term fixed rate loans. As
a result, the Company retains approximately half of the mortgage loans that
it originates. The Company originates mortgage loans only in its market
areas, and services only the loans that it retains. The Company does not
buy mortgage loans from other sources. The volume of mortgage loans
originated by the Company has increased from $11.9 million in 1994 to $57.3
million in 1998.
Indirect Lending. In 1993, the Company initiated a program of
purchasing indirect loans, which are installment loans with typical
maturities of three to five years originated primarily by automobile
dealers for the purpose of financing consumer purchases and sold by the
dealers to commercial banks and other sources of financing. The Company
purchases almost exclusively "A"-rated loans primarily from a select list
of local auto dealers and others after performing its own analysis of the
loan package. The indirect loan program is staffed by 11 people and managed
by an officer with over 21 years of experience in this area and a thorough
knowledge of the reliability of various dealers. The Company also purchases
some indirect boat and recreational vehicle loans. The program's
delinquency ratios of 1.05% for the year ended December 31, 1998 and 0.94%
for the year ended December 31, 1997 compare favorably to the industry
average. Similarly, the program's net charge-off ratio of 0.33% at December
31, 1998 is well below the industry average for this type of lending. The
Company's total amount of indirect loans at December 31, 1998 was $96.2
million. The Company plans to maintain its current quality controls and
maintain the indirect loan program at its current level. As a matter of
operating philosophy, the Company is willing to forego the potentially
higher yield represented by lower grade loans in exchange for the better
credit quality of the "A"-rated loans.
Commercial Banking. In 1994, the Company established a separate
commercial lending unit as an outgrowth of the Company's historical
business of making loans to small and medium-sized businesses from its
various locations. The commercial lending unit is staffed with experienced
commercial lenders who generate commercial loans through solicitations of
potential customers primarily in the greater Houston and San Antonio
markets. The commercial loan customers generally have between $5.0 million
and $50.0 million in annual sales, and the average commercial loan is
approximately $300,000. Most of these loans are secured by real estate and
are backed by the personal guaranty of the owners of the business. The
Company makes commercial loans to a wide variety of industries. The Company
intends to expand this business by adding additional experienced commercial
lenders, preferably bankers with an existing commercial loan portfolio.
The Company's overall business strategy is to (i) continue to service its
small to medium-sized owner-operated businesses and consumer customers by
providing individualized, responsive, quality service through its supercommunity
banking network, (ii) continue to increase its loan to deposit ratio and thereby
enrich its earning asset mix, and (iii) augment its existing market share by
looking for additional expansion opportunities in growth areas, particularly in
the Houston and San Antonio markets.
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COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally upon the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
non-financial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. Many of such competitors may have greater
financial and other resources than the Company. The Company has been able to
compete effectively with other financial institutions by emphasizing customer
service, technology and local office decision-making; by establishing long-term
customer relationships and building customer loyalty; and by providing products
and services designed to address the specific needs of its customers.
Competition from both financial and non-financial institutions is expected to
continue.
EMPLOYEES
As of December 31, 1998, the Company had 467 full-time employees, seven of
whom were executive officers. The Company provides medical and hospitalization
insurance to its full-time employees. The Company considers its relations with
employees to be excellent.
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation ("FDIC") and the
banking system as a whole, and not for the protection of the bank holding
company shareholders or creditors. The banking agencies have broad enforcement
power over bank holding companies and banks including the power to impose
substantial fines and other penalties for violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
THE COMPANY. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and it is subject
to supervision, regulation and examination by the Board of Governors of the
Federal Reserve System ("Federal Reserve"). The BHC Act and other federal laws
subject bank holding companies to particular restrictions on the types of
activities in which they may engage, and to a range of supervisory requirements
and activities, including regulatory enforcement actions for violations of laws
and regulations.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy
of the Federal Reserve that bank holding companies should pay cash dividends on
common stock only out of income available over the past year and only if
prospective earnings retention is consistent with the organization's expected
future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank
holding company's ability to serve as a source of strength to its banking
subsidiaries.
Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve policy, a holding company may not be inclined to provide
it. As discussed below, a bank holding company in certain circumstances could be
required to guarantee the capital plan of an undercapitalized banking
subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of
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an insured depository institution, and any claim for breach of such obligation
will generally have priority over most other unsecured claims.
Activities "Closely Related" to Banking. The BHC Act prohibits a bank
holding company, with certain limited exceptions, from acquiring direct or
indirect ownership or control of any voting shares of any company which is not a
bank or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve, by order or regulation, to be so closely
related to banking or managing or controlling banks, as to be a proper incident
thereto. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve include
consumer financial counseling, tax planning and tax preparation, futures and
options advisory services, check guaranty services, collection agency and credit
bureau services, and personal property appraisals. In approving acquisitions by
bank holding companies of companies engaged in banking-related activities, the
Federal Reserve considers a number of factors, and weighs the expected benefits
to the public (such as greater convenience and increased competition or gains in
efficiency) against the risks of possible adverse effects (such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices). The Federal Reserve is also empowered
to differentiate between activities commenced de novo and activities commenced
through acquisition of a going concern.
Securities Activities. The Federal Reserve has approved applications by
bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four family
mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10%
or more of the company's consolidated net worth. The Federal Reserve may oppose
the transaction if it believes that the transaction would constitute an unsafe
or unsound practice or would violate any law or regulation. Depending upon the
circumstances, the Federal Reserve could take the position that paying a
dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations,
and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1,000,000 for each day
the activity continues.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 1998, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 14.10% and its ratio of total
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capital to total risk-weighted assets was 15.13%. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
In addition to the risk-based capital guidelines, the Federal Reserve uses
a leverage ratio as an additional tool to evaluate the capital adequacy of bank
holding companies. The leverage ratio is a company's Tier 1 capital divided by
its average total consolidated assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
above the regulatory minimum. As of December 31, 1998, the Company's leverage
ratio was 8.02%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHC Act requires every bank
holding company to obtain the prior approval of the Federal Reserve before it
may acquire all or substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank, if after such acquisition it would own
or control, directly or indirectly, more than 5% of the voting shares of such
bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve has been notified and has not objected to the transaction. Under
a rebuttable presumption established by the Federal Reserve, the acquisition of
10% or more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, such as the Company,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of the Company.
In addition, any company is required to obtain the approval of the Federal
Reserve under the BHC Act before acquiring 25% (5% in the case of an acquiror
that is a bank holding company) or more of the outstanding Common Stock of the
Company, or otherwise obtaining control or a "controlling influence" over the
Company.
THE BANK. The Bank is a Texas-chartered banking association, the deposits
of which are insured by the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF") of the FDIC. The
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Bank is not a member of the Federal Reserve System; therefore, the Bank is
subject to supervision and regulation by the FDIC and the Texas Department of
Banking ("TDB"). Such supervision and regulation subjects the Bank to special
restrictions, requirements, potential enforcement actions and periodic
examination by the FDIC and the TDB. Because the Federal Reserve regulates the
bank holding company parent of the Bank, the Federal Reserve also has
supervisory authority which directly affects the Bank.
Equivalence to National Bank Powers. The Texas Constitution, as amended in
1986, provides that a Texas-chartered bank has the same rights and privileges
that are or may be granted to national banks domiciled in Texas. To the extent
that the Texas laws and regulations may have allowed state-chartered banks to
engage in a broader range of activities than national banks, the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") has operated to limit this
authority. FDICIA provides that no state bank or subsidiary thereof may engage
as principal in any activity not permitted for national banks, unless the
institution complies with applicable capital requirements and the FDIC
determines that the activity poses no significant risk to the insurance fund. In
general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of depository institutions.
Branching. Texas law provides that a Texas-chartered bank can establish a
branch anywhere in Texas provided that the branch is approved in advance by the
TDB. The branch must also be approved by the FDIC, which considers a number of
factors, including financial history, capital adequacy, earnings prospects,
character of management, needs of the community and consistency with corporate
powers.
Restrictions on Transactions With Affiliates and Insiders. Transactions
between the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and
Assets. Dividends paid by the Bank have provided a substantial part of the
Company's operating funds and it is anticipated that dividends paid by the Bank
to the Company will continue to be the Company's principal source of operating
funds. Capital adequacy requirements serve to limit the amount of dividends that
may be paid by the Bank. Under federal law, the Bank cannot pay a dividend if,
after paying the dividend, the Bank will be "undercapitalized." The FDIC may
declare a dividend payment to be unsafe and unsound even though the Bank would
continue to meet its capital requirements after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.
Examinations. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to
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compensate for the difference between the FDIC-determined value and the book
value of such assets. The TDB also conducts examinations of state banks but may
accept the results of a federal examination in lieu of conducting an independent
examination.
Audit Reports. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. FDICIA requires that independent audit committees be formed,
consisting of outside directors only. The committees of such institutions must
include members with experience in banking or financial management, must have
access to outside counsel, and must not include representatives of large
customers.
Capital Adequacy Requirements. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.
The FDIC's risk-based capital guidelines generally require state banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and
a ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for the Bank as for the Company. As of
December 31, 1998, the Bank's ratio of Tier 1 capital to total risk-weighted
assets was 13.94% and its ratio of total capital to total risk-weighted assets
was 14.97%. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION".
The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets. The TDB has issued a policy which generally requires state chartered
banks to maintain a leverage ratio (defined in accordance with federal capital
guidelines) of 6.0%. As of December 31, 1998, the Bank's ratio of Tier 1 capital
to average total assets (leverage ratio) was 7.92%. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION".
Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk based
capital ratio of 10.0% or higher; a Tier 1 risk based capital ratio of 6.0% or
higher; a leverage ratio of 5.0% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk based
capital ratio of 8.0% or higher; a Tier 1 risk based capital ratio of 4.0% or
higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated
a composite 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "under capitalized" if it fails to meet any one of the ratios required
to be adequately capitalized. The Bank is classified as "well capitalized" for
purposes of the FDIC's "prompt corrective action" regulations.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
7
<PAGE> 10
As an institution's capital decreases, the FDIC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. The FDIC has
only very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to the
regulators. In addition, the FDIC can impose special assessments in certain
instances.
After the one-time SAIF assessment in 1996, the assessment rate disparity
between BIF and SAIF members was eliminated. The current range of BIF and SAIF
assessments is between 0% and 0.27% of deposits.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalize the SAIF and assure the
payment of the Financing Corporation's ("FICO") bond obligations. Under this new
act, banks insured under the BIF are required to pay a portion of the interest
due on bonds that were issued by FICO to help shore up the ailing Federal
Savings and Loan Insurance Corporation in 1987. The BIF rate must equal
one-fifth of the SAIF rate through year-end 1999, or until the insurance funds
are merged, whichever occurs first. Thereafter BIF and SAIF payers will be
assessed pro rata for the FICO bond obligations. With regard to the assessment
for the FICO obligation, the current BIF rate is 0.0122% of deposits and the
SAIF rate is 0.0610% of deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. The appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan. The TDB also
has broad enforcement powers over the Bank, including the power to impose
orders, remove officers and directors, impose fines and appoint supervisors and
conservators.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that
8
<PAGE> 11
can be paid on such deposits. Undercapitalized institutions may not accept,
renew or roll over brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA")
and the regulations issued thereunder are intended to encourage banks to help
meet the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in meeting
the needs of its service area when considering applications to establish
branches, merger applications and applications to acquire the assets and assume
the liabilities of another bank. FIRREA requires federal banking agencies to
make public a rating of a bank's performance under the CRA. In the case of a
bank holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with any
other bank holding company. An unsatisfactory record can substantially delay or
block the transaction.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.
INSTABILITY OF REGULATORY STRUCTURE. Various legislation, including
proposals to overhaul the bank regulatory system, expand the powers of banking
institutions and bank holding companies and limit the investments that a
depository institution may make with insured funds, is from time to time
introduced in Congress. Such legislation may change banking statutes and the
operating environment of the Company and the Bank in substantial and
unpredictable ways. The Company cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon the financial condition or results of operations of the
Company or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY. One of the major additional burdens
imposed on the banking industry by FDICIA is the increased ability of banking
regulators to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve and FDIC are possessed of extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. For example,
the FDIC may terminate the deposit insurance of any institution which it
determines has engaged in an unsafe or unsound practice. The agencies can also
assess civil money penalties, issue cease and desist or removal orders, seek
injunctions, and publicly disclose such actions. FDICIA, FIRREA and other laws
have expanded the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
EFFECT ON ECONOMIC ENVIRONMENT. The policies of regulatory authorities,
including the monetary policy of the Federal Reserve, have a significant effect
on the operating results of bank holding companies and their subsidiaries. Among
the means available to the Federal Reserve to affect the money supply are open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member bank
deposits. These means are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
may affect interest rates charged on loans or paid for deposits.
9
<PAGE> 12
Federal Reserve monetary policies have materially affected the operating
results of commercial banks in the past and are expected to continue to do so in
the future. The nature of future monetary policies and the effect of such
policies on the business and earnings of the Company and the Bank cannot be
predicted.
ITEM 2. PROPERTIES
The Company conducts business at 21 full-service banking locations,
thirteen of which are located in the greater Houston metropolitan area. The
Company also has six offices located in Southeast Texas, one office (and two
loan production offices) located in San Antonio, and one office located in
Brenham. The following table sets forth specific information on each such
location. The Company's headquarters are located at 12200 Northwest Freeway in a
six story office building owned by the Bank.
<TABLE>
<CAPTION>
BANKING CENTER LOCATION OWN OR LEASE
- -------------- -------- ------------
<S> <C> <C>
Houston Area
Channelview............................... 811 Sheldon Road Own
Channelview, Texas 77530
Clear Lake................................ 2595 Bay Area Blvd. Lease
Houston, Texas 77058
Houston Commercial........................ 3434 Tidwell Own
Houston, Texas 77293
Houston Cypresswood....................... 1600 Stuebner Airline Lease
Houston, Texas 77391
Houston Dairy Ashford..................... 1160 Dairy Ashford Lease
Houston, Texas 77079
Houston Galleria Area..................... 1800 St. James Place, Suite 100 Lease
Houston, Texas 77056
Houston Memorial.......................... 8800 Katy Freeway Lease
Houston, Texas 77024
Houston Memorial Express.................. 8501 Katy Freeway Own
Houston, Texas 77024
Houston I-10 East......................... 10310 East Freeway Own
Houston, Texas 77029
Houston Northshore........................ 13106 Woodforest Own
Houston, Texas 77015
Houston Northwest......................... 12200 Northwest Freeway Own
Houston, Texas 77092
Houston Port City......................... 3601 Eastex Freeway Own
Houston, Texas 77026
Huffman................................... 25100 FM 2100 Own
Huffman, Texas 77336
New Caney-Community....................... 323 Community Drive Own
New Caney, Texas 77357
Southeast Texas
Beaumont West............................. 8255 Gladys at Major Lease
Beaumont, Texas 77706
I-10 Beaumont............................. 595 IH-10 N. Own
Beaumont, Texas 77706
Nederland................................. 1423 Boston Avenue Own
Nederland, Texas 77627
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
BANKING CENTER LOCATION OWN OR LEASE
- -------------- -------- ------------
<S> <C> <C>
Orange.................................... 400 N. 16th Street Own
Orange, Texas 77630
Port Arthur............................... 4100 Gulfway Drive Own
Port Arthur, Texas 77642
Port Neches............................... 2905 Nall Own
Port Neches, Texas 77651
San Antonio
San Antonio-Union......................... 3570 S.W. Military Drive Own
San Antonio, Texas 78211
San Antonio -- Citadel Plaza(1)........... 1747 Citadel Plaza, Suite 121 Lease
San Antonio, Texas 78209
San Antonio -- Loop 410(1)................ 909 N. E. Loop 410, Suite 602 Lease
San Antonio, Texas 78209
Brenham/Washington County................... 200 West Vulcan Own
Brenham, Texas 77833
</TABLE>
- ---------------
(1) Indicates loan production office.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is currently a party to any material legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on Nasdaq National Market System
("Nasdaq NMS") under the symbol "PBTX". As of January 31, 1999, there were
10,304,483 shares of the Company Common Stock outstanding held of record by
approximately 259 shareholders. The number of beneficial shareholders is unknown
to the Company at this time. The following table sets forth, per share, the high
and the low sale prices during 1998 and 1997 (since September 26, 1997, its
first day of trading), and cash dividends paid:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale prices:
High............... $ 18.00 $ 26.25 $ 28.75 $ 25.38 $ 20.88 $ 19.50 NA NA
Low................ 12.00 14.50 23.00 20.00 18.25 19.00 NA NA
Dividends paid....... 0.0600 0.0600 0.0400 0.0400 0.0400 0.0333 0.0333 0.0333
</TABLE>
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. While the Company has declared dividends on its Common Stock since
1990, and paid quarterly dividends aggregating $0.20 per share per annum in
1998, there is no assurance that the Company will continue to pay dividends in
the future.
The principal source of cash revenues to the Company is dividends paid by
the Bank with respect to the Bank's capital stock. There are certain
restrictions on the payment of such dividends imposed by federal and
11
<PAGE> 14
state banking laws, regulations and authorities. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "SUPERVISION
AND REGULATION -- THE BANK".
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 15,000,000
shares of preferred stock ("Preferred Stock"), issuable in series, none of which
were outstanding as of December 31, 1998 and (ii) 50,000,000 shares of Common
Stock, $0.25 per share par value, of which 12,241,980 shares were issued and
10,295,483 shares were outstanding as of December 31, 1998. The terms of any new
series of Preferred Stock may be fixed by the Board of Directors of the Company
within certain limits set by the Company's Articles of Incorporation. As of
December 31, 1998, an additional 420,000 shares of Common Stock were issuable
upon exercise of the Company's outstanding employee and director incentive stock
options.
The following discussion of the terms and provisions of the Company's
capital stock is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to this Annual Report on Form 10-K.
Common Stock. The holders of the Common Stock are entitled to one vote for
each share of Common Stock owned. Except as expressly provided by law and except
for any voting rights which may be conferred by the Board of Directors on any
shares of Preferred Stock issued, all voting power is in the Common Stock.
Holders of Common Stock may not cumulate their votes for the election of
directors. Holders of Common Stock do not have preemptive rights to acquire any
additional, unissued or treasury shares of the Company, or securities of the
Company convertible into or carrying a right to subscribe for or acquire shares
of the Company.
Holders of Common Stock will be entitled to receive dividends out of funds
legally available therefor, if and when properly declared by the Board of
Directors. However, the Board of Directors may not declare or pay cash dividends
on Common Stock, and no Common Stock may be purchased by the Company, unless
full dividends have been declared and paid on outstanding Preferred Stock for
the current dividend period and, with respect to any outstanding cumulative
preferred stock, all past dividend periods.
On the liquidation of the Company, the holders of Common Stock are entitled
to share pro rata in any distribution of the assets of the Company, after the
holders of shares of Preferred Stock have received the liquidation preference of
their shares plus any cumulated but unpaid dividends (whether or not earned or
declared), if any, and after all other indebtedness of the Company has been
retired.
RECENT SALES OF UNREGISTERED SECURITIES
No securities were sold by the Company during the fiscal year ended
December 31, 1998 that were not registered under the Securities Act of 1933.
12
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations". The selected historical consolidated
financial data as of and for the five years ended December 31, 1998 are derived
from the Company's Consolidated Financial Statements which have been audited by
independent public accountants.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income...................... $ 76,602 $ 73,582 $ 60,535 $ 61,906 $ 43,229
Interest expense..................... 32,726 32,638 25,889 29,175 15,894
---------- ---------- -------- -------- --------
Net interest income................ 43,876 40,944 34,646 32,731 27,335
Provision for loan losses............ 1,040 1,196 1,391 1,617 842
---------- ---------- -------- -------- --------
Net interest income after provision
for loan losses................. 42,836 39,748 33,255 31,114 26,493
Noninterest income................... 10,301 9,762 9,136 11,221 8,194
Noninterest expenses................. 31,826 31,163 26,852 26,694 21,792
---------- ---------- -------- -------- --------
Earnings before taxes.............. 21,311 18,347 15,539 15,641 12,895
Provision for income tax expense..... 7,487 6,501 5,370 5,458 4,403
---------- ---------- -------- -------- --------
Net earnings......................... 13,824 11,846 10,169 10,183 8,492
Preferred stock dividend............. 25 650 700 681 258
---------- ---------- -------- -------- --------
Net earnings available to common
shareholders....................... $ 13,799 $ 11,196 $ 9,469 $ 9,502 $ 8,234
========== ========== ======== ======== ========
PER SHARE DATA(1):
Basic earnings(2).................... $ 1.35 $ 1.15 $ 0.99 $ 0.99 $ 0.83
Diluted earnings(2).................. 1.30 1.11 0.97 0.95 0.81
Tangible book value.................. 8.24 7.19 6.41 5.94 4.54
Cash dividends....................... 0.20 0.14 0.14 0.13 0.03
Dividend payout ratio................ 15.36% 12.63% 14.48% 13.64% 3.71%
Weighted average common and dilutive
potential common shares outstanding
(in thousands)..................... 10,596 10,102 9,793 9,971 10,174
BALANCE SHEET DATA:
Total assets......................... $1,078,332 $1,052,135 $890,688 $839,454 $939,396
Securities........................... 437,314 480,183 456,136 487,188 620,130
Loans................................ 532,404 475,583 367,484 280,858 249,691
Allowance for loan losses............ 6,184 5,873 4,972 4,205 3,106
Total deposits....................... 965,673 949,479 776,521 768,181 884,042
Total shareholders' equity........... 89,320 78,427 68,436 63,958 51,366
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCE SHEET DATA:
Total assets......................... $1,057,289 $1,019,254 $843,414 $906,740 $667,018
Securities........................... 439,669 484,034 453,316 555,616 417,704
Loans................................ 518,402 433,981 319,249 265,438 186,034
Allowance for loan losses............ 5,915 5,606 4,295 3,403 2,280
Total deposits....................... 948,529 934,233 769,078 843,661 617,582
Total shareholders' equity........... 83,290 73,484 66,012 56,292 45,117
PERFORMANCE RATIOS:
Return on average assets............. 1.31% 1.16% 1.21% 1.12% 1.27%
Return on average common equity...... 16.57 16.67 16.05 19.28 19.10
Net interest margin.................. 4.38 4.29 4.39 3.85 4.42
Efficiency ratio(3).................. 58.66 61.46 61.33 60.73 61.34
ASSET QUALITY RATIOS(4):
Nonperforming assets to total loans
and other real estate.............. 0.31% 0.41% 0.31% 0.97% 1.00%
Net loan charge-offs (recoveries) to
average loans...................... 0.14 0.18 0.20 0.20 0.15
Allowance for loan losses to total
loans.............................. 1.16 1.23 1.35 1.50 1.24
Allowance for loan losses to
nonperforming
loans(5)........................... 705.13 611.77 920.74 307.16 158.15
CAPITAL RATIOS(4):
Leverage ratio....................... 8.02% 6.93% 7.96% 7.02% 5.46%
Average shareholders' equity to
average total assets............... 7.88 7.21 7.83 6.21 6.76
Tier 1 risk-based capital ratio...... 14.10 13.15 16.41 19.23 17.68
Total risk-based capital ratio....... 15.13 14.21 17.64 20.61 18.77
</TABLE>
- ---------------
(1) Adjusted for a 30 for one stock split.
(2) Basic earnings per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings per share is based on
the weighted average number of common and dilutive potential common shares
outstanding during the period.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) At period end, except net loan charge-offs (recoveries) to average loans and
average shareholders' equity to average total assets.
(5) Nonperforming loans consist of nonaccrual loans and restructured loans.
14
<PAGE> 17
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in the documents
incorporated into this document by reference, including matters discussed under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and as such may
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. The words "expects," "estimates,"
"anticipates," "intends," "plans," "believes," "seek," "will," "would,"
"should," "projected," "contemplated," and similar expressions are intended to
identify such forward-looking statements.
The Company's actual results or experience may differ materially from the
results anticipated in such forward-looking statements due to a variety of
factors, including, but not limited to: (1) the effects of future economic
conditions; (2) governmental monetary and fiscal policies, as well as
legislative and regulatory changes; (3) the risks of changes in interest rates
on the level and composition of deposits, loan demand and the values of loan
collateral, securities and interest rate protection agreements, as well as
interest rate risks; (4) the effects of competition from other commercial banks,
thrifts, mortgage banking firms, insurance companies, money market and other
mutual funds and other financial institutions operating in the Company's market
areas and elsewhere, including competitors offering banking products and
services by mail, telephone, computer and the Internet; (5) the failure of
assumptions underlying the establishment of reserves for loan losses and
estimations of values of collateral and various financial assets and
liabilities; and (6) other written or oral forward-looking statements
attributable to the Company and are expressly qualified in their entirety by
these cautionary statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's balance sheets and
statements of earnings. This section should be read in conjunction with the
Company's financial statements and accompanying notes and other detailed
information appearing elsewhere in this Annual Report.
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
OVERVIEW
The Company engaged in several transactions in 1996, 1997 and 1998 which
had a significant impact on the Company's performance in each of those years. In
1996, the Company paid a one-time FDIC assessment of $1.8 million with respect
to the Company's deposits insured by the SAIF of the FDIC. The year ended
December 31, 1997 was marked by strong balance sheet growth due to the Company's
acquisition of approximately $99.2 million in deposits related to three branch
locations acquired from a commercial bank and the acquisition of First
Northwestern Bank, N.A. which had approximately $60.2 million in deposits, the
transactions together referred to herein as the "Acquisitions." In the second
quarter of 1998, the Company completed a merger with Sunbelt National Bank
("Sunbelt"). The merger was accounted for as a pooling of interests. The
Company's earnings growth, however, was negatively affected by the non-recurring
expenses (data processing conversion, severance benefits and other items)
related to those transactions.
Net earnings available to common shareholders were $13.8 million, $11.2
million and $9.5 million for the years ended December 31, 1998, 1997 and 1996,
respectively, and net earnings per common share on a diluted basis were $1.30,
$1.11 and $0.97 for these same periods. Earnings growth from 1997 to 1998
resulted principally from strong internal loan growth and an increase in the net
interest margin. The increase in earnings from 1996 to 1997 resulted primarily
from higher net interest income generated by the Acquisitions and loan growth.
The Company posted returns on average assets of 1.31%, 1.16% and 1.21% and
returns on average common equity of 16.57%, 16.67% and 16.05% for the years
ended 1998, 1997 and 1996, respectively.
15
<PAGE> 18
Without the one-time FDIC assessment in 1996, the Company's return on average
assets and return on average common equity, respectively, would have been 1.34%
and 18.02%.
Total assets at December 31, 1998, 1997 and 1996 were $1.1 billion, $1.1
billion and $890.7 million, respectively. Total deposits at December 31, 1998,
1997 and 1996 were $965.7 million, $949.5 million and $776.5 million,
respectively. Loans were $532.4 million at December 31, 1998, an increase of
$56.8 million or 11.9% from $475.6 million at the end of 1997. Loans were $367.5
million at year-end 1996. Shareholders' equity was $89.3 million, $78.4 million
and $68.4 million at December 31, 1998, 1997 and 1996, respectively. Changes in
shareholders' equity reflect fluctuations in the net unrealized appreciation on
available-for-sale securities, net of tax in the amounts of a $610,000 decrease
in 1998, a $1.2 million decrease in 1997 and a $3.2 million decrease in 1996.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
1998 versus 1997. Net interest income was $43.9 million in 1998 compared to
$40.9 million in 1997, an increase of $2.9 million, or 7.2%. This increase was
mainly caused by an increase in interest income of $3.0 million over 1997,
partially offset by an increase in interest expense of $88,000. This resulted in
an increase in the net interest margin of 9 basis points to 4.38% in 1998
compared to 4.29% in 1997. The net interest spread remained flat at 3.49%.
The increase in interest income from 1997 to 1998 was primarily due to an
increase in average total interest-earning assets of $48.0 million. Average
loans increased $84.4 million in 1998, which was partially offset by a decrease
in average securities of $44.4 million, which was due to the Company's
repositioning of assets into the loan portfolio. The effect of the increase in
earning assets on interest income was partially offset by a decrease in the
yield of earning assets of 7 basis points due to a decrease in national interest
rates during 1998. Interest expense increased $88,000 due to the increase in
average interest-bearing deposits of $15.2 million from year to year. The
increase in interest-bearing liabilities had little effect on total interest
expense due to the decrease in the average rate of total interest-bearing
liabilities, decreasing by 7 basis points from 4.22% in 1997 to 4.15% in 1998.
1997 versus 1996. Net interest income increased from $34.6 million in 1996
to $40.9 million in 1997, a $6.3 million increase, primarily due to growth in
interest income of $13.0 million. This increase was partially offset by an
increase in interest expense of $6.7 million. This resulted in net interest
margins of 4.29% and 4.39% and net interest spreads of 3.49% and 3.58% for 1997
and 1996, respectively.
The increase in interest income was driven by growth in average
interest-earning assets of $164.7 million or 20.9%. Growth in interest-earning
assets included average loan growth of $114.7 million or 35.9% and growth in
average securities of $30.7 million or 6.8%. Also, the yield on average
interest-earning assets increased 4 basis points from 1996 to 1997.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all
16
<PAGE> 19
average balances are yearly average balances. Nonaccruing loans have been
included in the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans......................... $ 518,402 $46,554 8.98% $ 433,981 $40,311 9.29%
Securities.................... 439,669 27,685 6.30 484,034 31,290 6.46
Federal funds sold and other
temporary investments....... 43,968 2,363 5.37 36,018 1,981 5.50
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets................ 1,002,039 76,602 7.64% 954,033 73,582 7.71%
---------- ------- ---- ---------- ------- ----
Less allowance for loan
losses........................ (5,915) (5,606)
---------- ----------
Total interest-earning assets,
net of allowance.............. 996,124 948,427
Nonearning assets............... 61,165 70,827
---------- ----------
Total assets............ $1,057,289 $1,019,254
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits.................... $ 126,540 2,112 1.67% $ 130,470 2,614 2.00%
Savings and money market
accounts.................... 184,974 5,619 3.04 179,076 5,421 3.03
Certificates of deposit....... 457,074 24,092 5.27 457,946 24,347 5.32
Federal funds purchased and
securities sold under
repurchase agreements....... 19,282 893 4.63 4,860 233 4.79
Other borrowings................ 138 10 7.25 447 23 5.15
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities........... 788,008 32,726 4.15% 772,799 32,638 4.22%
---------- ------- ---- ---------- ------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.................... 179,941 166,741
Other liabilities............. 6,050 6,230
---------- ----------
Total liabilities....... 973,999 945,770
---------- ----------
Shareholders' equity............ 83,290 73,484
---------- ----------
Total liabilities and
shareholders'
equity................ $1,057,289 $1,019,254
========== ==========
Net interest income........... $43,876 $40,944
======= =======
Net interest spread........... 3.49% 3.49%
==== ====
Net interest margin........... 4.38% 4.29%
==== ====
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996
--------------------------------
AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans......................... $319,249 $30,139 9.44%
Securities.................... 453,316 29,491 6.51
Federal funds sold and other
temporary investments....... 16,747 905 5.40
-------- ------- -----
Total interest-earning
assets................ 789,312 60,535 7.67%
-------- ------- -----
Less allowance for loan
losses........................ (4,295)
--------
Total interest-earning assets,
net of allowance.............. 785,017
Nonearning assets............... 58,397
--------
Total assets............ $843,414
========
LIABILITIES AND SHAREHOLDERS' EQ
Interest-bearing liabilities:
Interest-bearing demand
deposits.................... $115,933 2,604 2.25%
Savings and money market
accounts.................... 148,664 4,080 2.74
Certificates of deposit....... 366,727 19,121 5.21
Federal funds purchased and
securities sold under
repurchase agreements....... 1,099 62 5.64
Other borrowings................ 411 22 5.35
-------- ------- -----
Total interest-bearing
liabilities........... 632,834 25,889 4.09%
-------- ------- -----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.................... 137,754
Other liabilities............. 6,814
--------
Total liabilities....... 777,402
--------
Shareholders' equity............ 66,012
--------
Total liabilities and
shareholders'
equity................ $843,414
========
Net interest income........... $34,646
=======
Net interest spread........... 3.58%
=====
Net interest margin........... 4.39%
=====
</TABLE>
17
<PAGE> 20
The following schedule 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 related
to higher 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>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
--------------------------- ---------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
----------------- -----------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans..................................................... $7,842 $(1,599) $ 6,243 $10,831 $ (659) $10,172
Securities................................................ (2,868) (737) (3,605) 1,998 (199) 1,799
Federal funds sold and other temporary investments........ 437 (55) 382 1,041 35 1,076
------- ------- ------- ------- ------- -------
Total increase (decrease) in interest income...... 5,411 (2,391) 3,020 13,870 (823) 13,047
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits.......................... (79) (423) (502) 327 (317) 10
Savings and money market accounts......................... 179 19 198 835 506 1,341
Certificates of deposit................................... (46) (209) (255) 4,756 470 5,226
Federal funds purchased and securities sold under
repurchase agreements................................... 691 (31) 660 212 (41) 171
Other borrowings.......................................... (16) 3 (13) 2 (1) 1
------- ------- ------- ------- ------- -------
Total increase (decrease) in interest expense..... 729 (641) 88 6,132 617 6,749
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income................ $4,682 $(1,750) $ 2,932 $7,738 $(1,440) $ 6,298
======= ======= ======= ======= ======= =======
</TABLE>
Provision for Loan Losses
The 1998 provision for loan losses declined to $1.0 from $1.2 million in
1997, a decrease of $156,000, or 13.0%. The reduced provision in 1998 reflected
continued strong asset quality as net charge-offs of loans remained at
relatively low levels totaling $729,000 or 0.14% of average loans, compared to
$783,000 or 0.18% of average loans in 1997. The provision for the year ended
1997 declined by $195,000 or 14.0% from the year ended 1996 and also reflected
strong asset quality.
Noninterest Income
Noninterest income is an important source of revenue for financial
institutions in a deregulated environment. The Company's primary source of
noninterest income is service charges on deposit accounts and other banking
service related fees.
Noninterest income for the year ended December 31, 1998 was $10.3 million,
an increase of $539,000 from $9.8 million in 1997. Noninterest income increased
$626,000 in 1997 from $9.1 million in 1996. This results in annual percentage
increases of 5.5% and 6.9% for 1998 and 1997, respectively. The following table
presents for the periods indicated the major categories of noninterest income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts....................... $ 8,050 $7,558 $6,731
Retail services income.................................... 1,355 1,396 1,200
Mortgage banking.......................................... 246 175 174
Investment services....................................... 319 242 165
Securities lending........................................ 31 77 118
Sale of SBA loans......................................... -- 237 392
Other noninterest income.................................. 300 77 356
------- ------ ------
Total noninterest income........................ $10,301 $9,762 $9,136
======= ====== ======
</TABLE>
18
<PAGE> 21
Noninterest income increased in 1998 mainly due to increased service
charges on deposit accounts, primarily as a result of a pricing change. In
addition, investment service fees increased due to improved sales of mutual
funds and annuities. These were partially offset by the absence of sales of SBA
loans during 1998. The increase in noninterest income from 1996 to 1997 was due
principally to service charge income generated by branches acquired with the
Acquisitions.
Noninterest Expense
For the years ended 1998, 1997 and 1996, noninterest expenses totaled $31.8
million, $31.2 million and $26.9 million, respectively. Noninterest expense
increased $663,000 in 1998 compared to the same period in 1997. This increase is
primarily due to merger related expenses incurred in connection with the merger
with Sunbelt and increased employee compensation and benefit expense. The 16.1%
increase in 1997 over the same period in 1996 was primarily the result of
operating expenses in branches acquired in the Acquisitions. The Company's
efficiency ratios, calculated by dividing total noninterest expenses (excluding
securities losses) by net interest income plus noninterest income, were 58.66%
in 1998, 61.46% in 1997 and 61.33% in 1996. The decrease in the efficiency ratio
in 1998 over 1997 reflects the Company's continued efforts to control operating
expenses. The following table presents for the periods indicated the major
categories of noninterest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Employee compensation and benefits...................... $19,440 $19,087 $15,005
Non-staff expenses:
Net bank premises expense............................. 1,935 1,757 1,596
Equipment rentals, depreciation and maintenance....... 1,617 1,439 1,164
Data processing....................................... 1,929 2,197 1,693
Professional fees..................................... 1,407 984 848
Regulatory assessments................................ 318 124 524
Special FDIC assessment............................... -- -- 1,782
Ad valorem and franchise taxes........................ 718 665 547
Net realized losses on available-for-sale
securities......................................... 46 -- --
Other................................................. 4,416 4,910 3,693
------- ------- -------
Total non-staff expenses...................... 12,386 12,076 11,847
------- ------- -------
Total noninterest expense..................... $31,826 $31,163 $26,852
======= ======= =======
</TABLE>
Employee compensation and benefit expense for the year ended December 31,
1998 was $19.4 million, an increase of $353,000, or 1.8%, from $19.1 million in
1997. The change primarily results from increased health insurance expense and
annual employee salary increases. Employee compensation and benefit expense for
the year ended December 31, 1997 was $19.1 million, an increase of $4.1 million
or 27.2% from $15.0 million for 1996. This increase is the result of expenses in
the branches acquired in the Acquisitions and the hiring of additional lending
staff. Total full-time equivalent employees at December 31, 1998, 1997 and 1996
were 467, 485 and 433, respectively.
Non-staff expenses were $12.4 million in 1998, an increase of $310,000 from
$12.1 million in 1997. This increase is mainly caused by the increases in
professional fees of $423,000, which rose primarily due to the merger with
Sunbelt, and net bank premises expense of $178,000, which rose due to higher
utility fees and other maintenance expenses. These increases are partially
counterbalanced by the decrease in other expenses of $494,000. Non-staff
expenses as of December 31, 1997 increased $229,000 over 1996 non-staff expenses
of $11.8 million. This increase was predominately attributable to expenses
related to the Acquisitions in 1997.
Income Taxes
Income tax expense includes the regular federal income tax at the statutory
rate, plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount
19
<PAGE> 22
of taxable income, the amount of tax-exempt income, the amount of non-deductible
interest expense and the amount of other non-deductible expenses. Taxable income
for the income tax component of the Texas franchise tax is the federal pre-tax
income, plus certain officers salaries, less interest income from federal
securities. There was no income tax component of the Texas franchise tax in
1998, 1997 or 1996. In 1998, income tax expense was $7.5 million, an increase of
$1.0 million from 1997. In 1997, income tax expense was $6.5 million, an
increase of $1.1 million over 1996. The effective tax rates in 1998, 1997 and
1996, respectively, were 35.13%, 35.43% and 34.56%.
Impact of Inflation
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities. SEE "-- INTEREST
RATE SENSITIVITY AND LIQUIDITY" BELOW.
FINANCIAL CONDITION
Loan Portfolio
Total loans increased by $56.8 million, or 11.9% to $532.4 million at
December 31, 1998, from $475.6 million at December 31, 1997. The growth in loans
denotes the Company's investment in loan production capacity. Total loans
increased $108.1 million, or 29.4% during 1997 to $475.6 million at December 31,
1997 from $367.5 million at December 31, 1996. This increase represented an
improved local economy and includes approximately $40 million in loans that were
purchased during the Acquisitions.
At December 31, 1998, total loans represented 55.1% of deposits and 49.4%
of total assets. Total loans as a percentage of deposits were 50.1% as of
December 31, 1997 and 47.3% of total deposits as of December 31, 1996.
The following table summarizes the loan portfolio of the Company by type of
loan as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ------------------ --------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
-------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial................ $ 50,644 9.51% $ 58,103 12.22% $ 49,195 13.39% $ 41,977
Real estate:
Construction and land
development............. 38,673 7.26 32,880 6.91 21,307 5.80 15,677
1-4 family residential.... 105,882 19.89 83,425 17.54 60,375 16.43 40,570
Commercial mortgages...... 174,668 32.81 127,281 26.77 90,260 24.56 63,964
Farmland.................. 722 0.14 1,085 0.23 1,361 0.37 2,001
Multi-family
residential............. 7,363 1.38 9,853 2.07 6,520 1.77 4,746
Consumer:
Indirect.................. 96,243 18.08 101,540 21.35 82,814 22.54 65,311
Direct.................... 58,209 10.93 61,416 12.91 55,652 15.14 46,612
-------- ------ -------- ------ -------- ------ --------
Total loans......... $532,404 100.00% $475,583 100.00% $367,484 100.00% $280,858
======== ====== ======== ====== ======== ====== ========
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
------- ------------------
PERCENT AMOUNT PERCENT
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial and
industrial................ 14.95% $ 37,663 15.08%
Real estate:
Construction and land
development............. 5.58 12,392 4.96
1-4 family residential.... 14.45 37,706 15.10
Commercial mortgages...... 22.77 58,453 23.41
Farmland.................. 0.71 2,969 1.19
Multi-family
residential............. 1.69 4,201 1.68
Consumer:
Indirect.................. 23.25 56,643 22.69
Direct.................... 16.60 39,664 15.89
------ -------- ------
Total loans......... 100.00% $249,691 100.00%
====== ======== ======
</TABLE>
The primary lending focus of the Company is on small and medium-sized
business and consumer loans. The Company offers a variety of commercial lending
products including term loans, lines of credit and fixed asset loans, including
real estate and equipment financing. A broad range of short to medium-term
commercial loans, primarily collateralized, are made available to businesses for
working capital (including inventory and receivables), business expansion
(including acquisitions of real estate and improvements), and the purchase of
equipment and machinery. The purpose of a particular loan generally determines
its structure.
20
<PAGE> 23
The Company's legal lending limit is currently $8.0 million. Loans up to
$400,000 are evaluated and acted upon by an officers' loan committee, which
meets twice per week. Loans above that amount must be approved by the Executive
Loan Committee, which meets weekly.
Generally, the Company's commercial loans are underwritten in the Company's
primary market area on the basis of the borrower's ability to service such debt
from income. As a general practice, the Company takes as collateral a lien on
any available real estate, equipment or other assets and obtains a personal
guaranty. Working capital loans are primarily collateralized by short-term
assets whereas term loans are primarily collateralized by long-term assets.
In addition to commercial loans secured by real estate, the Company makes
commercial mortgage loans to finance the purchase of real property which
generally consists of real estate on which structures have already been
completed. Additionally, a portion of the Company's lending activity has
consisted of the origination of single-family residential mortgage loans
collateralized by owner-occupied properties located in the Company's market
areas. The Company offers a variety of mortgage loan products which generally
are amortized over five to 30 years.
Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 80% of appraised value or have
mortgage insurance. The Company requires mortgage title insurance and hazard
insurance in the amount of the loan. Of the mortgages originated, the Company
generally retains mortgage loans with short terms or variable rates and sells
longer term fixed-rate loans and loans that do not meet the Company's credit
underwriting standards. As a result, the Company retains approximately half of
the mortgage loans that it originates.
The Company's commercial mortgage loans are secured by first liens on real
estate, typically have fixed interest rates and amortize over a 10 to 15 year
period with balloon payments or a rate adjustment at the end of three to five
years. In underwriting commercial mortgage loans, consideration is given to the
property's operating history, future operating projections, current and
projected occupancy, location and physical condition. The underwriting analysis
also includes credit checks, appraisals and a review of the financial condition
of the borrower.
The Company makes loans to finance the construction of residential and, to
a limited extent, nonresidential properties. Construction loans generally are
secured by first liens on real estate. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in the Company's construction lending activities. In keeping with
the community-oriented nature of its customer base, the Company provides
construction and permanent financing for churches located within its market
area.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, home equity loans, personal
loans (collateralized and uncollateralized) and deposit account collateralized
loans. The terms of these loans typically range from 12 to 84 months and vary
based upon the nature of collateral and size of loan.
Approximately 62.3% of the Company's consumer loan portfolio as of December
31, 1998, was comprised of indirect loans (representing 18.1% of the Company's
total loan portfolio). These are installment loans, with typical maturities of
three to five years, which are originated by automobile dealers and others for
the purpose of financing and refinancing consumer automobile purchases. The
Company also purchases some indirect boat and recreational vehicle loans.
The Company's indirect loan programs are administered by a staff specially
trained in evaluating and servicing this particular type of loan. The Company
competes for these loans with a number of other financial and non-financial
institutions, including the captive financial services subsidiaries of
automobile manufacturers, on the basis of interest rate and quality of service.
The Company generally receives credit applications on a daily basis from
one or more of the automobile dealerships and others from which it actively
purchases indirect loans. Upon receipt of a credit application, the Company
undertakes a credit analysis of the prospective purchaser, ordering credit
reports on the borrower
21
<PAGE> 24
which are analyzed by one of the officers specializing in buying indirect loans.
In making credit decisions, such officers evaluate, among other things, the
general credit quality of the applicant, the proposed income to debt ratio, and
residential and employment stability.
The collection of overdue indirect loans is administered by a staff
specially trained for such purpose. Holders of loans that are 10 days past due
generally receive written notice of such delinquency. When any loan becomes 15
days past due, the collectors establish telephone contact with the borrower. If
the loan remains past due for 30 days, the Company generally sends a demand
letter requiring payment within 10 days before asserting its legal rights. The
Company's collection staff makes all reasonable efforts to work out credit
problems before the accounts are turned over to independent repossession agents.
Repossessed automobiles are sold as soon as possible through a number of means
in order to minimize any potential losses. The Company's ongoing experience with
indirect loan underwriting and collections has contributed to a relatively low
delinquency rate of 1.05% as of December 31, 1998.
The following table summarizes with respect to the Company's indirect loans
information regarding the amounts of loans originated and outstanding, the
amounts of loans charged off and the delinquency ratios for the periods
indicated:
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans originated during period......................... $40,900 $ 63,906 $56,416
Loans outstanding at end of period..................... 96,243 101,540 82,814
Net loan charge-offs for the period.................... (330) (413) (150)
Net loan charge-off ratio.............................. 0.33% 0.44% 0.21%
Delinquency ratio at end of period..................... 1.05% 0.94% 0.95%
</TABLE>
The contractual maturity ranges of the commercial and industrial and real
estate construction loan portfolio and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of
December 31, 1998 are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial.................... $21,243 $28,740 $ 661 $50,644
Real estate construction..................... 23,723 5,422 9,528 38,673
------- ------- ------- -------
Total.............................. $44,966 $34,162 $10,189 $89,317
======= ======= ======= =======
Loans with a predetermined interest rate..... $21,677 $30,504 $ 3,792 $55,973
Loans with a floating interest rate.......... 23,289 3,658 6,397 33,344
------- ------- ------- -------
Total.............................. $44,966 $34,162 $10,189 $89,317
======= ======= ======= =======
</TABLE>
A loan is considered impaired based on current information and events, if
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the loan's observable market price or based on the fair value of the collateral
if the loan is collateral-dependent.
Nonperforming Assets
The Company has several procedures in place to assist it in maintaining the
overall quality of its loan portfolio. The Company has established underwriting
guidelines to be followed by its officers. The Company also monitors its
delinquency levels for any negative or adverse trends. There can be no
assurance, however,
22
<PAGE> 25
that the Company's loan portfolio will not become subject to increasing
pressures from deteriorating borrower credit due to general economic conditions.
The Company's conservative lending approach, as well as a healthy local
economy, have resulted in strong asset quality. Nonperforming assets at December
31, 1998 were $1.7 million compared to $1.9 million at December 31, 1997 and
$1.2 million at December 31, 1996. The increase in nonperforming assets during
1997 was primarily related to assets acquired with the Acquisitions. This
resulted in ratios of nonperforming assets to total loans plus other real estate
of 0.31%, 0.41% and 0.31% for the years ended 1998, 1997 and 1996, respectively.
The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory. All
loans past due 90 days, however, are placed on nonaccrual status, unless the
loan is both well-secured and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring. The Company had $69,000 and $95,000 in restructured loans as of
December 31, 1998 and December 31, 1997, respectively. The Company's internal
loan review department evaluates additional loans which are potential problem
loans as to risk exposure in determining the adequacy of the allowance for loan
losses.
The Company maintains on an ongoing basis updated appraisals on loans
secured by real estate, particularly those categorized as nonperforming loans
and potential problem loans. In instances where updated appraisals reflect
reduced collateral values, an evaluation of the borrower's overall financial
condition is made to determine the need, if any, for possible writedowns or
appropriate additions to the allowance for loan losses. The Company records
other real estate at fair value at the time of acquisition, less estimated costs
to sell.
The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans......................... $ 808 $ 865 $ 540 $1,207 $1,678
Restructured loans....................... 69 95 -- 162 286
Other real estate........................ 774 989 618 1,360 532
------ ------ ------ ------ ------
Total nonperforming assets..... $1,651 $1,949 $1,158 $2,729 $2,496
====== ====== ====== ====== ======
Nonperforming assets to total loans and
other real estate...................... 0.31% 0.41% 0.31% 0.97% 1.00%
</TABLE>
The additional interest income the Company would have recorded and the
interest income the Company did record on nonperforming loans for the five year
period ending December 31, 1998 was insignificant.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Management has established
an allowance for loan losses which it believes is adequate for estimated losses
in the Company's loan portfolio. Based on an evaluation of the loan portfolio,
management presents a quarterly review of the allowance for loan losses to the
Bank's Board of Directors, indicating any change in the allowance since the last
review and any recommendations as to adjustments in the allowance. In making its
evaluation, management considers the diversification by industry of the
Company's commercial loan portfolio, the effect of changes in the local real
estate market on collateral values, the results of recent regulatory
examinations, the effects on the loan portfolio of current economic indicators
and their probable impact on borrowers, the amount of charge-offs for the
period, the amount of nonperforming loans and related collateral security, the
evaluation of its loan portfolio by the loan review function and the annual
examination of the Company's financial statements by its independent auditors.
Charge-offs occur when loans are deemed to be uncollectible.
23
<PAGE> 26
The Company follows a loan review program to evaluate the credit risk in
the loan portfolio. Through the loan review process, the Company maintains an
internally classified loan list which, along with the delinquency list of loans,
helps management assess the overall quality of the loan portfolio and the
adequacy of the allowance for loan losses. Loans classified as "substandard" are
those loans with clear and defined weaknesses such as a highly-leveraged
position, unfavorable financial ratios, uncertain repayment sources or poor
financial condition, which may jeopardize recoverability of the debt. At
December 31, 1998, the Company had $2.7 million of such loans, which were
primarily residential and commercial real estate loans.
Loans classified as "doubtful" are those loans which have characteristics
similar to substandard accounts but with an increased risk that a loss may
occur, or at least a portion of the loan may require a charge-off if liquidated
at present. At December 31, 1998, the Company had $94,000 of such loans.
Although loans classified as substandard do not duplicate loans classified as
doubtful, both substandard and doubtful loans include some loans that are
delinquent at least 30 days or on nonaccrual status. Loans classified as "loss"
are those loans which are in the process of being charged off.
In addition to the internally classified loan list and delinquency list of
loans, the Company maintains a separate "watch list" which further aids the
Company in monitoring loan portfolios. Watch list loans show warning elements
where the present status portrays one or more deficiencies that require
attention in the short term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans do
not have all of the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements as compared with those of a satisfactory
credit. The Company reviews these loans to assist in assessing the adequacy of
the allowance for loan losses. At December 31, 1998, the Company had $3.3
million of such loans, which were primarily secured by residential and
commercial real estate.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Company's historical charge-off experience. The Company then charges to
operations a provision for loan losses to maintain the allowance for loan losses
at an adequate level determined by the foregoing methodology.
For the year ended December 31, 1998, net loan charge-offs totaled $729,000
or $0.14% of average loans outstanding for the period, compared to $783,000 or
0.18% in net loan charge-offs during 1997. During 1998, the Company recorded a
provision for loan losses of $1.0 million compared to $1.2 million for 1997. At
December 31, 1998, the allowance totaled $6.2 million, or 1.16% of total loans.
The Company made a provision for loan losses of $1.2 million during 1997 as
compared to a provision of $1.4 million for 1996. At December 31, 1997, the
allowance aggregated $5.9 million or 1.23% of total loans.
24
<PAGE> 27
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding............... $518,402 $433,981 $319,249 $265,438 $186,034
-------- -------- -------- -------- --------
Gross loans outstanding at end of
period................................ 532,404 475,583 367,484 280,858 249,691
-------- -------- -------- -------- --------
Allowance for loan losses at beginning
of period............................. $ 5,873 $ 4,972 $ 4,205 $ 3,106 $ 2,080
Provision for loan losses............... 1,040 1,196 1,391 1,617 842
Adjustments due to acquisitions......... -- 488 -- -- 467
Charge-offs:
Commercial and industrial............. (282) (216) (187) (163) (126)
Real estate........................... (37) (87) (89) (61) (24)
Consumer.............................. (865) (922) (695) (684) (413)
Recoveries:
Commercial and industrial............. 129 115 55 97 115
Real estate........................... 118 44 19 32 58
Consumer.............................. 208 283 273 261 107
-------- -------- -------- -------- --------
Net loan (charge-offs) recoveries....... (729) (783) (624) (518) (283)
Allowance for loan losses at end of
period................................ $ 6,184 $ 5,873 $ 4,972 $ 4,205 $ 3,106
======== ======== ======== ======== ========
Ratio of allowance to end of period
loans................................. 1.16% 1.23% 1.35% 1.50% 1.24%
Ratio of net loan charge-offs to average
loans................................. 0.14 0.18 0.20 0.20 0.15
Ratio of allowance to end of period
nonperforming loans................... 705.13 611.77 920.74 307.16 158.15
</TABLE>
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial.............. $ 54 9.51% $ 177 12.22% $ 58 13.39%
Real estate:
Construction and land development.... -- 7.26 -- 6.91 -- 5.80
1-4 family residential............... 7 19.89 57 17.54 62 16.43
Commercial mortgage.................. -- 32.81 56 26.77 110 24.56
Farmland............................. -- 0.14 -- 0.23 -- 0.37
Multi-family......................... -- 1.38 -- 2.07 -- 1.77
Consumer............................... 8 29.01 43 34.26 52 37.68
Unallocated............................ 6,115 5,540 4,690
------ ------ ------ ------ ------ ------
Total allowance for loan
losses..................... $6,184 100.00% $5,873 100.00% $4,972 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1994
-------------------- --------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for loan losses applicable to:
Commercial and industrial................................ $ 333 14.95% $ 112 15.08%
Real estate:
Construction and land development...................... 21 5.58 -- 4.96
1-4 family residential................................. 94 14.45 53 15.10
Commercial mortgage.................................... 259 22.77 10 23.41
Farmland............................................... -- 0.71 -- 1.19
Multi-family........................................... -- 1.69 -- 1.68
Consumer................................................. 100 39.85 77 38.58
Unallocated.............................................. 3,398 2,854
------ ------ ------ ------
Total allowance for loan losses................ $4,205 100.00% $3,106 100.00%
====== ====== ====== ======
</TABLE>
The Company believes that the allowance for loan losses at December 31,
1998 is adequate to cover losses inherent in the portfolio as of such date.
There can be no assurance, however, that the Company will not sustain losses in
future periods, which could be substantial in relation to the size of the
allowance at December 31, 1998.
Securities
The Company uses its securities portfolio primarily as a source of income
and secondarily as a source of liquidity. At December 31, 1998, investment
securities totaled $437.3 million, a decrease of $42.9 million from $480.2
million at December 31, 1997. The decrease was predominately attributable to the
repositioning of the Company's assets to the loan portfolio. At December 31,
1998, investment securities represented 40.6% of total assets compared to 45.6%
of total assets at December 31, 1997. The yield on the investment portfolio for
the year ended December 31, 1998 was 6.30% compared to a yield of 6.46% for the
year ended December 31, 1997.
The following table summarizes the amortized cost of investment securities
held by the Company as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government securities........................... $114,657 $220,852 $280,569
Mortgage-backed securities........................... 321,310 255,501 171,725
Other securities..................................... 902 2,439 675
-------- -------- --------
Total securities........................... $436,869 $478,792 $452,969
======== ======== ========
</TABLE>
26
<PAGE> 29
The following table summarizes the contractual maturity of investment
securities and their weighted average yields:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------------------
AFTER FIVE
AFTER ONE BUT YEARS BUT
WITHIN ONE WITHIN WITHIN TEN AFTER TEN
YEAR FIVE YEARS YEARS YEARS
--------------- ---------------- ---------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
------- ----- -------- ----- -------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities...... $82,628 6.70% $ 32,029 6.50% $ -- --% $ -- --% $114,657 6.64%
Mortgage-backed and other
securities.................... 217 3.95 123,149 6.04 164,612 5.97 34,234 6.06 322,212 6.00
------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Totals.................. $82,845 6.69% $155,178 6.14% $164,612 5.97% $34,234 6.06% $436,869 6.17%
======= ==== ======== ==== ======== ==== ======= ==== ======== ====
</TABLE>
At the date of purchase, the Company is required to classify debt and
equity securities into one of three categories: held-to-maturity, trading or
available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as
held-to-maturity and measured at amortized cost in the financial statements only
if management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the financial statements with unrealized gains and losses included in
earnings. Investments not classified as either held-to-maturity or trading are
classified as available-for-sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, in a separate
component of shareholders' equity until realized.
The following table summarizes the carrying value and classification of
securities as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Available-for-sale................................... $ 70,406 $188,947 $325,351
Held-to-maturity..................................... 366,908 291,236 130,785
-------- -------- --------
Total securities........................... $437,314 $480,183 $456,136
======== ======== ========
</TABLE>
At December 31, 1998, investment securities totaled $437.3 million, a
decrease of $42.9 million from $480.2 million at December 31, 1997. The decrease
was predominately attributable to the repositioning of the Company's assets to
the loan portfolio. At December 31, 1997, securities totaled $480.2 million, an
increase of $24.0 million from $456.1 million at December 31, 1996. The increase
resulted from investing funds acquired with the Acquisitions.
The following table presents the amortized cost of securities classified as
available-for-sale and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---------- ---------- ------- --------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities........... $44,916 $272 $-- $45,188 $148,956 $1,436 $-- $150,392
Mortgage-backed
securities........... 24,973 173 -- 25,146 37,661 31 73 37,619
Other securities...... 72 -- -- 72 939 -- 3 936
------- ---- --- ------- -------- ------ --- --------
Total.......... $69,961 $445 $-- $70,406 $187,556 $1,467 $76 $188,947
======= ==== === ======= ======== ====== === ========
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government
securities........... $275,781 $3,432 $ 77 $279,136
Mortgage-backed
securities........... 45,728 40 218 45,550
Other securities...... 675 -- 10 665
-------- ------ ---- --------
Total.......... $322,184 $3,472 $305 $325,351
======== ====== ==== ========
</TABLE>
27
<PAGE> 30
The following table presents the amortized cost of securities classified as
held-to-maturity and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities.......... $ 69,741 $1,242 $ -- $ 70,983 $ 71,896 $ 849 $ -- $ 72,745
Mortgage-backed
securities.......... 296,337 2,047 217 298,167 217,840 717 1,082 217,475
Other securities..... 830 12 -- 842 1,500 2 -- 1,502
-------- ------ ---- -------- -------- ------ ------ --------
Total......... $366,908 $3,301 $217 $369,992 $291,236 $1,568 $1,082 $291,722
======== ====== ==== ======== ======== ====== ====== ========
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government
securities.......... $ 4,788 $17 $ 3 $ 4,802
Mortgage-backed
securities.......... 125,997 75 1,922 124,150
Other securities..... -- -- -- --
-------- --- ------ --------
Total......... $130,785 $92 $1,925 $128,952
======== === ====== ========
</TABLE>
Mortgage-backed securities are securities which have been developed by
pooling a number of real estate mortgages and are principally issued by federal
agencies such as the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation. These securities are deemed to have high credit
ratings, and minimum regular monthly cash flows of principal and interest are
guaranteed by the issuing agencies. Included in the Company's mortgage-backed
securities at December 31, 1998 were $13.8 million in agency-issued collateral
mortgage obligations and $355,000 in privately-issued collateral mortgage
obligations.
At December 31, 1998, 10.6% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. However, unlike U.S.
Treasury and U.S. government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities. Mortgage-backed securities which are purchased at a premium will
generally suffer decreasing net yields as interest rates drop because home
owners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Therefore, securities purchased at a discount
will obtain higher net yields in a decreasing interest rate environment. As
interest rates rise, the opposite will generally be true. During a period of
increasing interest rates, fixed rate mortgage-backed securities do not tend to
experience heavy prepayments of principal and consequently, the average life of
this security will not be unduly shortened. If interest rates begin to fall,
prepayments will increase. Approximately $29.3 million of the Company's
mortgage-backed securities earn interest at floating rates and reprice within
one year, and accordingly are less susceptible to declines in value should
interest rates increase.
In December of 1996, the Company purchased $30.5 million of mortgage-backed
securities classified as held-to-maturity. This transaction, which settled in
January of 1997, was the principal cause of the $29.9 million decline in other
liabilities from December 31, 1996 to December 31, 1997. See "Note N --
Supplemental Statement of Cash Flow Information" to the Financial Statements.
Deposits
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings,
money market and time accounts. The Company relies primarily on competitive
pricing policies and customer service to attract and retain these deposits. The
Company does not have any brokered deposits.
Average total deposits during 1998 increased to $948.5 million from $934.2
million in 1997, an increase of $14.3 million, or 1.5%. Average total deposits
during 1997 increased $165.2 million or 21.5% from $769.1 million in 1996. This
increase resulted primarily from deposits acquired in the Acquisitions. The
Company's ratios of average noninterest-bearing demand deposits to average total
deposits for years ended December 31, 1998, 1997 and 1996 were 19.0%, 17.8% and
17.9%, respectively.
The Company's lending and investing activities are funded principally by
deposits, approximately 51.8% of which are demand and savings deposits. Average
noninterest-bearing deposits at December 31, 1998 were $179.9 million as
compared to $166.7 million for 1997, an increase of $13.2 million or 7.9%.
28
<PAGE> 31
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1998, 1997, and 1996 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market checking..................... $126,540 1.67% $130,470 2.00% $115,933 2.25%
Regular savings........................... 88,061 2.16 92,531 2.37 93,785 2.46
Money market savings...................... 96,913 3.83 86,545 3.73 54,879 3.23
Time deposits less than $100,000.......... 319,280 5.21 328,477 5.25 271,027 5.19
Time deposits $100,000 and over........... 137,794 5.39 129,469 5.49 95,700 5.29
-------- ---- -------- ---- -------- ----
Total interest-bearing
deposits...................... 768,588 4.14 767,492 4.22 631,324 4.09
Noninterest-bearing deposits.............. 179,941 -- 166,741 -- 137,754 --
-------- ---- -------- ---- -------- ----
Total deposits.................. $948,529 3.35% $934,233 3.47% $769,078 3.36%
======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3 months or less............................................ $ 59,779
Over 3 months through 6 months.............................. 34,562
Over 6 months through 1 year................................ 27,882
Over 1 year................................................. 18,938
--------
Total............................................. $141,161
========
</TABLE>
Interest Rate Sensitivity and Liquidity
The Company's asset and liability management process is utilized to manage
the Company's interest rate risk through structuring the balance sheet to
maximize net interest income while maintaining an acceptable level of risk to
changes in market interest rates. The achievement of this goal requires a
balance between profitability, liquidity and interest rate risk.
Interest rate risk is managed by the Investment Committee, which is
composed of senior officers and directors of the Company and the Bank, in
accordance with policies approved by the Company's Board of Directors. The
Company also periodically obtains advice from external sources to assist it in
the management of interest rate risk. The Investment Committee formulates
strategies based on appropriate levels of interest rate risk. In determining the
appropriate level of interest rate risk, the Investment Committee considers the
impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economics, liquidity, business
strategies and other factors. The Investment Committee meets regularly to
review, among other things, the sensitivity of assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activity, commitments to
originate loans and the maturities of investments and borrowings. Additionally,
the Investment Committee reviews liquidity, cash flow flexibility and deposit
maturities.
To effectively measure and manage interest rate risk, the Company uses
simulation analysis to determine the impact on net interest income under various
interest rate scenarios, balance sheet trends and strategies. From these
simulations, interest rate risk is quantified and appropriate strategies are
developed and implemented. Additionally, duration and market value sensitivity
measures are utilized when they provide added value to the overall interest rate
risk management process. The overall interest rate risk position and strategies
are reviewed by executive management and the Company's Board of Directors on an
ongoing basis. The Company manages its business to reduce its overall exposure
to changes in interest rates.
29
<PAGE> 32
The Company manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. The Company does not currently
enter into instruments such as leveraged derivatives, structured notes, interest
rate swaps, caps, floors, financial options, financial futures contracts or
forward delivery contracts for the purpose of reducing interest rate risk.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time ("GAP") and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive GAP,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative GAP, when the amount
of its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of its interest-earning assets also maturing or repricing
within that time period. During a period of rising interest rates, a negative
GAP would tend to adversely affect net interest income, while a positive GAP
would tend to result in an increase in net interest income. During a period of
falling interest rates, a negative GAP would tend to result in an increase in
net interest income, while a positive GAP would tend to affect net interest
income adversely.
The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 1998:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
------------------------------------------------------------------------------------------
GREATER
0-30 31-180 181-365 1-3 3-5 5-10 THAN
DAYS DAYS DAYS YEARS YEARS YEARS 10 YEARS TOTAL
--------- --------- --------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities............... $ 45,801 $ 79,664 $ 72,951 $149,851 $ 53,251 $ 35,494 $ 302 $ 437,314
Loans.................... 79,817 53,979 52,487 148,095 122,208 54,945 20,873 532,404
Federal funds sold and
other temporary
investments............ 48,472 -- -- -- -- -- -- 48,472
--------- --------- --------- -------- -------- -------- -------- ----------
Total
interest-earning
assets........... 174,090 133,643 125,438 297,946 175,459 90,439 21,175 1,018,190
--------- --------- --------- -------- -------- -------- -------- ----------
Interest-bearing
liabilities:
Demand, money market and
savings deposits....... 321,837 -- -- -- -- -- -- 321,837
Certificates of deposit
and other time
deposits............... 52,588 174,954 106,809 97,542 21,870 1,379 5 455,147
Federal funds purchased
and securities sold
under repurchase
agreements............. 18,743 -- -- -- -- -- -- 18,743
--------- --------- --------- -------- -------- -------- -------- ----------
Total
interest-bearing
liabilities...... 393,168 174,954 106,809 97,542 21,870 1,379 5 795,727
--------- --------- --------- -------- -------- -------- -------- ----------
Period GAP................. $(219,078) $ (41,311) $ 18,629 $200,404 $153,589 $ 89,060 $ 21,170 $ 222,463
Cumulative GAP............. $(219,078) $(260,389) $(241,760) $(41,356) $112,233 $201,293 $222,463
Period GAP to total
assets................... (20.32)% (3.83)% 1.73% 18.58% 14.24% 8.26% 1.96%
Cumulative GAP to total
assets................... (20.32)% (24.15)% (22.42)% (3.84)% 10.41% 18.67% 20.63%
Cumulative interest-earning
assets to cumulative
interest-bearing
liabilities............ 44.28% 54.17% 64.18% 94.65% 114.13% 125.30% 127.96%
</TABLE>
The Company's one-year cumulative GAP position at December 31, 1998 was
negative $241.8 million or 22.42% of assets. This is a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and
30
<PAGE> 33
contributes toward effective asset and liability management, shortcomings are
inherent in GAP analysis since certain assets and liabilities may not move
proportionally as interest rates change. Consequently, in addition to GAP
analysis the Company uses a simulation model to test the interest rate
sensitivity of net interest income and the balance sheet. Based on the Company's
December 31, 1998 simulation analysis, the Company estimates that a 200 basis
point rise or decline in rates over the next twelve month period would have an
impact of less than 3.0% on its net interest income for the same period. The
change is relatively small, despite the Company's liability sensitive GAP
position. This results primarily from the behavior of demand, money market and
savings deposits. The Company has found that historically, interest rates on
these deposits change more slowly in a rising rate environment than in a
declining rate environment.
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. During the past three years, the Company's
liquidity needs have been met primarily by financing activities, which consisted
mainly of growth in core deposits, supplemented by earnings through operating
activities. Although access to purchased funds from correspondent banks is
available and has been utilized on occasion to take advantage of investment
opportunities, the Company does not generally rely on these external funding
sources.
Capital Resources
Capital management consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve and the Bank is subject to capital adequacy
requirements imposed by the FDIC and the TDB. Both the Federal Reserve and the
FDIC have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital and establish
minimum capital requirements in relation to assets and off-balance sheet
exposure, adjusted for credit risk. The risk-based capital standards currently
in effect are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
The risk-based capital standards issued by the Federal Reserve require all
bank holding companies to have "Tier 1 capital" of at least 4.0% and "total
risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted
assets. "Tier 1 capital" generally includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings, less deductions for goodwill and various other intangibles.
"Tier 2 capital" may consist of a limited amount of intermediate-term preferred
stock, a limited amount of term subordinated debt, certain hybrid capital
instruments and other debt securities, perpetual preferred stock not qualifying
as Tier 1 capital, and a limited amount of the general valuation allowance for
loan losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital".
The Federal Reserve has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure; excellent asset
quality; high liquidity; good earnings; and that are generally considered to be
strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.
Pursuant to FDICIA, each federal banking agency revised its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multifamily mortgages. The Bank is subject to capital adequacy guidelines of
the FDIC that are substantially similar to the
31
<PAGE> 34
Federal Reserve's guidelines. Also pursuant to FDICIA, the FDIC has promulgated
regulations setting the levels at which an insured institution such as the Bank
would be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." The Bank is classified "well capitalized" for purposes of the
FDIC's prompt corrective action regulations. SEE "SUPERVISION AND
REGULATION -- THE COMPANY" AND "-- THE BANK".
Shareholders' equity increased to $89.3 million at December 31, 1998 from
$78.4 million at December 31, 1997, an increase of $10.9 million or 13.9%. This
increase predominately resulted from net income of $13.8 million, partially
offset by dividends paid of $2.0 million and redemption of preferred stock of
$1.0 million. Shareholders' equity increased to $78.4 million at December 31,
1997 from $68.4 million at December 31, 1996, an increase of $10.0 million or
14.6%. This increase was primarily the result of net income of $11.8 million,
net proceeds from an initial public offering of $7.4 million, offset by a
decline in the net unrealized appreciation on available-for-sale securities of
$1.2 million, dividends paid of $1.9 million and the redemption of preferred
stock of $6.0 million.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1998 to the minimum
and well-capitalized regulatory standards:
<TABLE>
<CAPTION>
ACTUAL RATIO AT
MINIMUM REQUIRED WELL-CAPITALIZED DECEMBER 31, 1998
---------------- ---------------- -----------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio....................... 3.00%(1) N/A 8.02%
Tier 1 risk-based capital ratio...... 4.00% N/A 14.10%
Risk-based capital ratio............. 8.00% N/A 15.13%
THE BANK
Leverage ratio....................... 3.00%(2) 5.00% 7.92%
Tier 1 risk-based capital ratio...... 4.00% 6.00% 13.94%
Risk-based capital ratio............. 8.00% 10.00% 14.97%
</TABLE>
- ---------------
(1) The Federal Reserve may require the Company to maintain a leverage ratio of
up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200
basis points above the required minimum.
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 and Assessment
phases are substantially complete; the Renovation and Validation and
Implementation phases are currently in process and on schedule.
32
<PAGE> 35
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. It is anticipated that the validation phase will be completed during
the first quarter of 1999. The Company will concentrate its efforts on customer
communications and business resumption contingency plan testing during 1999. In
addition, the Company's compliance efforts specifically regarding Year 2000
issues were reviewed by the FDIC in March 1998 and by an outside auditor in
November 1998.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information regarding the market risk of the Company's financial
instruments, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION -- INTEREST RATE SENSITIVITY AND LIQUIDITY". The
Company's principal market risk exposure is to interest rates.
33
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, the reports thereon, the notes thereto and
supplementary data commence at page F-1 of this Annual Report on Form 10-K.
CONSOLIDATED QUARTERLY FINANCIAL DATA OF THE COMPANY
The following table presents certain unaudited quarterly financial
information concerning the Company's results of operations for each of the two
years ended December 31, 1998. The information should be read in conjunction
with the historical Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
QUARTER ENDED 1998
-----------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income....................................... $18,906 $19,165 $19,308 $19,223
Interest expense...................................... 8,056 8,184 8,218 8,268
------- ------- ------- -------
Net interest income................................. 10,850 10,981 11,090 10,955
Provision for loan losses............................. 340 275 225 200
------- ------- ------- -------
Net interest income after provision for loan
losses........................................... 10,510 10,706 10,865 10,755
Noninterest income.................................... 2,611 2,581 2,602 2,507
Noninterest expense................................... 7,897 8,020 8,263 7,646
------- ------- ------- -------
Earnings before income taxes........................ 5,224 5,267 5,204 5,616
Provision for income taxes............................ 1,736 1,878 1,880 1,993
------- ------- ------- -------
Net earnings................................ $ 3,488 $ 3,389 $ 3,324 $ 3,623
======= ======= ======= =======
Earnings per share:
Basic............................................... $ 0.34 $ 0.33 $ 0.32 $ 0.36
Diluted............................................. 0.33 0.32 0.31 0.34
QUARTER ENDED 1997
-----------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income....................................... $19,279 $18,734 $18,623 $16,946
Interest expense...................................... 8,495 8,336 8,301 7,506
------- ------- ------- -------
Net interest income................................. 10,784 10,398 10,322 9,440
Provision for loan losses............................. 450 150 173 423
------- ------- ------- -------
Net interest income after provision for loan
losses........................................... 10,334 10,248 10,149 9,017
Noninterest income.................................... 2,571 2,530 2,431 2,230
Noninterest expense................................... 8,596 7,900 7,428 7,239
------- ------- ------- -------
Earnings before income taxes........................ 4,309 4,878 5,152 4,008
Provision for income taxes............................ 1,528 1,794 1,806 1,373
------- ------- ------- -------
Net earnings................................ $ 2,781 $ 3,084 $ 3,346 $ 2,635
======= ======= ======= =======
Earnings per share:
Basic............................................... $ 0.26 $ 0.30 $ 0.33 $ 0.26
Diluted............................................. 0.25 0.29 0.32 0.25
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with accountants on any matter of
accounting principles or practices or financial statement disclosures during the
two year period ended December 31, 1998.
34
<PAGE> 37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors," "Continuing
Directors and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders (the "1999 Proxy Statement") is incorporated herein by
reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Matters" in the 1999 Proxy Statement is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Beneficial Ownership of Common Stock by
Management of the Company and Principal Shareholders" in the 1999 Proxy
Statement is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Interests of Management and Others in
Certain Transactions" in the 1999 Proxy Statement is incorporated herein by
reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Reference is made to the Financial Statements, the reports thereon, the
notes thereto and supplementary data commencing at page F-1 of this Annual
Report on Form 10-K. Set forth below is a list of such Financial Statements:
Reports of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Earnings for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statement of Shareholders' Equity for the Years Ended December
31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or
notes thereto.
35
<PAGE> 38
EXHIBITS
Each exhibit marked with an asterisk is filed with this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Reorganization dated as of December
30, 1997 by and among the Company, IBID, Inc., the Bank
and Sunbelt (incorporated herein by reference to Exhibit
2 to the Company's Registration Statement on Form S-4
(Registration No. 333-47281)).
3.1 -- Amended and Restated Articles of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.1
to the Company's Registration Statement on Form S-1
(Registration No. 33-33001) (the "Registration
Statement")).
3.2 -- Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.2 to the Registration
Statement).
4 -- Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to the
Registration Statement).
9.1 -- Voting Agreement and Irrevocable Proxy (included as
Exhibit D of the Agreement and Plan of Reorganization
filed as Exhibit 2.1 to this Annual Report on Form 10-K).
10.1 -- Prime Bancshares, Inc. 1997 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 to the
Registration Statement).
10.2 -- Prime Bancshares, Inc. 1993 Incentive Stock Option Plan
(incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-K for the year ended December 31, 1997
filed March 9, 1998).
21 -- Subsidiaries of Prime Bancshares, Inc. (incorporated
herein by reference to Exhibit 21 to the Company's Form
10-K for the year ended December 31, 1997 filed March 9,
1998).
23.1* -- Consent of Grant Thornton LLP
23.2* -- Consent of Harper & Pearson Company
27* -- Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of 1998.
36
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Prime Bancshares, Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Houston and State of Texas on March 1, 1999.
PRIME BANCSHARES, INC.
By: /s/ E. J. GUZZO
----------------------------------
E. J. Guzzo
President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report or amendment thereto has been signed by the following
persons in the indicated capacities on March 1, 1999.
<TABLE>
<CAPTION>
SIGNATURE POSITIONS
--------- ---------
<C> <S>
/s/ FREDRIC M. SAUNDERS Chairman of the Board, (principal executive
- ----------------------------------------------------- officer)
Fredric M. Saunders
/s/ L. ANDERSON CREEL Treasurer (principal financial officer and
- ----------------------------------------------------- principal accounting officer)
L. Anderson Creel
/s/ E. J. GUZZO President and Director
- -----------------------------------------------------
E. J. Guzzo
/s/ DAVID PASTERNAK Director
- -----------------------------------------------------
David Pasternak
/s/ STUART D. SAUNDERS Director
- -----------------------------------------------------
Stuart D. Saunders
/s/ JAMES B. WESLEY Director
- -----------------------------------------------------
James B. Wesley
/s/ JERRY S. DOMINY Director
- -----------------------------------------------------
Jerry S. Dominy
</TABLE>
37
<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Prime Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Prime
Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the 1997 and 1996 financial
statements of Sunbelt National Bank, a company acquired during 1998 in a
transaction accounted for as a pooling of interests, as discussed in Note M.
Such statements are included in the 1997 and 1996 consolidated financial
statements of Prime Bancshares, Inc. and Subsidiaries and reflect total assets
of 9 percent in 1997 and total revenues of 11 percent and 12 percent in 1997 and
1996 of the consolidated totals. The financial statements of Sunbelt National
Bank were audited by other auditors whose report has been furnished to us and
our opinion, insofar as it relates to amounts included for Sunbelt National Bank
for 1997 and 1996, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Prime Bancshares, Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Houston, Texas
January 19, 1999
F-1
<PAGE> 41
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Sunbelt National Bank
Houston, Texas
We have audited the accompanying balance sheet of Sunbelt National Bank as
of December 31, 1997, and the related statements of earnings, changes in
stockholders' equity and cash flows for the two years then ended (not presented
separately herein). These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sunbelt National Bank at
December 31, 1997, and results of its operations and its cash flows for each of
the two years then ended, in conformity with generally accepted accounting
principles.
/s/ HARPER & PEARSON COMPANY
HARPER & PEARSON COMPANY
Houston, Texas
January 15, 1998
F-2
<PAGE> 42
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash and cash equivalents
Cash and due from banks................................... $ 33,424 $ 25,168
Federal funds sold and other temporary investments........ 48,472 42,553
---------- ----------
Total cash and cash equivalents................... 81,896 67,721
Securities
Available-for-sale........................................ 70,406 188,947
Held-to-maturity.......................................... 366,908 291,236
---------- ----------
Total securities.................................. 437,314 480,183
Loans, net.................................................. 526,220 469,710
Premises and equipment, net................................. 16,566 16,984
Accrued interest receivable................................. 6,151 7,250
Other assets................................................ 10,185 10,287
---------- ----------
$1,078,332 $1,052,135
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing.................................... $ 188,689 $ 179,754
Interest-bearing....................................... 776,984 769,725
---------- ----------
Total deposits.................................... 965,673 949,479
Federal funds purchased and securities sold under
repurchase agreements.................................. 18,743 17,132
Other liabilities......................................... 4,596 7,097
---------- ----------
Total liabilities................................. 989,012 973,708
Commitments and contingencies............................... -- --
Shareholders' equity
Preferred stock........................................... -- 1,000
Common stock, $0.25 par value, 50,000,000 shares
authorized; 12,241,980 shares issued in 1998 and
12,010,980 shares issued in 1997; 10,295,483
outstanding in 1998 and 10,064,483 shares outstanding
in 1997................................................ 3,060 3,003
Additional capital........................................ 14,402 13,781
Retained earnings......................................... 73,323 61,498
Accumulated other comprehensive income.................... 160 770
---------- ----------
90,945 80,052
Less common stock held in treasury -- at cost............. 1,625 1,625
---------- ----------
89,320 78,427
---------- ----------
$1,078,332 $1,052,135
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 43
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans..................................................... $46,554 $40,311 $30,139
Securities................................................ 27,685 31,290 29,491
Federal funds sold and other temporary investments........ 2,363 1,981 905
------- ------- -------
Total interest income............................. 76,602 73,582 60,535
Interest expense............................................ 32,726 32,638 25,889
------- ------- -------
Net interest income............................... 43,876 40,944 34,646
Provision for loan losses................................... 1,040 1,196 1,391
------- ------- -------
Net interest income after provision for loan
losses.......................................... 42,836 39,748 33,255
Noninterest income
Service charges........................................... 8,050 7,558 6,731
Other operating income.................................... 2,251 2,204 2,405
------- ------- -------
Total noninterest income.......................... 10,301 9,762 9,136
Noninterest expense
Employee compensation and benefits........................ 19,440 19,087 15,005
Net bank premises expense................................. 1,935 1,757 1,596
Equipment rentals, depreciation and maintenance........... 1,617 1,439 1,164
Realized losses on available-for-sale securities.......... 46 -- --
Other operating expenses.................................. 8,788 8,880 9,087
------- ------- -------
Total noninterest expenses........................ 31,826 31,163 26,852
------- ------- -------
Earnings before income taxes...................... 21,311 18,347 15,539
Provision for income taxes
Current................................................... 7,444 6,967 5,700
Deferred expense (benefit)................................ 43 (466) (330)
------- ------- -------
7,487 6,501 5,370
------- ------- -------
NET EARNINGS...................................... $13,824 $11,846 $10,169
======= ======= =======
Basic earnings per common share............................. $ 1.35 $ 1.15 $ 0.99
======= ======= =======
Diluted earnings per common share........................... $ 1.30 $ 1.11 $ 0.97
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 44
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMMON TOTAL
PREFERRED COMMON ADDITIONAL RETAINED COMPREHENSIVE STOCK IN SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME TREASURY EQUITY
--------- ------ ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996..... $ 7,000 $2,943 $ 8,134 $43,366 $ 5,142 $(2,626) $63,959
Comprehensive income:
Net earnings................. -- -- -- 10,169 -- -- 10,169
Unrealized losses on
securities, net of tax and
reclassification
adjustment................. -- -- -- -- (3,214) -- (3,214)
-------
Comprehensive income........... -- -- -- -- -- -- 6,955
Purchase of treasury stock..... -- -- -- -- -- (626) (626)
Sale of common stock........... -- 37 103 -- -- -- 140
Dividends...................... -- -- -- (1,992) -- -- (1,992)
------- ------ ------- ------- ------- ------- -------
Balance at December 31, 1996... 7,000 2,980 8,237 51,543 1,928 (3,252) 68,436
Comprehensive income:
Net earnings................. -- -- -- 11,846 -- -- 11,846
Unrealized losses on
securities, net of tax and
reclassification
adjustment................. -- -- -- -- (1,158) -- (1,158)
-------
Comprehensive income........... -- -- -- -- -- -- 10,688
Purchase of treasury stock..... -- -- -- -- -- (408) (408)
Sale of common stock........... -- 23 131 -- -- -- 154
Sale of treasury stock in
initial public offering...... -- -- 5,745 -- -- 2,035 7,780
Stock issuance costs........... -- -- (332) -- -- -- (332)
Redemption of preferred
stock........................ (6,000) -- -- (6,000)
Dividends...................... -- -- -- (1,891) -- -- (1,891)
------- ------ ------- ------- ------- ------- -------
Balance at December 31, 1997... 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)
Benefit received related to
employee stock options....... -- -- 336 -- -- -- 336
------- ------ ------- ------- ------- ------- -------
Balance at December 31, 1998... $ -- $3,060 $14,402 $73,323 $ 160 $(1,625) $89,320
======= ====== ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 45
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 13,824 $ 11,846 $ 10,169
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Depreciation and amortization........................... 2,485 2,374 1,339
Accretion of discounts on amortization of premiums, net
of securities........................................ (119) (589) (747)
Realized loss on available-for-sale securities.......... 46 -- --
Provision for loan losses............................... 1,040 1,196 1,391
Write-down of other assets.............................. -- -- 50
Gain on sale of premises, equipment and other real
estate............................................... (230) (59) (210)
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 in accrued interest receivable.............. 1,099 5 2,448
(Increase) decrease in other assets.................. (236) 6,201 (84)
Decrease in other liabilities........................ (2,190) (28,568) (126)
--------- --------- --------
Net cash provided (used) by operating activities... 15,719 (7,594) 14,230
Cash flows from investing activities:
Purchases of held-to-maturity securities.................. (165,057) (179,246) (4,788)
Proceeds from sales and maturities of available-for-sale
securities.............................................. 121,156 143,540 123,107
Purchases of available-for-sale securities................ (62) (264) (73,224)
Proceeds from maturities of held-to-maturity securities... 85,984 20,114 12,202
Increase in loans, net of the effects resulting from the
acquisition of a bank, and the purchase of certain
branch assets and liabilities........................... (57,550) (67,954) (87,251)
Purchases of premises and equipment....................... (1,607) (2,088) (2,098)
Proceeds from sale of premises, equipment and other real
estate.................................................. 444 567 1,071
Net decrease in cash resulting from the acquisition of a
bank.................................................... -- (4,781) --
Net increase in cash resulting from acquisition of certain
branch assets and the assumption of certain
liabilities............................................. -- 96,502 --
--------- --------- --------
Net cash (used) provided by investing activities... (16,692) 6,390 (30,981)
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........................... 16,194 13,222 8,340
Change in federal funds purchased and securities sold
under repurchase agreements............................. 1,611 7,432 9,700
Purchase of treasury stock................................ -- (408) (626)
Redemption of preferred stock............................. (1,020) (6,000) --
Sale of treasury stock in initial public offering, net.... -- 7,448 --
Sale of common stock, net................................. 362 154 140
Payment of dividends...................................... (1,999) (1,891) (1,992)
--------- --------- --------
Net cash provided by financing activities.......... 15,148 19,957 15,562
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 14,175 18,753 (1,189)
Cash and cash equivalents at beginning of year.............. 67,721 48,968 50,157
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 81,896 $ 67,721 $ 48,968
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 46
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follow.
1. GENERAL
The Company operates twenty-two banking centers and two loan production
offices in Southeast and Central Texas. The Company's primary sources of revenue
are derived from investing in various United States Treasury and Agency
securities and granting loans primarily to customers in Southeast and Central
Texas. Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent on the
economies in those areas.
2. PRINCIPLES OF CONSOLIDATION AND INVESTMENT IN SUBSIDIARIES
The consolidated financial statements include the accounts of the Parent
and its wholly owned subsidiaries, IBID, Inc. (IBID) and Prime Bank (the Bank)
(collectively referred to as the Company). All significant intercompany
transactions and balances have been eliminated in the consolidated report of the
Company.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
4. SECURITIES
The Company accounts for securities according to Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. At the date of purchase, the Company is required to
classify debt and equity securities into one of three categories:
held-to-maturity, trading, or available-for-sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held-to-maturity and measured at amortized cost in
the financial statements only if management has the positive intent and ability
to hold those securities to maturity. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading and measured at fair value in the financial statements with unrealized
gains and losses included in earnings. Investments not classified as either
held-to-maturity or trading are classified as available-for-sale and measured at
fair value in the financial statements with unrealized gains and losses
reported, net of tax, in a separate component of shareholders' equity until
realized.
Gains and losses on the sale of securities are determined using the
specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their carrying value that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
F-7
<PAGE> 47
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LOANS
Loans are reported at the principal amount outstanding, net of charge-offs,
unearned discounts, purchase discounts and an allowance for loan losses.
Unearned discounts on installment loans are recognized using a method which
approximates a level yield over the term of the loans. Interest on other loans
is calculated using the simple interest method on the daily balance of the
principal amount outstanding.
The Company applies SFAS No. 114, Accounting for Creditors for Impairment
of a Loan, as amended by SFAS No. 118. Under SFAS 114, as amended, a loan is
identified as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan agreement. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received. Loans are not again placed on accrual status until payments are
brought current and, in management's judgment, the loan will continue to pay as
agreed.
6. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely.
The allowance is an amount that management believes will be adequate to
absorb losses inherent in existing loans and commitments to extend credit, based
on evaluations of the collectibility and prior loss experience of loans and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans and current and anticipated
economic conditions that may affect the borrower's ability to pay.
7. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated useful
life of each type of asset.
8. OTHER REAL ESTATE
Real estate acquired by foreclosure is recorded at fair value at the date
of foreclosure or acquisition, establishing a new cost basis. After foreclosure,
management periodically performs valuations and the real estate is carried at
the lower of carrying amount or fair value less cost to sell. Operating expenses
of such properties, net of related income, and gains and losses on their
disposition are included in other expenses.
9. GOODWILL
Goodwill represents the aggregate excess of the cost of companies acquired
over the fair value of their net assets at the dates of acquisition. This excess
is being amortized by various methods over periods up to 15 years.
10. INCOME TAXES
The Company files a consolidated Federal income tax return. By agreement
with Parent, the Bank records a provision or benefit for Federal income taxes on
the same basis as if it filed a separate Federal income tax return. The asset
and liability method of accounting is used for income taxes where deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. When
F-8
<PAGE> 48
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management determines that it is more likely than not that a deferred tax asset
will not be realized, a valuation allowance must be established. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
11. EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income
available for common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is calculated by
dividing net earnings available for common shareholders by the weighted average
number of common and dilutive potential common shares. Stock options may be
potential dilutive common shares and are therefore considered in the earnings
per share calculation, if dilutive. The number of dilutive potential common
shares is determined using the treasury stock method.
12. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they are
funded or related fees are incurred or received.
13. USE OF ESTIMATES
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
14. RECLASSIFICATIONS
Certain reclassifications have been made to conform to the 1998
presentation.
NOTE B -- SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
At December 31, 1997, the Company purchased $17,132 of government
securities under agreements to sell substantially the identical securities for
an amount equal to the original purchase price plus accrued interest on January
5, 1998. The average interest rate was 5.3%. At December 31, 1998, the Company
had no securities purchased under agreements to resell.
F-9
<PAGE> 49
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- SECURITIES
The securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
December 31, 1998:
U. S. Treasury securities..................... $ 44,916 $ 272 $ -- $ 45,188
Mortgage-backed securities.................... 24,973 173 -- 25,146
Other......................................... 72 -- -- 72
-------- ------ ------ --------
$ 69,961 $ 445 $ -- $ 70,406
======== ====== ====== ========
December 31, 1997:
U. S. Treasury securities..................... $148,956 $1,436 $ -- $150,392
Mortgage-backed securities.................... 37,661 31 73 37,619
Other......................................... 939 -- 3 936
-------- ------ ------ --------
$187,556 $1,467 $ 76 $188,947
======== ====== ====== ========
HELD-TO-MATURITY SECURITIES:
December 31, 1998:
U.S. Treasury securities...................... $ 69,741 $1,242 $ -- $ 70,983
Municipal securities.......................... 830 12 -- 842
Mortgage-backed securities.................... 296,337 2,047 217 298,167
-------- ------ ------ --------
$366,908 $3,301 $ 217 $369,992
======== ====== ====== ========
December 31, 1997:
U.S. Treasury securities...................... $ 71,896 $ 849 $ -- $ 72,745
Municipal securities.......................... 1,500 2 -- 1,502
Mortgage-backed securities.................... 217,840 717 1,082 217,475
-------- ------ ------ --------
$291,236 $1,568 $1,082 $291,722
======== ====== ====== ========
</TABLE>
There were no gross realized gains on sales of available-for-sale
securities for the years ended December 31, 1998, 1997, and 1996. Gross realized
losses on sales of available-for-sale securities were $46, $0, and $0 for the
years ended December 31, 1998, 1997, and 1996.
The following table shows the maturity distribution of the investment
portfolio at December 31, 1998:
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
--------------------------- -----------------------------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
-------------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Due in one year or less..................... $ 37,892 $ 38,353 $44,916 $45,188
Due from one to five years.................. 32,679 33,472 -- --
Mortgage-backed and equity securities....... 296,337 298,167 25,045 25,218
-------- -------- ------- -------
$366,908 $369,992 $69,961 $70,406
======== ======== ======= =======
</TABLE>
Securities with an aggregate book value of approximately $167,000 and
$146,000 at December 31, 1998 and 1997, were pledged as collateral to secure
public deposits.
F-10
<PAGE> 50
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into a securities lending agreement whereby certain
securities owned by the Company are exchanged for a few days for substantially
identical securities. The Company had exchanged securities with market values
totaling $57,429 and $80,359 at December 31, 1998 and 1997.
NOTE D -- LOANS
Major classifications of loans are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Commercial.................................................. $ 50,121 $ 57,580
Real estate:
Construction........................................... 38,673 32,880
1-4 family residential................................. 105,882 83,425
Commercial mortgage.................................... 174,668 127,281
Other.................................................. 8,085 10,938
Consumer.................................................. 156,808 166,099
Overdrafts................................................ 232 210
-------- --------
534,469 478,413
Less:
Unearned discounts..................................... 2,065 2,830
Allowance for loan losses.............................. 6,184 5,873
-------- --------
$526,220 $469,710
======== ========
</TABLE>
Impaired loans were $808 and $865 at December 31, 1998 and 1997. The
reduction in interest income associated with these impaired loans was
insignificant and no valuation allowance for loan losses related to impaired
loans has been established. There were no commitments to lend additional funds
to borrowers whose loans were classified as impaired.
Outstanding loans to directors, significant stockholders and executive
officers of the Company and to their related business interests aggregated $492
and $863 at December 31, 1998 and 1997.
NOTE E -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows for the year ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Balance at January 1..................................... $ 5,873 $ 4,972 $4,205
Provision................................................ 1,040 1,196 1,391
Charge-offs.............................................. (1,184) (1,225) (971)
Recoveries............................................... 455 442 347
Increase resulting from bank acquisition................. -- 488 --
------- ------- ------
Balance at December 31................................... $ 6,184 $ 5,873 $4,972
======= ======= ======
</TABLE>
F-11
<PAGE> 51
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1998 1997
------------ ------- -------
<S> <C> <C> <C>
Land................................................. -- $ 4,334 $ 4,435
Building and improvements............................ 15-33 years 12,710 12,361
Furniture, fixtures and equipment.................... 5-10 years 11,834 10,847
Automobiles.......................................... 3 years 88 68
------- -------
28,966 27,711
Less accumulated depreciation...................... 12,400 10,727
------- -------
$16,566 $16,984
======= =======
</TABLE>
Included in other assets are other real estate and repossessed assets of
$852 and $1,260 at December 31, 1998 and 1997.
NOTE G -- INTEREST BEARING DEPOSITS
The types of accounts and their respective balances included in
interest-bearing deposits are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
NOW accounts and interest-bearing checking accounts......... $131,401 $127,520
Savings and money market accounts........................... 190,436 181,524
Certificates of deposit..................................... 455,147 460,681
-------- --------
$776,984 $769,725
======== ========
</TABLE>
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100, was approximately $141,161 and $136,639 at December 31,
1998 and 1997. At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<S> <C>
1999..................................................... $334,312
2000..................................................... 68,838
2001..................................................... 28,743
2002..................................................... 13,350
2003 and thereafter...................................... 9,904
--------
$455,147
========
</TABLE>
Deposits of executive officers, significant shareholders and directors were
$6,063 and $2,406 (including time deposits of $3,801 and $1,239) at December 31,
1998 and 1997.
NOTE H -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At December 31, 1998 and 1997, the Company entered into the sale of $18,743
and $17,132 of government securities under agreements to repurchase
substantially the identical securities on January 4, 1999
F-12
<PAGE> 52
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and January 5, 1998. The average interest rate was 4.25% and 4.80% at December
31, 1998 and 1997. The following summarizes the sales to related parties at
December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Mission Heights Management Co. Ltd.......................... $ 6,268 $ 7,911
Other related parties....................................... 5,851 9,019
------- -------
$12,119 $16,930
======= =======
</TABLE>
NOTE I -- PREFERRED STOCK
The Company has authorized a total of 15,000,000 shares of preferred stock,
which are issuable in series. The Company had 6,000,000 authorized, issued and
outstanding shares of non-voting, non-convertible, non-cumulative Series A-10%
preferred stock, par value $1 per share, that was redeemed in 1997. The Company
also had 1,250,000 authorized shares of non-voting, non-convertible,
non-cumulative Series B-10% preferred stock, par value $1 per share. The Company
had 1,000,000 shares issued and outstanding until the stock was redeemed in
1998.
NOTE J -- INCOME TAXES
The deferred tax asset, current Federal income tax receivable or payable,
and deferred tax liability, included in other assets and other liabilities, are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Current receivable (payable)................................ $1,043 $(177) $ (17)
Deferred tax asset.......................................... 1,846 1,805 1,273
Deferred tax liability...................................... (150) (463) (993)
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses................................ $1,757 $1,579 $1,101
Depreciation and amortization differences................ -- 174 50
Difference in basis of other real estate................. 52 52 17
Other.................................................... 37 -- 105
------ ------ ------
$1,846 $1,805 $1,273
====== ====== ======
Deferred tax liabilities:
Unrealized gain on available-for-sale securities......... $ (86) $ (397) $ (993)
Depreciation and amortization differences................ (64) -- --
Other.................................................... -- (66) --
------ ------ ------
$ (150) $ (463) $ (993)
====== ====== ======
</TABLE>
F-13
<PAGE> 53
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.00% 35.00% 35.00%
Effect of utilization of graduated tax rates................ 0.00% 0.00% (0.69)%
Other....................................................... 0.13% 0.43% 0.25%
----- ----- -----
Effective income tax rate................................... 35.13% 35.43% 34.56%
===== ===== =====
</TABLE>
NOTE K -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. Commitments under outstanding standby letters of credit
totaled $1,266 and $2,101 at December 31, 1998 and 1997. Commitments to extend
credit totaled $71,155 and $66,617 at December 31, 1998 and 1997. The Company
does not anticipate any material losses as a result of these commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation to any condition established in the contract and have
fixed expiration dates or other termination clauses. Some of the commitments are
expected to expire without being drawn upon, so that the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. The credit risk involved and collateral required in issuing
letters of credit are essentially the same as those involved in extending loan
facilities to customers.
The Company is involved in certain claims and lawsuits occurring in the
normal course of business. Management, after consultation with outside legal
counsel, does not believe that the outcome of these actions would have a
material impact on the financial statements of the Company.
The Company leases certain premises and equipment under cancelable and
noncancelable lease arrangements. Total rentals charged to operating expenses
were $614, $605 and $508 in the years ended December 31, 1998, 1997 and 1996.
Future lease commitments under noncancelable leases are not material.
The Company has incentive stock option plans, and at December 31, 1998,
420,000 shares of common stock were outstanding for these plans. The exercise
price of each option is equal to the market price of the Company's stock on the
date of grant. The maximum term is 10 years and the shares vest 20% per year.
The Company's Board of Directors and shareholders approved a new stock
option plan in 1997 (the "1997 Incentive Plan") which authorizes the issuance of
up to 1,000,000 shares of common stock under both "non-qualified" and "incentive
stock" options to employees and "non-qualified" options to directors who are not
employees. Options under the 1997 Incentive Plan vest at 20% per year and must
be exercised within
F-14
<PAGE> 54
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10 years following the date of grant. There were 51,000 options granted during
1998 for the 1997 Incentive Plan.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its plans. Had compensation cost been
determined based on the fair value at the grant dates for awards consistent with
the method of SFAS No. 123, Accounting for Stock-Based Compensation,the
Company's net earnings and earnings per share would have been reduced as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net earnings:
As reported........................................... $13,824 $11,846 $10,169
Pro forma............................................. 13,669 11,770 10,169
Basic earnings per share:
As reported........................................... $ 1.35 $ 1.15 $ 0.99
Pro forma............................................. 1.33 1.14 0.99
Diluted earnings per share:
As reported........................................... $ 1.30 $ 1.11 $ 0.97
Pro forma............................................. 1.29 1.10 0.97
</TABLE>
The fair value of stock options granted was estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted average fair values
and related assumptions were:
<TABLE>
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
Weighted average fair value................................. $ 7.41 $ 1.07
Expected volatility......................................... 39% 31%
Risk free interest rate..................................... 5.5% 5.9%
Expected lives.............................................. 5 years 2.5 years
Expected dividend yield..................................... 1.2% 0.8%
</TABLE>
Following is a summary of the status of the incentive option plans:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PRICE AVERAGE
NUMBER OF RANGE EXERCISE
SHARES PER SHARE PRICE
--------- ------------- --------
<S> <C> <C> <C>
Options outstanding at January 1, 1996............ 600,000 $.83-$2.67 $ 1.65
Options exercised................................. (147,000) $.83-$2.33 .96
--------
Options outstanding at December 31, 1996.......... 453,000 $.83-$2.67 1.87
Options granted................................... 240,000 $4.17 4.17
Options exercised................................. (93,000) $.83-$2.33 1.66
--------
Options outstanding at December 31, 1997.......... 600,000 $.83-$4.17 2.83
Options exercised................................. (231,000) $.83-$4.17 1.67
Options granted................................... 51,000 $16.25-$19.69 19.18
--------
Options outstanding at December 31, 1998.......... 420,000 $2.33-$19.69 $ 5.45
========
Options exercisable at
December 31, 1996............................... 285,000 $ 1.84
December 31, 1997............................... 282,000 $ 1.92
December 31, 1998............................... 153,000 $ 2.92
</TABLE>
F-15
<PAGE> 55
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
---------------------
WEIGHTED
AVERAGE
REMAINING
EXERCISE CONTRACTUAL EXERCISABLE
PRICE NUMBER LIFE NUMBER
- -------- ------- ----------- -----------
<S> <C> <C> <C>
$ 2.33 60,000 4.0 years 60,000
$ 2.67 78,000 5.4 years 54,000
$ 4.17 231,000 8.0 years 39,000
$16.25 7,500 9.8 years --
$19.69 43,500 9.6 years --
------- -------
420,000 153,000
======= =======
</TABLE>
NOTE L -- REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by state and federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998 that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
F-16
<PAGE> 56
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS:
--------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Ratio As of December 31, 1998:
Total Capital (to Risk Weighted
Assets):
Prime Bancshares, Inc............. $90,816 15.13% M$48,002 M8.0% N/A
Prime Bank........................ $89,845 14.97% M$48,010 M8.0% M$60,013 10.0%
Tier 1 Capital (to Risk Weighted
Assets):
Prime Bancshares, Inc. ........... $84,632 14.10% M$24,011 M4.0% N/A
Prime Bank........................ $83,660 13.94% M$24,005 M4.0% M$36,008 6.0%
Tier 1 Capital (to Average Assets):
Prime Bancshares, Inc. ........... $84,632 8.02% M$42,236 M4.0% N/A
Prime Bank........................ $83,660 7.92% M$42,235 M4.0% M$52,794 5.0%
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets):
Prime Bancshares, Inc. ........... $78,486 14.21% M$44,189 M8.0% N/A
Prime Bank........................ $76,805 13.90% M$44,189 M8.0% M$55,236 10.0%
Tier 1 Capital (to Risk Weighted
Assets):
Prime Bancshares, Inc. ........... $72,613 13.15% M$22,094 M4.0% N/A
Prime Bank........................ $70,932 12.84% M$22,094 M4.0% M$33,141 6.0%
Tier 1 Capital (to Average Assets):
Prime Bancshares, Inc. ........... $72,613 6.93% M$42,161 M4.0% N/A
Prime Bank........................ $70,932 6.77% M$42,928 M4.0% M$52,410 5.0%
</TABLE>
NOTE M -- ACQUISITIONS/DISPOSITIONS
On May 22, 1998 the Company acquired Sunbelt National Bank, a Texas based
commercial bank with $81.4 million in assets and $72.8 million in deposits. The
Company issued 747,463 shares of common stock to shareholders of Sunbelt on an
exchange ratio of 1.625 shares of the Company's common stock for each share of
Sunbelt's stock.
The Sunbelt acquisition was accounted for under the pooling of interest
method of accounting. Accordingly, the consolidated financial statements include
the consolidated accounts of Sunbelt for periods presented. Financial
information on a separate company basis for the three months ended March 31,
1998 and for the years ended December 31, 1997 and 1996 for the Company and
Sunbelt was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
COMPANY SUNBELT COMPANY SUNBELT COMPANY SUNBELT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net interest income.................... $9,827 $1,133 $36,021 $4,923 $30,074 $4,572
Noninterest income..................... 2,336 166 8,956 806 8,292 844
Noninterest expense.................... 6,738 908 26,554 4,609 23,056 3,796
Net earnings........................... 3,365 258 11,363 483 9,222 947
</TABLE>
F-17
<PAGE> 57
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, the Company purchased deposits and certain assets of three
branches of Bank of America Texas, N.A. The purchase price was allocated based
on the fair value of the assets acquired and liabilities assumed, and the excess
of cost over the fair value of the net assets acquired of $1,835, is being
amortized over ten years using an accelerated method. Amortization expense
charged to other operating expense during 1998 and 1997 was $252 and $231.
During 1997, the Company purchased all of the assets and liabilities of
First Northwestern Bank, N. A. and purchase accounting was applied. The
acquisition included approximately $60,200 in deposits and $40,200 in loans. The
purchase price was allocated based on the fair value of the assets acquired and
liabilities assumed, and the excess of cost over the fair value of the net
assets acquired of $3,621, is being amortized over fifteen years using a
straight line method. Amortization expense charged to other operating expense
during 1998 and 1997 was $264 and $220.
The following summarized proforma information assumes the First
Northwestern acquisition had occurred on January 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Interest income............................................. $74,393 $65,353
Net earnings................................................ 12,013 10,658
Basic earnings per share.................................... 1.17 1.04
Diluted earnings per share.................................. 1.12 1.02
</TABLE>
The pro forma financial information should be read in conjunction with the
related historical information and is not necessarily indicative of the results
that would have been attained had the transactions actually taken place January
1, 1996.
NOTE N -- SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Cash paid during the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest................................................ $32,865 $32,133 $25,986
Income taxes............................................ $ 8,451 $ 6,744 $ 5,369
</TABLE>
During 1996, the Company purchased $30,501 of U.S. Agency Securities. The
settlement of the transaction did not occur until January 1997.
NOTE O -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are based on management's
estimates and do not purport to represent the aggregate net fair value of the
Company. Further, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which vary widely among different
financial institutions and which are subject to change.
The following methods and assumptions were used by the Company in
estimating financial instrument fair values:
- CASH AND CASH EQUIVALENTS, FEDERAL FUNDS PURCHASED/SOLD AND REPURCHASE
AGREEMENTS
The balance sheet carrying amount approximates fair value.
F-18
<PAGE> 58
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- SECURITIES TO BE HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE
Fair values for investment securities are based on quoted market prices
or quotations received from securities dealers. If quoted market prices
are not available, fair value estimates may be based on quoted market
prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
- LOANS
Fair values of loans are estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage and consumer
loans. Each of these categories is further subdivided into fixed and
adjustable rate loans and performing and nonperforming loans. The fair
value of performing loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
various types of loans. The fair value of nonperforming loans is
estimated at the value of the underlying collateral.
- DEPOSITS
The fair value of demand deposits, such as non-interest bearing demand
deposits and interest-bearing transaction accounts such as savings, NOW
and money market accounts are equal to the amount payable on demand as of
December 31, 1998 and 1997 (i.e. their carrying amounts).
The fair value of demand deposits is defined as the amount payable, and
prohibits adjustment for any value derived from the expected retention of
such deposits for a period of time. That value, commonly referred to as
the core deposit base intangible, is neither included in the following
fair value amounts nor recorded as an intangible asset in the balance
sheet.
The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate used represents rates
currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
- OFF-BALANCE SHEET INSTRUMENTS
Estimated fair values for the Company's off-balance sheet instruments are
based on fees, net of related expenses, currently charged to enter into
similar agreements, considering the remaining terms of the agreements and
the counterparties' credit standing.
F-19
<PAGE> 59
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1998 and 1997. The fair value of
financial instruments is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........................ $ 33,424 $ 33,424 $ 25,168 $ 25,168
Federal funds sold and other temporary
investments................................... 48,472 48,472 42,553 42,553
Securities
Available-for-sale............................ 70,406 70,406 188,947 188,947
Held-to-maturity.............................. 366,908 369,992 291,236 291,722
Loans, net....................................... 526,220 530,000 469,710 469,000
Financial liabilities:
Deposits
Noninterest-bearing........................... 188,689 188,689 179,754 179,754
Interest-bearing transaction and money market
accounts.................................... 321,837 321,837 309,044 309,044
Certificates of deposit....................... 455,147 459,000 460,681 462,000
Federal funds purchased and securities sold under
repur-chase agreements........................ 18,743 18,743 17,132 17,132
</TABLE>
NOTE P -- EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share
(EPS) and the weighted average number of shares of dilutive potential common
stock.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net earnings................................................ $13,824 $11,846 $10,169
Less: dividends on preferred stock.......................... 25 650 700
------- ------- -------
Net earnings available to common stockholders used in basic
and diluted EPS........................................... $13,799 $11,196 $ 9,469
======= ======= =======
Weighted average common shares used in basic EPS (000's).... 10,221 9,722 9,555
Effect of dilutive securities:
Stock options (000's)..................................... 375 380 238
------- ------- -------
Weighted average common and potential dilutive common shares
used in diluted EPS (000's)............................... 10,596 10,102 9,793
======= ======= =======
</TABLE>
NOTE Q -- COMPREHENSIVE INCOME
Effective January 1, 1998, the Company has adopted Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which requires an entity to
report and display comprehensive income and its components. Comprehensive income
includes net earnings plus other comprehensive income. The Company's other
comprehensive income consists of unrealized gains or losses on securities.
F-20
<PAGE> 60
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other comprehensive income and its tax effects are as follows:
<TABLE>
<CAPTION>
BEFORE TAX TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT
---------- ------------- ----------
<S> <C> <C> <C>
1998
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period............................................... $ (984) $ 344 $ (640)
Less: reclassification adjustment for losses included in
net earnings......................................... 46 (16) 30
------- ------ -------
Other comprehensive income................................ $ (938) $ 328 $ (610)
======= ====== =======
1997
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period............................................... $(1,782) $ 624 $(1,158)
Less: reclassification adjustment for losses included in
net earnings......................................... -- -- --
------- ------ -------
Other comprehensive income................................ $(1,782) $ 624 $(1,158)
======= ====== =======
1996
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period............................................... $(4,870) $1,656 $(3,214)
Less: reclassification adjustment for losses included in
net earnings......................................... -- -- --
------- ------ -------
Other comprehensive income................................ $(4,870) $1,656 $(3,214)
======= ====== =======
</TABLE>
NOTE R -- NEW PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"), which is effective for financial statements issued
for periods beginning after June 15, 1999. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company does not expect the effect of SFAS No. 133 to be
material to the financial statements taken as a whole.
NOTE S -- SUBSEQUENT EVENTS
On January 3, 1999, the Board of Directors of the Company declared a cash
dividend of $0.06 per share to all common shareholders of record as of December
31, 1998. The dividend was paid on January 11, 1999.
F-21
<PAGE> 61
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE T -- PARENT-ONLY FINANCIAL STATEMENTS
PRIME BANCSHARES, INC.
(PARENT ONLY)
BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash and cash equivalents................................... $ 886 $ 1,678
Other assets................................................ 154 5
Investment in subsidiaries.................................. 88,357 76,753
------- -------
$89,397 $78,436
======= =======
LIABILITIES
Other liabilities........................................... $ 77 $ 9
------- -------
Total liabilities................................. 77 9
Commitments and contingencies............................... -- --
Shareholders' equity:
Preferred stock........................................... -- 1,000
Common stock.............................................. 3,060 3,003
Additional capital........................................ 14,402 13,781
Retained earnings......................................... 73,323 61,498
Accumulated other comprehensive income.................... 160 770
------- -------
90,945 80,052
Less common stock in treasury -- at cost.................. 1,625 1,625
------- -------
89,320 78,427
------- -------
$89,397 $78,436
======= =======
</TABLE>
F-22
<PAGE> 62
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRIME BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Costs and expenses
General and administrative................................ $ 538 $ 13 $ 1
------- ------- -------
Operating loss......................................... (538) (13) (1)
Current income tax benefit................................ 188 5 --
------- ------- -------
Loss before equity in net earnings of subsidiaries..... (350) (8) (1)
Equity in net earnings of subsidiaries...................... 14,174 11,854 10,170
------- ------- -------
NET EARNINGS...................................... $13,824 $11,846 $10,169
======= ======= =======
</TABLE>
F-23
<PAGE> 63
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRIME BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $13,824 $11,846 $10,169
Adjustments to reconcile net earnings to net cash used in
operating activities:
Earnings of subsidiaries............................... (14,179) (11,854) (10,170)
Change in assets and liabilities:
Increase in other assets............................. (149) (5) --
Increase in other liabilities........................ 68 -- --
------- ------- -------
Net cash used in operating activities............. (436) (13) (1)
Cash flows from investing activities:
Dividend from subsidiary............................... 2,301 12,612 2,430
Capital contribution to subsidiary..................... -- (10,582) --
------- ------- -------
Net cash provided by investing activities......... 2,301 2,030 2,430
Cash flows from financing activities:
Purchase of treasury stock................................ -- (408) (626)
Dividend payments......................................... (1,999) (1,891) (1,992)
Redemption of preferred stock............................. (1,020) (6,000) --
Sale of treasury stock in initial public offering......... -- 7,448 --
Sale of common stock, net................................. 362 154 140
------- ------- -------
Net cash used in financing activities............. (2,657) (697) (2,478)
------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (792) 1,320 (49)
Cash and cash equivalents at beginning of year.............. 1,678 358 407
------- ------- -------
Cash and cash equivalents at end of year.................... $ 886 $ 1,678 $ 358
======= ======= =======
</TABLE>
F-24
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Reorganization dated as of December
30, 1997 by and among the Company, IBID, Inc., the Bank
and Sunbelt (incorporated herein by reference to Exhibit
2 to the Company's Registration Statement on Form S-4
(Registration No. 333-47281)).
3.1 -- Amended and Restated Articles of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.1
to the Company's Registration Statement on Form S-1
(Registration No. 33-33001) (the "Registration
Statement")).
3.2 -- Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.2 to the Registration
Statement).
4 -- Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to the
Registration Statement).
9.1 -- Voting Agreement and Irrevocable Proxy (included as
Exhibit D of the Agreement and Plan of Reorganization
filed as Exhibit 2.1 to this Annual Report on Form 10-K).
10.1 -- Prime Bancshares, Inc. 1997 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 to the
Registration Statement).
10.2 -- Prime Bancshares, Inc. 1993 Incentive Stock Option Plan
(incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-K for the year ended December 31, 1997
filed March 9, 1998).
21 -- Subsidiaries of Prime Bancshares, Inc. (incorporated
herein by reference to Exhibit 21 to the Company's Form
10-K for the year ended December 31, 1997 filed March 9,
1998).
23.1* -- Consent of Grant Thornton LLP
23.2* -- Consent of Harper & Pearson Company
27* -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 19, 1999, accompanying the consolidated
financial statements of Prime Bancshares, Inc. and subsidiaries included in the
Annual Report of Form 10-K for the year ended December 31, 1998. We hereby
consent to the incorporation by reference of said reports in the Registration
Statements of Prime Bancshares, Inc. and subsidiaries on Form S-8, File No.
333-47863 and File No. 333-65141.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Houston, Texas
March 3, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 15, 1998 accompanying the financial
statements of Sunbelt National Bank as of and for the two years in the period
ended December 31, 1997. The financial statements of Sunbelt National Bank are
not presented separately, but are included in the financial statements in the
Annual Report on Form 10-K of Prime Bancshares, Inc. and Subsidiaries for the
year ended December 31, 1998. We consent to the incorporation by reference of
said report in the Registration Statements of Prime Bancshares, Inc. and
Subsidiaries on Form S-8 Registration Statement No. 333-47863 and No. 333-65141.
/s/ HARPER & PEARSON COMPANY
HARPER & PEARSON COMPANY
Houston, Texas
March 3, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,424
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 48,472
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70,406
<INVESTMENTS-CARRYING> 366,908
<INVESTMENTS-MARKET> 369,992
<LOANS> 532,404
<ALLOWANCE> 6,184
<TOTAL-ASSETS> 1,078,332
<DEPOSITS> 965,673
<SHORT-TERM> 18,743
<LIABILITIES-OTHER> 4,596
<LONG-TERM> 0
0
0
<COMMON> 3,060
<OTHER-SE> 86,260
<TOTAL-LIABILITIES-AND-EQUITY> 1,078,332
<INTEREST-LOAN> 46,554
<INTEREST-INVEST> 27,685
<INTEREST-OTHER> 2,363
<INTEREST-TOTAL> 76,602
<INTEREST-DEPOSIT> 31,823
<INTEREST-EXPENSE> 32,726
<INTEREST-INCOME-NET> 43,876
<LOAN-LOSSES> 1,040
<SECURITIES-GAINS> (46)
<EXPENSE-OTHER> 31,780
<INCOME-PRETAX> 21,311
<INCOME-PRE-EXTRAORDINARY> 21,311
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,824
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 7.64
<LOANS-NON> 808
<LOANS-PAST> 699
<LOANS-TROUBLED> 69
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,873
<CHARGE-OFFS> 1,184
<RECOVERIES> 455
<ALLOWANCE-CLOSE> 6,184
<ALLOWANCE-DOMESTIC> 6,184
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,115
</TABLE>
