<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM____________TO___________
COMMISSION FILE NUMBER: 000-25051
PROSPERITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2331986
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3040 POST OAK BLVD.
HOUSTON, TEXAS 77056
(Address of principal executive offices, including zip code)
(713) 993-0002
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
As of July 31, 2000, there were 5,232,401 shares of the registrant's Common
Stock, par value $1.00 per share, outstanding.
<PAGE> 2
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements................................................ 3
Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31,1999
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2000 and 1999 (unaudited)....... 4
Consolidated Statements of Shareholders' Equity for
the Year Ended December 31, 1999 and for the Six
Months Ended June 30, 2000 (unaudited)..................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 (unaudited)................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................19
Item 2. Changes in Securities and Use of Proceeds...........................19
Item 3. Defaults upon Senior Securities.....................................19
Item 4. Submission of Matters to a Vote of Security Holders.................19
Item 5. Other Information...................................................19
Item 6. Exhibits and Reports on Form 8-K....................................19
Signatures...................................................................20
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -------
(unaudited)
(Dollars in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks ....................................... $ 16,205 $ 20,658
Federal funds sold............................................. 500 16,100
----------- ----------
Total cash and cash equivalents............................ 16,705 36,758
Available for sale securities, at fair value (amortized cost
of $233,729 (unaudited) and $228,850, respectively)....... 227,707 224,782
Held to maturity securities, at cost (fair value of $79,478
(unaudited) and $87,184, respectively)..................... 80,492 87,889
Loans.......................................................... 231,179 223,505
Less allowance for credit losses............................... (2,919) (2,753)
----------- ----------
Loans, net..................................... 228,260 220,752
Accrued interest receivable.................................... 5,448 5,013
Goodwill (net of accumulated amortization of $4,322
(unaudited) and $3,792, respectively)...................... 18,701 19,229
Bank premises and equipment, net............................... 9,552 9,751
Other assets................................................... 4,931 4,499
----------- ----------
TOTAL ASSETS................................................... $591,796 $608,673
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing.................................... $ 120,320 $ 113,514
Interest-bearing....................................... 396,817 421,242
--------- -------
Total deposits................................. 517,137 534,756
Federal funds purchased..................................... -- 10,000
Other borrowings............................................... 14,613 5,700
Accrued interest payable................................... 1,507 1,554
Other liabilities.......................................... 1,407 1,397
--------- ---------
Total liabilities.............................. 534,664 553,407
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF SUBSIDIARY
TRUST....................................................... 12,000 12,000
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 50,000,000 shares authorized; 5,232,401
(unaudited) and 5,198,901, shares issued at June 30, 2000 and December
31, 1999, respectively; 5,228,825 (unaudited) and 5,195,325 shares
outstanding at June 30, 2000
and December 31, 1999, respectively.................... 5,232 5,199
Capital surplus............................................ 15,994 15,880
Retained earnings.......................................... 27,898 24,889
Accumulated other comprehensive income -- net
unrealized (losses) on available for sale
securities, net of tax benefit of $2,048 (unaudited)
and tax of $1,383, respectively....................... (3,974) (2,684)
Less treasury stock, at cost, 3,576 shares at June 30,
2000 (unaudited) and 3,576 shares at December 31,
1999, respectively..................................... (18) (18)
----------- ----------
Total shareholders' equity..................... 45,132 43,266
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY......................................... $591,796 $608,673
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
-------------------------- -----------------------------
2000 1999 2000 1999
------------ ---------- ----------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees......................... $ 5,018 $ 3,863 $ 9,814 $ 7,456
Securities:
Taxable...................................... 4,473 3,094 9,026 6,211
Nontaxable................................... 265 229 533 464
70% nontaxable preferred dividends........... 135 -- 203 --
Federal funds sold............................ 5 122 44 422
---------- ---------- ----------- -----------
Total interest income....................... 9,896 7,308 19,620 14,553
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits.................................... 4,188 3,017 8,298 6,123
Note payable and federal funds........... -- -- 2 --
Other.................................... 243 2 280 7
---------- ---------- ----------- -----------
Total interest expense................... 4,431 3,019 8,580 6,130
---------- ---------- ----------- -----------
NET INTEREST INCOME...................... 5,465 4,289 11,040 8,423
PROVISION FOR CREDIT LOSSES................... 75 65 150 130
---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES........................... 5,390 4,224 10,890 8,293
---------- ---------- ----------- -----------
NONINTEREST INCOME:
Customer service fees....................... 1,089 633 2,145 1,241
Other....................................... 213 110 405 205
---------- ---------- ----------- -----------
Total noninterest income.................. 1,302 743 2,550 1,446
--------- ---------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits.............. 1,752 1,397 3,588 2,820
Net occupancy expense....................... 189 165 379 290
Data processing............................. 248 217 537 417
Goodwill amortization....................... 264 162 529 323
Depreciation expense........................ 233 87 466 173
Minority interest trust preferred
securities................................ 288 -- 575 --
Other....................................... 946 733 1,815 1,412
---------- ---------- ----------- -----------
Total noninterest expense................. 3,920 2,761 7,889 5,435
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES.................... 2,772 2,206 5,551 4,304
PROVISION FOR INCOME TAXES.................... 789 703 1,601 1,367
---------- ---------- ----------- -----------
NET INCOME.................................... $ 1,983 $ 1,503 $ 3,950 $ 2,937
========== ========== =========== ===========
EARNINGS PER SHARE
Basic......................................... $ 0.38 $ 0.29 $ 0.76 $ 0.57
========== ========== =========== ===========
Diluted....................................... $ 0.37 $ 0.28 $ 0.73 $ 0.55
========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income -- Net
Common Stock Unrealized Gain
------------------------ (Loss) on Avail- Total
Capital Retained able for Sale Treasury Shareholders'
Shares Amount Surplus Earnings Securities Stock Equity
----------- ---------- ------- -------- ---------- -------- ---------
(Amounts in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999................ 5,176,401 $ 5,176 $ 16,477 $ 19,452 $ 348 $ (18) $ 41,435
Net income ............................. 6,474 6,474
Net change in unrealized gain (loss) on
available for sale securities ........ (3,032) (3,032)
---------
Total comprehensive income.............. 3,442
---------
Sale of common stock.................... 22,500 23 76 99
Trust preferred issuance costs.......... (560) (560)
Stock issuance cost .................... (113) (113)
Cash dividends declared, $.20
per share............................. (1,037) (1,037)
----------- ---------- --------- -------- ---------- -------- ---------
BALANCE AT DECEMBER 31, 1999.............. 5,198,901 $ 5,199 $ 15,880 $ 24,889 $ (2,684) $ (18) $ 43,266
Net income (unaudited) ................. 3,950 3,950
Net change in unrealized gain
(loss) on available for sale
securities (unaudited)................ (1,290) (1,290)
---------
Total comprehensive income (unaudited).. 2,660
---------
Sale of common stock (unaudited) ..... 33,500 33 114 147
Cash dividends declared, $0.18
per share (unaudited)................. (941) (941)
----------- ---------- --------- --------- ---------- -------- ---------
BALANCE AT JUNE 30, 2000
(unaudited)...........................5,232,401 $ 5,232 $ 15,994 $ 27,898 $ (3,974) $ (18) $ 45,132
=========== ========== ========= ========= ========== ======== =========
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
2000 1999
------------- --------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 3,950 $ 2,937
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization........................ 995 628
Provision for credit losses.......................... 150 130
Net (accretion) amortization of premium/discount
on investments.................................... (60) 153
Decrease (increase) in accrued interest receivable... 435 (326)
Increase in other assets............................. (637) (361)
Increase in accrued interest payable
and other liabilities.............................. (37) (7)
------------- --------------
Total adjustments.................................. 846 217
------------- --------------
Net cash provided by operating activities.......... 4,796 3,154
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal
paydowns of held to maturity securities.............. 11,467 30,653
Purchase of held to maturity securities................. (4,103) (282)
Proceeds from maturities and principal
paydowns of available for sale securities............ 10,875 9,548
Purchase of available for sale securities............... (15,661) (36,352)
Net increase in loans................................... (7,674) (17,523)
Purchase of bank premises and equipment................. (253) (253)
Net decrease in interest-bearing
deposits in financial institutions................... -- 99
------------- -------------
Net cash (used in) investing activities............ (5,349) (14,308)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing
deposits............................................. 6,806 (4,130)
Net (decrease) increase in interest-bearing deposits (24,425) 11,850
Repayments of line of credit............................ (1,087) (1,865)
Stock issuance costs................................... -- (112)
Payments of cash dividends.............................. (941) (519)
Sale of Common Stock.................................... 147 99
------------- -------------
Net cash provided by
financing activities........................... (19,500) 5,323
---------------- -------------
NET (DECREASE) CASH AND CASH
EQUIVALENTS............................................. $ (20,053) $ (5,831)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD............................................... 36,758 18,342
------------- -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.................................................. $ 16,705 $ 12,511
============= =============
</TABLE>
NONCASH INVESTING ACTIVITIES:
The Company incurred a net change in unrealized
gain (loss) on securities available for sale
of $665,000 and $1.6 million for the periods
ended June 30, 2000 and June 30, 1999.
See notes to consolidated financial statements.
6
<PAGE> 7
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Prosperity Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries,
First Prosperity Bank (the "Bank") and Prosperity Holdings, Inc. All
significant inter-company transactions and balances have been eliminated.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the statements
reflect all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows of the Company on a consolidated
basis, and all such adjustments are of a normal recurring nature. These
financial statements and the notes thereto should be read in conjunction with
the Company's Form 10-K filed on March 8, 2000. Operating results for the six
month period ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
2. INCOME PER COMMON SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
----------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 1,983 $ 1,504 $ 3,950 $ 2,937
Weighted average common shares outstanding 5,221 5,182 5,213 5,177
Potential dilutive common shares 186 201 193 200
----------- ----------- ---------- ----------
Weighted average common shares and equivalents
outstanding 5,407 5,383 5,406 5,377
----------- ----------- ---------- ----------
Basic earnings per common share $ 0.38 $ 0.29 $ 0.76 $ 0.57
=========== =========== ========== ==========
Diluted earnings per common share $ 0.37 $ 0.28 $ 0.73 $ 0.55
=========== =========== ========== ==========
</TABLE>
7
<PAGE> 8
PROSPERITY BANCSHARES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. RECENT ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. This statement is effective for fiscal years beginning after June
15, 2000. Management believes the implementation of this pronouncement will not
have a material effect on the Company's financial statements.
4. SUBSEQUENT EVENTS
On June 16, 2000, the Company's wholly-owned subsidiary First Prosperity
Bank (the "Bank") entered into a Purchase and Assumption Agreement with Compass
Bank ("Compass") whereby the Bank will purchase certain assets and assume
certain liabilities of five branches of Compass located in El Campo, Hitchcock,
Needville, Palacios and Sweeny, Texas. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Prosperity Bancshares, Inc. (the "Company") is a registered bank
holding company that derives substantially all of its revenues and income from
the operation of First Prosperity Bank (the "Bank"). The Bank is a full-service
bank that provides a broad line of financial products and services to small and
medium-sized businesses and consumers through 15 full-service banking locations
in the greater Houston metropolitan area and nine contiguous counties situated
south and southwest of Houston and extending into South Texas.
Statements and financial discussion and analysis contained in the
Form 10-Q that are not historical facts are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are based on assumptions and
involve a number of risks and uncertainties, many of which are beyond the
Company's control. The important factors that could cause actual results to
differ materially from the forward-looking statements include, without
limitation:
o changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;
o changes in the levels of loan prepayments and the resulting effects on
the value of the Company's loan portfolio;
o changes in local economic and business conditions which adversely affect
the Company's customers and their ability to transact profitable business
with the company, including the ability of the Company's borrowers to
repay their loans according to their terms or a change in the value of
the related collateral.
o increased competition for deposits and loans adversely affecting rates
and terms;
o the timing, impact and other uncertainties of future acquisitions,
including the Company's ability to identify suitable future acquisition
candidates, the success or failure in the integration of their
operations, and the ability to enter new markets successfully and
capitalize on growth opportunities;
o increased credit risk in the Company's assets and increased operating
risk caused by a material change in commercial, consumer and/or real
estate loans as a percentage of the total loan portfolio;
8
<PAGE> 9
o the failure of assumptions underlying the establishment of and
provisions made to the allowance for credit losses;
o changes in the availability of funds resulting in increased costs or
reduced liquidity;
o increased asset levels and changes in the composition of assets and the
resulting impact on the Company's capital levels and regulatory capital
ratios;
o the Company's ability to acquire, operate and maintain cost effective and
efficient systems without incurring unexpectedly difficult or expensive
but necessary technological changes;
o the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation levels;
and
o changes in statutes and government regulations or their interpretations
applicable to bank holding companies and the Company's present and future
banking and other subsidiaries, including changes in tax requirements and
tax rates.
OVERVIEW
The Company showed positive earnings growth for the quarter ended
June 30, 2000 due to the increase in loan volume and the acquisition of South
Texas Bancshares and its wholly-owned subsidiary, The Commercial National Bank
of Beeville, with three locations in Beeville, Goliad and Mathis, Texas (the
"South Texas Acquisition") in the fourth quarter of 1999, accounted for under
the purchase method. Net income available to common shareholders was $2.0
million ($0.37 per common share on a diluted basis) for the quarter ended June
30, 2000 compared with $1.5 million ($0.28 per common share on a diluted basis)
for the quarter ended June 30, 1999, an increase of $480,000, or 32.0%. The
Company posted returns on average common equity of 18.12% and 14.20% and
returns on average assets of 1.35% and 1.33% for the quarters ended June 30,
2000 and 1999, respectively. For the six months ended June 30, 2000 net income
available to common shareholders was $4.0 million ($0.73 per common share on a
diluted basis) compared with $2.9 million ($0.55 per common share on a diluted
basis) for the same period in 1999, an increase of $1.0 million or 34.5%.
Total assets were $591.8 million at June 30, 2000 compared with
$608.7 million at December 31, 1999. Total loans increased to $231.2 million at
June 30, 2000 from $223.5 million at December 31, 1999, an increase of $7.7
million, or 3.4%. Total deposits were $517.1 million at June 30, 2000 compared
with $534.8 million at December 31, 1999, an decrease of $17.6 million, or
3.3%. Shareholders' equity increased $1.9 million or 4.3%, to $45.1 million at
June 30, 2000 compared with $43.3 million at December 31, 1999.
On June 16, 2000, the Company's wholly-owned subsidiary First
Prosperity Bank (the "Bank") entered into a Purchase and Assumption Agreement
with Compass Bank ("Compass") whereby the Bank will purchase certain assets and
assume certain liabilities of five branches of Compass located in El Campo,
Hitchcock, Needville, Palacios and Sweeny, Texas. Compass' banking locations in
Hitchcock, Needville, Palacios and Sweeny will be operated as branches of the
Bank following consummation of the transaction. The Bank will acquire
approximately $80 million in deposits in the transaction. The Company expects
the transaction to be consummated during the third quarter of 2000.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income was $5.5 million for the quarter ended June 30,
2000 compared with $4.3 million for the quarter ended June 30, 1999, an
increase of $1.2 million, or 27.4%. Net interest income increased as a result
of an increase in average interest-earning assets to $548.4 million for the
quarter ended June 30, 2000 from $421.9
9
<PAGE> 10
million for the quarter ended June 30, 1999, an increase of $126.5 million, or
30.0%. The net interest margin on a tax equivalent basis increased to 4.23%
from 4.16% for the same periods. Net interest income increased $2.6 million, or
31.1%, to $11.0 million for the six months ended June 30, 2000 from $8.4
million for the same period in 1999. This increase is mainly attributable to
higher average interest-earning assets and in December of 1999, the Company
purchased a Qualified Zone Academy Bond ("QZAB") which generates a tax credit
that is included in income.
The Company's net interest income is affected by changes in the
amount and mix of interest-earning assets and interest-bearing liabilities,
referred to as a "volume change." It is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing deposits
and other borrowed funds, referred to as a "rate change."
10
<PAGE> 11
The following tables set forth, for each category of
interest-earning assets and interest-bearing liabilities, the average amounts
outstanding, the interest earned or paid on such amounts, and the average rate
earned or paid for the quarters ended June 30, 2000 and 1999 and the six months
ended June 30, 2000 and 1999. The tables also set forth the average rate paid
on total interest-bearing liabilities, and the net interest margin on average
total interest-earning assets for the same periods.
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (4) Balance Paid Rate (4)
------------- -------- ----------- ---------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans..................................... $ 228,315 $ 5,018 8.84% $ 183,924 $ 3,863 8.42%
Securities(1)............................. 319,789 4,873 6.10 227,676 3,323 5.84
Federal funds sold and other temporary
investments.............................. 274 5 7.22 10,289 122 4.69
---------- --------- ---------- ---------
Total interest-earning assets........... 548,378 9,896 7.24% 421,889 7,308 6.94%
--------- ---------
Less allowance for credit losses.......... (2,873) (1,942)
----------- -----------
Total interest-earning assets, net
of allowance........................... 545,505 419,947
Noninterest-earning assets............. 47,075 33,149
-------- ----------
Total assets............................ $ 592,580 $ 453,096
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.......... $ 68,359 $ 299 1.76% $ 46,814 $ 176 1.51%
Savings and money market accounts......... 140,625 1,308 3.74 121,359 1,002 3.31
Certificates of deposit................... 199,078 2,581 5.21 157,545 1,839 4.68
Federal funds purchased and other
borrowings............................... 14,944 243 6.43 188 2 4.21
---------- --------- ---------- ---------
Total interest-bearing
liabilities............................ 423,006 4,431 4.20% 325,906 3,019 3.72%
---------- --------- ---------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits....... 112,076 82,907
Company-obligated mandatorily
redeemable trust preferred securities
of subsidiary trust.................... 12,000 --
Other liabilities......................... 1,488 1,825
---------- ----------
Total liabilities....................... 548,570 410,638
---------- ----------
Shareholders' equity......................... 44,010 42,458
---------- ----------
Total liabilities and shareholders' equity $ 592,580 $ 453,096
=========== ==========
Net interest rate spread..................... 3.04% 3.22%
Net interest income and margin(2)............ $ 5,465 4.01% $ 4,289 4.08%
========== ===========
(Table continued on following page)
Net interest income and margin
(tax-equivalent basis)(3).................. $ 5,764 4.23% $ 4,375 4.16%
========== ===========
</TABLE>
-----------------------
(1) Yield is based on amortized cost and does not include any component
of unrealized gains or losses.
(2) The net interest margin is equal to net interest income divided by
average interest-earning assets.
(3) In order to make pretax income and resultant yields on tax-exempt
investments and loans comparable to those on taxable investments and
loans, a tax-equivalent adjustment has been computed using a federal
income tax rate of 34%.
(4) Annualized.
11
<PAGE> 12
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (4) Balance Paid Rate (4)
------------- -------- ------- ---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans..................................... $ 226,000 $ 9,814 8.73% $ 178,861 $ 7,456 8.41%
Securities(1)............................. 320,472 9,762 6.09 227,710 6,675 5.86
Federal funds sold and other temporary
investments.............................. 1,585 44 5.49 17,421 422 4.82
---------- --------- --------- ---------
Total interest-earning assets............ 548,057 19,620 7.18% 423,992 14,553 7.16%
---------- ----------
Less allowance for credit losses.......... (2,839) (1,915)
----------- ----------
Total interest-earning assets, net
of allowance........................... 545,218 422.077
Noninterest-earning assets............. 47,808 34,412
-------- ---------
Total assets............................ $ 593,026 $ 456,489
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.......... $ 69,766 $ 598 1.72% $ 49,454 $ 372 1.52%
Savings and money market accounts......... 146,298 2,657 3.65 122,230 2,014 3.32
Certificates of deposit................... 199,864 5,043 5.07 158,573 3,737 4.75
Federal funds purchased and other
borrowings............................... 8,834 282 6.31 322 7 4.32
---------- --------- --------- ---------
Total interest-bearing
liabilities............................ 424,762 8,580 4.06% 330,579 6,130 3.74%
---------- --------- --------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits....... 111,253 81,807
Company-obligated mandatorily
redeemable trust preferred securities
of subsidiary trust................... 12,000 --
Other liabilities......................... 1,518 1,955
---------- ---------
Total liabilities....................... 549,533 414,341
---------- ---------
Shareholders' equity......................... 43,493 42,148
---------- ---------
Total liabilities and shareholders'
equity............................... $ 593,026 $ 456,489
========== =========
Net interest rate spread..................... 3.12% 3.15%
Net interest income and margin(2)............ $ 11,040 4.05% $ 8,423 4.01%
========== ==========
Net interest income and margin
(tax-equivalent basis)(3).................. $ 11,583 4.25% $ 8,597 4.09%
========== ==========
</TABLE>
-----------------------
(1) Yield is based on amortized cost and does not include any component of
unrealized gains or losses.
(2) The net interest margin is equal to net interest income divided by
average interest-earning assets.
(3) In order to make pretax income and resultant yields on tax-exempt
investments and loans comparable to those on taxable investments and
loans, a tax-equivalent adjustment has been computed using a federal
income tax rate of 34%.
(4) Annualized.
12
<PAGE> 13
The following tables present the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates
for the periods indicated. For purposes of these tables, changes attributable
to both rate and volume which cannot be segregated have been allocated to rate.
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------
2000 vs. 1999
------------------------------------------
Increase
(Decrease)
Due to
-------------------------
Volume Rate Total
---------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans.................................................$ 930 $ 225 $ 1,155
Securities............................................ 1,344 206 1,550
Federal funds sold and other temporary
investments......................................... (117) -- (117)
---------- ----------- ------------
Total increase in interest income................... 2,157 431 2,588
---------- ----------- -----------
Interest-bearing liabilities:
Interest-bearing demand deposits...................... 81 42 123
Savings and money market accounts..................... 159 147 306
Certificates of deposit............................... 485 257 742
Federal funds purchased and other borrowings.......... 154 87 241
---------- ----------- -----------
Total increase in interest expense.................. 879 533 1,412
---------- ----------- -----------
Increase (decrease) in net interest income...............$ 1,278 $ (102) $ 1,176
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------
2000 vs. 1999
------------------------------------------
Increase
(Decrease)
Due to
-------------------------
Volume Rate Total
---------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans.................................................$ 1,970 $ 388 $ 2,358
Securities............................................ 2,719 368 3,087
Federal funds sold and other temporary
investments......................................... (386) 8 (378)
----------- ------------ ------------
Total increase in interest income................... 4,303 764 5,067
---------- ------------ -----------
Interest-bearing liabilities:
Interest-bearing demand deposits...................... 153 73 226
Savings and money market accounts..................... 398 245 643
Certificates of deposit............................... 976 330 1,306
Federal funds purchased and other borrowings.......... 186 89 275
---------- ------------ -----------
Total increase in interest expense.................. 1,713 737 2,450
---------- ------------ -----------
Increase in net interest income..........................$ 2,590 $ 27 $ 2,617
========== ============ ===========
</TABLE>
Provision for Credit Losses
Management actively monitors the Company's asset quality and
provides specific loss provisions when necessary. Loans are charged-off against
the provision for credit losses when appropriate. Although management believes
it uses the best information available to make determinations with respect to
the provision for credit losses, future adjustments may be necessary if
economic conditions differ from the assumptions used in making the initial
13
<PAGE> 14
determinations. As of June 30, 2000, the allowance for credit losses amounted
to $2.9 million, or 1.26% of total loans compared with $2.8 million, or 1.23%
of total loans at December 31, 1999.
Provisions for credit losses are charged to income to bring the
total allowance for credit losses to a level deemed appropriate by management
of the Company based on such factors as historical loan loss experience,
industry diversification of the commercial loan portfolio, the amount of
nonperforming loans and related collateral, the volume growth and composition
of the loan portfolio, current economic conditions that may affect the
borrower's ability to pay and the value of collateral, the evaluation of the
loan portfolio through the internal loan review function and other relevant
factors.
The provision for credit losses for the six months ended June 30,
2000 increased $20,000 to $150,000 from $130,000 for the corresponding period
in 1999. The provision for credit losses for the three months ended June 30,
2000 was $75,000, an increase of $10,000 from $65,000 for the same period in
1999.
Noninterest Income
The Company's primary sources of noninterest income are service
charges on deposit accounts and other banking service related fees. The
following table presents, for the periods indicated, the major categories of
noninterest income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
--------- ------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service charges on deposit accounts....... $ 1,089 $ 633 $ 2,145 $ 1,241
Other noninterest income.................. 213 110 405 205
-------- ------- -------- -------
Total noninterest income.................. $ 1,302 $ 743 $ 2,550 $ 1,446
======== ======= ======== ========
</TABLE>
Noninterest income totaled $1.3 million for the three months ended
June 30, 2000 compared with $743,000 for the same period in 1999, an increase
of $559,000, or 75.2%. Noninterest income increased $1.1 million, or 76.4%, to
$2.6 million for the six month period ending June 30, 2000 from $1.4 million
for the same period in 1999. The increase in service charges on deposit
accounts was principally due to the South Texas Acquisition.
Noninterest Expense
Noninterest expense totaled $3.9 million for the quarter ended June
30, 2000 compared with $2.8 million for the quarter ended June 30, 1999, an
increase of $1.2 million, or 42.0%. Noninterest expense totaled $7.9 million
for the six months ended June 30, 2000, an increase of $2.5 million, or 45.2%,
from $5.4 million for the same period in 1999. The increase was primarily due
to the South Texas Acquisition.
14
<PAGE> 15
The following table presents, for the periods indicated, the major
categories of noninterest expense:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits.......................... $ 1,752 $ 1,397 $ 3,588 $ 2,820
Non-staff expenses:
Net occupancy expense.............................. 189 165 379 290
Depreciation....................................... 233 87 466 173
Data processing.................................... 248 217 537 417
Professional fees.................................. 86 59 147 98
Regulatory assessments and FDIC insurance.......... 43 21 84 42
Ad valorem and franchise taxes..................... 77 51 151 99
Goodwill amortization.............................. 264 162 529 323
Minority interest trust preferred securities....... 288 -- 575 --
Other.............................................. 740 602 1,433 1,173
---------- ----------- ----------- ---------
Total non-staff expenses................................ 2,168 1,364 4,301 2,615
Total noninterest expense............................... $ 3,920 $ 2,761 $ 7,889 $ 5,435
========== =========== =========== ===========
</TABLE>
Salaries and employee benefit expenses were $1.8 million for the
quarter ended June 30, 2000 compared with $1.4 million for the quarter ended
June 30, 1999, an increase of $355,000, or 25.4%, For the six month period
ended June 30, 2000, salaries and employee benefits totaled $3.6 million, an
increase of $768,000, or 27.2%, from $2.8 million for the six month period
ending June 30, 1999. The change was due primarily to an increase in the number
of employees due to the South Texas Acquisition and annual employee salary
increases.
Non-staff expenses increased $804,000, or 58.9%, to $2.2 million for
the quarter ended June 30, 2000 compared with the same period in 1999. For the
six month period ended June 30, 2000, non-staff expenses increased $1.7
million, or 64.5%, to $4.3 million from $2.6 million for the same period in
1999. The increase was principally due to the South Texas Acquisition.
Income Taxes
Income tax expense increased $234,000, or 17.1%, to $1.6 million for
the six months ended June 30, 2000 from $1.4 million for the same period in
1999. For the three month period ended June 30, 1999, income tax expense
increased $86,000, or 12.2%, to $789,000 from $703,000 for the same period in
1999. Both increases were primarily attributable to higher pretax net earnings.
FINANCIAL CONDITION
Loan Portfolio
Total loans were $231.2 million at June 30, 2000, an increase of
$7.7 million, or 3.4% from $223.5 million at December 31, 1999. Loan growth
occurred primarily in consumer and agricultural loans. Period end loans
comprised 42.2% of average earning assets at June 30, 2000 compared with 49.7%
at December 31, 1999.
15
<PAGE> 16
The following table summarizes the loan portfolio of the Company by
type of loan as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------- --------------------
Amount Percent Amount Percent
---------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial.......... $ 24,215 10.5% $ 28,279 12.7%
Real estate:
Construction and land
development................. 4,341 1.9 4,015 1.8
1-4 family residential........... 99,254 42.9 97,359 43.5
Home equity...................... 13,080 5.7 11,343 5.1
Commercial mortgages............. 40,840 17.7 38,752 17.3
Farmland......................... 7,549 3.3 7,404 3.3
Multifamily residential.......... 1,015 0.4 1,837 0.8
Agriculture........................ 18,572 8.0 12,735 5.7
Consumer........................... 22,313 9.6 21,781 9.8
--------- ----- -------- -----
Total loans................... $231,179 100.0% $ 223,505 100.0%
======== ===== ========== =====
</TABLE>
Nonperforming Assets
The Company had no nonperforming assets for the periods ended June
30, 2000 and December 31, 1999. The Company generally places a loan on
nonaccrual status and ceases accruing interest when the payment of principal or
interest is delinquent for 90 days, or earlier in some cases, unless the loan
is in the process of collection and the underlying collateral fully supports
the carrying value of the loan. The Company generally charges off all loans
before attaining nonaccrual status.
The following table presents information regarding nonperforming
assets as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans........................... $ -- $ --
Accruing loans 90 or more days past due.... -- --
------- --------
Total nonperforming loans.................. -- --
Other real estate.......................... -- --
------- --------
Total nonperforming assets................. $ -- $ --
======= ========
</TABLE>
Allowance for Credit Losses
Management actively monitors the Company's asset quality and
provides specific loss allowances when necessary. Loans are charged-off against
the allowance for credit losses when appropriate. Although management believes
it uses the best information available to make determinations with respect to
the allowance for credit losses, future adjustments may be necessary if
economic conditions differ from the assumptions used in making the initial
determinations. As of June 30, 2000, the allowance for credit losses amounted
to $2.9 million, or 1.26% of total loans compared with $2.8 million, or 1.23%
of total loans at December 31, 1999.
16
<PAGE> 17
Set forth below is an analysis of the allowance for credit losses for the
periods indicated:
<TABLE>
<CAPTION>
As of June 30, As of December 31,
--------------- ------------------
2000 1999
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding.................................. $ 226,000 $ 193,687
=========== ===========
Gross loans outstanding at end of period................... $ 231,179 $ 223,505
=========== ===========
Allowance for credit losses at
beginning of period...................................... $ 2,753 $ 1,850
Balance acquired with the South Texas Acquisition.......... -- 566
Provision for credit losses................................ 150 280
Charge-offs:
Commercial and industrial................................ (13) (13)
Real estate and agriculture.............................. (25) (43)
Consumer................................................. (9) (55)
Recoveries:
Commercial and industrial................................ 3 34
Real estate and agriculture.............................. 40 117
Consumer................................................. 20 17
--------- ----------
Net recoveries (charge-offs)............................... 16 57
--------- ----------
Allowance for credit losses at end of period............... $ 2,919 $ 2,753
========= ==========
Ratio of allowance to end of period loans.................. 1.26 % 1.23%
Ratio of net (recoveries) charge-offs to average
loans.................................................... (0.01) (0.03)
Ratio of allowance to end of period
nonperforming loans...................................... -- --
</TABLE>
Securities
Securities totaled $308.2 million at June 30, 2000 compared with
$312.7 million at December 31, 1999, a decrease of $4.5 million, or 1.4%. At
June 30, 2000, securities represented 52.1% of total assets compared with 51.4%
of total assets at December 31, 1999.
Premises and Equipment
Premises and equipment, net of accumulated depreciation, totaled
$9.6 million at June 30, 2000 and $9.8 million at December 31, 1999.
Deposits
Total deposits were $517.1 million at June 30, 2000 compared with
$534.8 million at December 31, 1999, a decrease of $17.7 million. The decrease
was principally due to the withdrawal of funds by one business customer. At
June 30, 2000, noninterest-bearing deposits accounted for approximately 23.3%
of total deposits compared with 21.2% of total deposits at December 31, 1999.
Interest-bearing deposits totaled $396.8 million, or 76.7%, of total deposits
at June 30, 2000 compared with $421.2 million, or 78.8%, of total deposits at
December 31, 1999.
17
<PAGE> 18
Other Borrowings
The Company had $14.6 million in Federal Home Loan Bank ("FHLB")
advances at June 30, 2000, compared with $5.7 million in FHLB advances at
December 31, 1999. The Company had no federal funds purchased at June 30, 2000
and had $10.0 million in federal funds purchased at December 31, 1999.
Liquidity
Effective management of balance sheet liquidity is necessary to fund
growth in earning assets and to pay liability maturities, depository customers'
withdrawal requirements and shareholders' dividends. Thc Company has numerous
sources of liquidity including a significant portfolio of shorter-term assets,
marketable investment securities (excluding those presently classified as
"held-to-maturity"), increases in customers' deposits, and access to borrowing
arrangements. Available borrowing arrangements maintained by the Company
include federal funds lines with other commercial banks and an advancement
arrangement with the FHLB.
Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. As of June 30, 2000, the
Company had cash and cash equivalents of $16.7 million, down from $36.8 million
at December 31, 1999. The decline was due primarily to an increase in loans and
a decrease in federal funds sold.
Capital Resources
Total shareholders' equity was $45.1 million at June 30, 2000
compared with $43.3 million at December 31, 1999, an increase of $1.8 million,
or 4.2%. The increase was primarily due to net earnings of $4.0 million, offset
by cash dividends paid of $941,000 and a net change in unrealized loss on
available for sale securities of $1.3 million, for the six months ended June
30, 2000.
Both the Board of Governors of the Federal Reserve System, with
respect to the Company, and the Federal Deposit Insurance Corporation ("FDIC"),
with respect to the Bank, have established certain minimum risk-based capital
standards that apply to bank holding companies and federally insured banks. As
of June 30, 2000, the Company's risk-based capital ratios were above the levels
required for the Company to be designated as "well capitalized", with Tier 1
capital, total risk-based capital and leverage capital ratios of 16.75%, 17.91%
and 7.39%, respectively. As of June 30, 2000, the Bank's risk-based capital
ratios were above the levels required for the Bank to be designated as "well
capitalized" by the FDIC, with Tier-1 capital, total risk-based capital and
leverage capital ratios of 16.00%, 17.16% and 7.06%, respectively.
Year 2000 Compliance
The Company suffered no failures of any system or product through
the end of the year 1999 and into the year 2000. During 2000, the Company's
Year 2000 project team will continue to monitor the Company's computer systems
and products and the Year 2000 compliance of the third parties with which the
Company transacts business in an attempt to identify and potential problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manages market risk, which for the Company is primarily
interest rate risk, through its Asset Liability Committee which is composed of
senior officers of the Company, in accordance with policies approved by the
Company's Board of Directors.
The Company uses simulation analysis to examine the potential
effects of market changes on net interest income and market value. It considers
macroeconomic variables, Company strategy, liquidity and other factors as it
quantifies market risk. There have been no material changes of this nature
since the Company's Form 10-K filing on March 8, 2000. See Form 10-K, Item 7
"Management's Discussion and Analysis and Results of Operations-Interest Rate
Sensitivity and Liquidity".
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Not applicable
c. Not applicable
d. Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 18, 2000, the Company held its Annual Meeting of
Shareholders to consider and act upon the following items:
1. Harry Bayne, James A. Bouligny and Robert Steelhammer were
elected as Class II directors to serve on the Board of
Directors of the Company until the Company's 2003 Annual
Meeting of Shareholders and until their successors are duly
elected and qualified. A total of 4,238,913 shares were voted
in favor of the election of each Class II director and 5,220
shares were withheld from voting for each director.
The other directors whose term of office as a director
continued after the meeting include: Tracy T. Rudolph, David
Zalman J.T. Herin, Charles M. Slavik and Harrison Stafford.
2. The shareholders ratified the appointment of Deloitte & Touche
LLP as the independent auditors of the books and accounts of
the Company for the year ending December 31, 2000. A total of
4,213,173 shares were voted in favor of the appointment, 0
shares were voted against the appointment and 30,960 shares
abstained from voting.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit 27 Financial Data Schedule
b. No reports on Form 8-K were filed by the Company during the
three months ended June 30, 2000.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROSPERITY BANCSHARES, INC.
(Registrant)
Date: August 8, 2000 /s/ DAVID ZALMAN
------------------ ------------------------------
David Zalman
President/Secretary
Date: August 8, 2000 /s/ DAVID HOLLAWAY
------------------ ------------------------------
David Hollaway
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
Exhibit
Number Description
---------- -----------
Exhibit 27 Financial Data Schedule
