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FORM 10-Q
UNITED STATES
(Mark One) SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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.SM
(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.)
4295 San Felipe
Houston, Texas 77027
(Address of principal executive offices, including zip code)
(713) 693-9300
(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 August 1, 2002, there were 16,279,370 shares of the registrant's Common
Stock, par value $1.00 per share, outstanding.
1
PROSPERITY BANCSHARES, INC.SM AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements .................................................. 3
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
December 31, 2001 .......................................................... 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2002 and 2001 (unaudited) ................................... 4
Consolidated Statements of Shareholders' Equity for the Year Ended December 31,
2001 and for the Six Months Ended June 30, 2002 (unaudited) ................ 5
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2002 and 2001 (unaudited) .............................................. 6
Notes to Interim Consolidated Financial Statements ............................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk .................... 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................................. 20
Item 2. Changes in Securities and Use of Proceeds ..................................... 20
Item 3. Defaults upon Senior Securities ............................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ........................... 20
Item 5. Other Information ............................................................. 21
Item 6. Exhibits and Reports on Form 8-K .............................................. 21
Signatures ............................................................................. 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
PROSPERITY BANCSHARES, INC.SM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
--------- ------------
(unaudited)
(Dollars in thousands,
except share data)
ASSETS
Cash and due from banks ...................................................... $ 29,211 $ 41,005
Federal funds sold ........................................................... 13,224 715
----------- -----------
Total cash and cash equivalents .......................................... 42,435 41,720
Interest-bearing deposits in financial institutions .......................... 198 198
Available for sale securities, at fair value (amortized cost
of $228,191 (unaudited) and $481,899, respectively) ..................... 229,842 482,233
Held to maturity securities, at cost (fair value of $566,992
(unaudited) and $274,227, respectively) ................................... 556,017 270,089
Loans ........................................................................ 478,935 424,400
Less allowance for credit losses ............................................. (6,869) (5,985)
----------- -----------
Loans, net ..................................................... 472,066 418,415
Accrued interest receivable .................................................. 9,014 8,466
Goodwill (net of accumulated amortization of $6,354
(unaudited) and $6,354, respectively) ..................................... 25,953 22,641
Core Deposit Intangibles (net of accumulated amortization
of $4 and $0) ........................................................... 272 --
Bank premises and equipment, net ............................................. 16,250 15,077
Other real estate owned ...................................................... 157 --
Other assets ................................................................. 8,152 3,486
----------- -----------
TOTAL ASSETS ................................................................. $ 1,360,356 $ 1,262,325
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES:
Deposits:
Noninterest-bearing ................................................... $ 198,022 $ 188,832
Interest-bearing ...................................................... 1,013,911 934,565
----------- -----------
Total deposits ................................................. 1,211,933 1,123,397
Federal funds purchased ................................................... -- --
Other borrowings .......................................................... 15,477 18,080
Accrued interest payable .................................................. 2,451 2,869
Other liabilities ......................................................... 6,115 2,254
----------- -----------
Total liabilities .............................................. 1,235,976 1,146,600
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS ................................................................... 27,000 27,000
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par value; 50,000,000 shares authorized; 16,277,222
(unaudited) and 16,218,022, shares issued at June 30, 2002 and December
31, 2001, respectively; 16,270,070 (unaudited) and 16,210,870 shares
outstanding at June 30, 2002 and December 31, 2001, respectively ...... 16,277 16,218
Capital surplus ........................................................... 16,953 16,865
Retained earnings ......................................................... 62,959 55,462
Accumulated other comprehensive income -- net
unrealized gain on available for sale securities, net
of tax of $661 (unaudited) and $117, respectively ................. 1,228 217
Less treasury stock, at cost, 7,152 shares at June 30,
2002 (unaudited) and December 31, 2001 ............................ (37) (37)
----------- -----------
Total shareholders' equity ..................................... 97,380 88,725
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 1,360,356 $ 1,262,325
=========== ===========
See notes to interim consolidated financial statements.
3
PROSPERITY BANCSHARES, INC.SM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------
2002 2001 2002 2001
----------- --------- --------- --------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees ...................... $ 8,361 $ 8,866 $ 16,117 $ 17,739
Securities:
Taxable. .................................. 10,073 9,415 19,887 18,193
Nontaxable ................................ 378 411 768 789
70% nontaxable preferred dividends ........ 264 344 616 655
Deposits in financial institutions ......... 2 7 6 22
Federal funds sold. ........................ 28 100 92 1,065
--------- --------- --------- --------
Total interest income. ................... 19,106 19,143 37,486 38,463
--------- --------- --------- --------
INTEREST EXPENSE:
Deposits. ................................ 6,040 9,085 12,189 18,851
Note payable and federal funds sold ...... 243 322 450 575
Other .................................... -- -- -- --
--------- --------- --------- --------
Total interest expense ................. 6,283 9,407 12,639 19,426
--------- --------- --------- --------
NET INTEREST INCOME .................... 12,823 9,736 24,847 19,037
PROVISION FOR CREDIT LOSSES ................ 120 -- 240 --
--------- --------- --------- --------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES ............. 12,703 9,736 24,607 19,037
--------- --------- --------- --------
NONINTEREST INCOME:
Customer service fees .................... 2,001 1,789 3,859 3,577
Other .................................... 325 269 628 516
--------- --------- --------- --------
Total noninterest income ................ 2,326 2,058 4,487 4,093
-------- --------- --------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits ........... 3,405 3,177 7,314 6,512
Net occupancy expense .................... 516 474 995 990
Data processing .......................... 506 520 963 1,025
Core deposit intangible and goodwill
amortization ........................... 4 340 4 681
Depreciation expense. .................... 398 383 771 798
Minority interest trust preferred
securities ............................. 496 288 994 576
Merger related expenses .................. -- -- -- 2,425
Other .................................... 2,800 1,555 4,746 2,859
--------- --------- --------- --------
Total noninterest expense. .............. 8,125 6,737 15,787 15,866
--------- --------- --------- --------
INCOME BEFORE INCOME TAXES. ................ 6,904 5,057 13,307 7,264
PROVISION FOR INCOME TAXES ................. 2,109 1,487 4,021 2,027
--------- --------- --------- --------
NET INCOME. ................................ $ 4,795 $ 3,570 $ 9,286 $ 5,237
========= ========= ========= ========
EARNINGS PER SHARE
Basic ...................................... $ 0.30 $ 0.22 $ 0.57 $ 0.32
========= ========= ========= ========
Diluted .................................... $ 0.29 $ 0.22 $ 0.56 $ 0.32
========= ========= ========= ========
See notes to interim consolidated financial statements.
4
PROSPERITY BANCSHARES, INC.SM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Comprehensive
Income -- Net
Unrealized Gain
Common Stock (Loss) on Avail- Total
------------------- Capital Retained able for Sale Treasury Shareholders'
Shares Amount Surplus Earnings Securities Stock Equity
-------- -------- ------- -------- ---------- ----- ------
(Amounts in thousands, except share data)
BALANCE AT JANUARY 1, 2001............... 16,150,972 $16,151 $17,949 $45,665 $ 605 $(37) $80,333
Net income............................... 12,958 12,958
Net change in unrealized gain on
available for sale securities........ (388) (388)
-------
Total comprehensive income............. 12,570
-------
Cash paid to dissenting shareholders
in connection with the issuance of
common stock in exchange for common
stock of Commercial Bancshares, Inc.. (63,550) (64) (783) (847)
Trust preferred issuance costs....... (476) (476)
Sale of common stock................... 130,600 131 175 306
Cash dividends declared................ (3,161) (3,161)
---------- ------- ------- ------- ------ ---- -------
BALANCE AT DECEMBER 31, 2001............. 16,218,022 $16,218 $16,865 $55,462 $ 217 $(37) $88,725
Net income (unaudited)................. 9,286 9,285
Net change in unrealized gain on
available for sale securities
(unaudited).......................... 1,011 1,011
Total comprehensive income (unaudited).. 10,296
------
Sale of common stock (unaudited)....... 59,200 59 88 147
Cash dividends declared (unaudited).... (1,789) (1,788)
---------- ------- ------- ------- ------ ---- -------
BALANCE AT JUNE 30, 2002
(unaudited)......................... 16,277,222 $16,277 $16,953 $62,959 $1,228 $(37) $97,380
========== ======= ======= ======= ====== ==== =======
See notes to interim consolidated financial statements.
5
PROSPERITY BANCSHARES, INC.SM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
----------------------------
2002 2001
---------- ----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. ............................................. $ 9,286 $ 5,237
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ......................... 775 1,480
Provision for credit losses ........................... 240 --
Loss on sale of premises and equipment ................ 6 341
Gain on sale of other real estate .................... (67) --
Net amortization of premium/discount on investments .. 1,601 133
(Increase) decrease in accrued interest receivable
and other assets ................................... (3,252) 1,807
Increase in accrued interest payable
and other liabilities ............................... 1,747 654
--------- ---------
Total adjustments ................................... 1,050 4,415
--------- ---------
Net cash provided by operating activities ........... 10,336 9,652
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal
paydowns of held to maturity securities ............... 64,157 131,010
Purchase of held to maturity securities ................. (105,313) --
Proceeds from maturities and principal
paydowns of available for sale securities ............. 52,227 40,746
Purchase of available for sale securities ............... (31,912) (232,446)
Net increase in loans ................................... (9,086) (18,932)
Purchase of bank premises and equipment ................. (1,009) (1,028)
Proceeds from sale of bank premises and equipment
and other real estate acquired by foreclosure ....... 861 557
Premium paid for the purchase of Texas Guaranty
Bank N.A. ........................................... (3,318) --
Net liabilities acquired in the purchase of Texas
Guaranty Bank, N.A. (net of cash of $12,723) ........ 3,815 --
--------- ---------
Net cash used in investing activities ................. (29,578) (80,093)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in noninterest-bearing deposits. ......... (2,960) (7,864)
Net increase in interest-bearing deposits ............... 29,662 24,688
Repayments of line of credit. ........................... (5,103) (308)
Cash paid to dissenting shareholders .................... -- (847)
Payments of cash dividends. ............................. (1,789) (1,542)
Sale of common stock .................................... 147 247
--------- ---------
Net cash provided by financing activities .......... 19,957 14,374
--------- ---------
NET INCREASE (DECREASE) OF CASH AND CASH EQUIVALENTS. ...... $ 715 $ (56,067)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............. 41,720 99,163
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD. .................. $ 42,435 $ 43,096
========= =========
See notes to interim consolidated financial statements.
6
PROSPERITY BANCSHARES, INC.SM AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements include the accounts of
Prosperity Bancshares, Inc. SM (the "Company") and its wholly-owned
subsidiaries, Prosperity Bank SM (the "Bank") and Prosperity Holdings, Inc. On
May 31, 2002, Prosperity completed a two-for-one stock split effected in the
form of a 100 percent stock dividend. All prior period per share and share data
have been restated to reflect this split. All significant inter-company
transactions and balances have been eliminated.
The accompanying unaudited interim 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 Annual Report on Form 10-K for the year ended December 31, 2001.
Operating results for the six month period ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
2. INCOME PER COMMON SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
Net income available to common shareholders .......... $ 4,795 $ 3,570 $ 9,286 $ 5,237
Weighted average common shares outstanding ........ 16,245 16,180 16,236 16,146
Potential dilutive common shares .................. 329 304 331 322
-------- --------- --------- ---------
Weighted average common shares and equivalents
outstanding .................................. 16,574 16,484 16,567 16,468
-------- --------- --------- ---------
Basic earnings per common share ................... $ 0.30 $ 0.22 $ 0.57 $ 0.32
======== ========= ========= =========
Diluted earnings per common share ................. $ 0.29 $ 0.22 $ 0.56 $ 0.32
======== ========= ========= =========
7
PROSPERITY BANCSHARES, INC.(SM) AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets," which addresses the accounting for goodwill and other
intangible assets. SFAS 142 specifies that, among other things, intangible
assets with an indefinite useful life and goodwill will no longer be amortized.
The standard requires goodwill to be periodically tested for impairment and
written down to fair value if considered impaired. The provisions of SFAS 142
were effective for fiscal years beginning after December 15, 2001. For the six
months ended June 30, 2002, the Company did not record approximately $680,000 in
goodwill amortization that would have been recorded prior to adoption of SFAS
142.
In July 2001, FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. The statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after September 15, 2002, with earlier
application encouraged. The adoption this statement is not expected to have a
material impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-lived Assets. SFAS 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. It supersedes, with exceptions, SFAS 121, Accounting for the
Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of, and is
effective for fiscal years beginning after December 15, 2001. Management
believes the adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
4. RECENT MERGER ACTIVITY
On July 15, 2002, the Company announced the signing of a definitive
agreement pursuant to which Southwest Bank Holding Company, Dallas, Texas
("Southwest") will merge with and into the Company and Bank of the Southwest,
Dallas, Texas will become a subsidiary of the Company. Under the terms of the
agreement, the Company will pay approximately $21.0 million in cash. Bank of the
Southwest is privately held and operates two (2) banking offices in Dallas,
Texas. As of June 30, 2002, Bank of the Southwest had total assets of $129.6
million, loans of $55.3 million, deposits of $114.3 million and shareholders'
equity of $14.7 million. The transaction is expected to close before December
31, 2002 and is subject to approval by Bank of the Southwest shareholders,
approval by regulators and certain closing conditions.
On July 12, 2002, the Company completed the acquisition of The First State
Bank, Needville, Texas (the "First State Acquisition") in a cash transaction.
The Company's existing Needville Banking Center has relocated into the former
First State Bank location effective July 15, 2002. As of June 30, 2002, The
First State Bank had total assets of $16.6 million, loans of $5.5 million,
deposits of $14.2 million and shareholders' equity of $2.2 million.
On May 8, 2002, the Company completed the acquisition of Texas Guaranty
Bank, N.A. (the "Texas Guaranty Acquisition") in a cash transaction. Texas
Guaranty operated three offices in Houston, Texas, all of which became full
service banking centers of the Company. As of the date of closing, Texas
Guaranty Bank, N.A. had total assets of $74.0 million, loans of $45.7 million,
deposits of $61.8 million and shareholders' equity of $8.6 million.
On May 2, 2002, the Company announced that it had entered into a definitive
agreement pursuant to which Paradigm Bancorporation, Inc. ("Paradigm") will be
merged into the Company and Paradigm's subsidiary bank,
8
Paradigm Bank Texas, will be merged into the Bank. Under terms of the agreement,
Prosperity will issue approximately 2.58 million shares of its common stock for
all outstanding shares of Paradigm (giving effect to the two for one stock
split). Paradigm operates a total of eleven (11) banking offices - six (6) in
metropolitan Houston and five (5) in the nearby Southeast Texas cities of
Dayton, Galveston, Mont Belvieu, and Winnie. As of June 30, 2002, Paradigm had
total assets of $250.3 million, total loans of $175.3 million, total deposits of
$219.7 million and shareholders' equity of $19.3 million. The transaction is
expected to close before September 30, 2002 and is subject to approval by
Paradigm shareholders, approval by regulators and certain closing conditions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Special Cautionary Notice Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in the Form 10-Q
that are not historical facts are forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are based on assumptions and involve a number
of risks and uncertainties, many of which are beyond the Company's control. The
important factors that could cause actual results to differ materially from the
forward-looking statements include, without limitation:
o changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;
o changes in the levels of loan prepayments and the resulting effects on
the value of the Company's loan portfolio;
o changes in local economic and business conditions which adversely
affect the Company's customers and their ability to transact
profitable business with the company, including the ability of the
Company's borrowers to repay their loans according to their terms or a
change in the value of the related collateral;
o increased competition for deposits and loans adversely affecting rates
and terms;
o the timing, impact and other uncertainties of future acquisitions,
including the Company's ability to identify suitable future
acquisition candidates, the success or failure in the integration of
their operations, and the ability to enter new markets successfully
and capitalize on growth opportunities;
o increased credit risk in the Company's assets and increased operating
risk caused by a material change in commercial, consumer and/or real
estate loans as a percentage of the total loan portfolio;
o the failure of assumptions underlying the establishment of and
provisions made to the allowance for credit losses;
o changes in the availability of funds resulting in increased costs or
reduced liquidity;
o increased asset levels and changes in the composition of assets and
the resulting impact on the Company's capital levels and regulatory
capital ratios;
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;
o changes in statutes and government regulations or their
interpretations applicable to financial holding companies and the
Company's present and future banking and other subsidiaries, including
changes in tax requirements and tax rates; and
o other risks and uncertainties listed from time to time in the
Company's reports and documents filed with the Securities and Exchange
Commission.
9
The Company undertakes no obligation to publicly update or otherwise revise
any forward-looking statements, whether as a result of new information, future
events or otherwise, unless the securities laws require the Company to do so.
STOCK SPLIT
On May 8, 2002, the Company announced a two-for-one stock split effected in
the form of a 100 percent stock dividend to shareholders of record on May 20,
2002 and was effective on May 31, 2002. The Company's Common Stock outstanding
increased to approximately 16.2 million shares after the split. All per share
and share information has been restated to reflect this split.
OVERVIEW
The Company is a registered financial holding company that derives
substantially all of its revenues and income from the operation of Prosperity
BankSM. The Bank, which changed its name from First Prosperity BankSM on May 1,
2001, is a full-service bank that provides a broad line of financial products
and services to small and medium-sized businesses and consumers through 32
full-service banking locations in the greater Houston metropolitan area and
fourteen contiguous counties situated south and southwest of Houston and
extending into South Texas.
Total assets were $1.36 billion at June 30, 2002 compared with $1.26
billion at December 31, 2001. Total loans increased to $478.9 million at June
30, 2002 from $424.4 million at December 31, 2001, an increase of $54.5 million,
or 12.9%. Loans from the Texas Guaranty Acquisition totaled $45.7 million. Total
deposits were $1.21 billion at June 30, 2002 compared with $1.12 billion at
December 31, 2001, a increase of $88.5 million, or 7.9%. Shareholders' equity
increased $8.7 million or 9.8%, to $97.4 million at June 30, 2002 compared with
$88.7 million at December 31, 2001.
RESULTS OF OPERATIONS AS REPORTED
Net income available to common shareholders was $4.8 million ($0.29 per
common share on a diluted basis) for the quarter ended June 30, 2002 compared
with $3.6 million ($0.22 per common share on a diluted basis) for the quarter
ended June 30, 2001, an increase of $1.2 million, or 34.3%. The Company posted
returns on average common equity of 20.16% and 17.30%, returns on average assets
of 1.43% and 1.22% and efficiency ratios of 52.06% and 56.05% for the quarters
ended June 30, 2002 and 2001, respectively.
For the six months ended June 30, 2002, net income available to common
shareholders was $9.3 million ($0.56 per common share on a diluted basis)
compared with $5.2 million ($0.32 per common share on a diluted basis) for the
same period in 2001, an increase of $4.1 million or 77.3%. The Company posted
returns on average common equity of 19.77% and 12.72%, returns on average assets
of 1.42% and 0.90% and efficiency ratios of 52.20% and 67.79% for the six months
ended June 30, 2002 and 2001, respectively. The increase in earnings per share,
ROAA, ROAE and the efficiency ratio for the six months ended June 30, 2002
compared with the same period in 2001 was primarily due to $2.4 million in
pre-tax merger-related expenses and other charges incurred in connection with
the merger of Commercial Bancshares, Inc. ("the Commercial Merger") into the
Company on February 23, 2001 which was accounted for as a pooling of interests.
Results of Operations Excluding Merger-Related Expenses
Net income for the six months ended June 30, 2002 was $9.3 million ($0.56
per common share on a diluted basis) compared with net income of $6.8 million
($0.42 per common share on a diluted basis) for the six months ended June 30,
2001, an increase of $2.5 million or 36.3%. The net income for the six months
ended June 30, 2001 of $6.8 million does not include the pre-tax merger-related
expenses of $2.4 million incurred in connection with the Commercial Merger.
Excluding the merger-related expenses in 2001, the Company would have posted
returns on average common equity of 19.77% and 16.54%, returns on average assets
of 1.42% and 1.17% and efficiency ratios of 52.20% and 57.04% for the six months
ended June 30, 2002 and 2001, respectively.
10
Net Interest Income
Net interest income was $12.8 million for the quarter ended June 30, 2002
compared with $9.7 million for the quarter ended June 30, 2001, an increase of
$3.1 million, or 31.7%. Net interest income increased as a result of an increase
in average interest-earning assets to $1.26 billion for the quarter ended June
30, 2002 from $1.09 billion for the quarter ended June 30, 2001, an increase of
$168.5 million, or 15.4%. The net interest margin on a tax-equivalent basis
increased to 4.21% from 3.74% for the same periods principally due to a 182
basis point decrease in the rate paid on interest-bearing liabilities from 4.28%
for the quarter ended June 30, 2001 to 2.46% for the quarter ended June 30,
2002, partially offset by a 94 basis point decrease in the yield on earning
assets from 6.99% for the quarter ended June 30, 2001 to 6.05% for the quarter
ended June 30, 2002.
Net interest income increased $5.8 million, or 30.5%, to $24.8 million for
the six months ended June 30, 2002 from $19.0 million for the same period in
2001. This increase is mainly attributable to higher average interest-earning
assets. The net interest margin on a tax-equivalent basis increased to 4.17%
from 3.67% for the same periods principally due to a 191 basis point decrease in
the rate paid on interest-bearing liabilities from 4.44% for the six months
ended June 30, 2001 to 2.53% for the six months ended June 30, 2002, partially
offset by a 103 basis point decrease in the yield on earning assets from 7.10%
for the six months ended June 30, 2001 to 6.07% for the six months ended June
30, 2002.
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 quarter ended June 30, 2002 and 2001 and for the six months ended June 30,
2002 and 2001, respectively. The tables also set forth the net interest margin
on average total interest-earning assets for the same periods. Except as
indicated in the footnotes, no tax-equivalent adjustments were made and all
average balances are daily average balances. Any nonaccruing loans have been
included in the table as loans carrying a zero yield.
Three Months Ended June 30,
-----------------------------------------------------------------
2002 2001
----------------------------- ----------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (4) Balance Paid Rate (4)
----------- ------- --------- --------- ------ --------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans. ............................ $ 456,520 $ 8,361 7.33% $ 425,747 8,866 8.33%
Securities(1). .................... 799,286 10,719 5.36 661,122 10,170 6.15
Federal funds sold and other
temporary investments ............ 7,575 26 1.37 8,010 107 5.34
--------- -------- --------- -------
Total interest-earning assets.... 1,263,381 19,106 6.05% 1,094,879 19,143 6.99%
-------- -------
Less allowance for credit losses... (6,498) (5,598)
--------- ---------
Total interest-earning assets,
net of allowance. .............. 1,256,883 1,089,281
Noninterest-earning assets ..... 85,386 76,671
-------- ---------
Total assets .................... $1,342,269 $1,165,952
========= ==========
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 238,509 $ 792 1.33% $ 190,484 $ 1,196 2.51%
Savings and money market accounts.. 286,168 1,249 1.75 241,164 2,057 3.41
Certificates of deposit. .......... 476,364 3,999 3.36 424,493 5,832 5.50
Federal funds purchased and other
borrowings. ...................... 20,676 243 4.70 23,476 322 5.49
--------- -------- --------- -------
Total interest-bearing
liabilities .................... 1,021,717 6,283 2.46% 879,617 9,407 4.28%
--------- -------- --------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 190,008 184,431
Company-obligated mandatorily
redeemable trust preferred
securities of subsidiary
trusts ......................... 27,000 12,000
Other liabilities. ................ 8,408 7,366
------- -------
Total liabilities. .............. 1,247,133 1,083,414
--------- ---------
Shareholders' equity ................ 95,136 82,538
--------- ---------
Total liabilities and
shareholders' equity .......... $1,342,269 $1,165,952
========== ==========
Net interest rate spread ............ 3.59% 2.71%
Net interest income and margin(2).... $ 12,823 4.06% $ 9,736 3.56%
========= ========
Net interest income and margin
(tax-equivalent basis)(3) .......... $ 13,287 4.21% $ 10,244 3.74%
========= ========
- ------------------------
(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 35%.
(4) Annualized.
12
Six Months Ended June 30,
--------------------------------------------------------------------
2002 2001
----------------------------- -------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (4) Balance Paid Rate (4)
----------- ------- --------- --------- ------ -----------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans. ........................... $ 436,918 $16,117 7.38% $ 416,609 $17,739 8.52%
Securities(1). ................... 787,022 21,277 5.41 627,824 19,637 6.26
Federal funds sold and other
temporary investments ........... 11,908 92 1.55 39,175 1,087 5.55
---------- ------- ---------- -------
Total interest-earning assets. .. 1,235,848 37,486 6.07% 1,038,608 38,463 7.10%
------- -------
Less allowance for credit losses . (6,272) (5,563)
---------- ----------
Total interest-earning assets,
net of allowance. ............. 1,229,576 1,078,045
Noninterest-earning assets .... 82,312 82,545
---------- ----------
Total assets ................... $1,311,888 $1,160,590
========== ==========
Liabilities and shareholders'
equity
Interest-bearing liabilities:
Interest-bearing demand deposits . $ 238,836 $ 1,585 1.33% $ 193,994 $ 2,685 2.77%
Savings and money market accounts. 282,005 2,498 1.77 244,755 4,426 3.62
Certificates of deposit. ......... 459,352 8,106 3.53 417,143 11,740 5.63
Federal funds purchased and other
borrowings. ..................... 17,323 450 5.20 20,091 575 5.72
---------- ------- ---------- -------
Total interest-bearing
liabilities ................... 997,516 12,639 2.53% 875,983 19,426 4.44%
---------- ------- ---------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits ....................... 185,701 181,916
Company-obligated mandatorily
redeemable trust preferred
securities of subsidiary
trusts ....................... 27,000 12,000
Other liabilities. ............... 7,719 8,324
---------- ----------
Total liabilities. ............. 1,217,936 1,078,223
---------- ----------
Shareholders' equity ............... 93,952 82,367
---------- ----------
Total liabilities and
shareholders' equity. ......... $1,311,888 $1,160,590
========== ==========
Net interest rate spread ........... 3.53% 2.66%
Net interest income and margin(2). . $24,847 4.02% $ 19,037 3.51%
======= ========
Net interest income and margin
(tax-equivalent basis)(3) ......... $25,791 4.17% $ 19,905 3.67%
======= ========
- ---------------------------
(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 35%.
(4) Annualized.
13
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
a "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a "rate change."
The following tables 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 distinguish 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.
Three Months Ended June 30,
-----------------------------------
2002 vs. 2001
-----------------------------------
Increase
(Decrease)
Due to
----------------------
Volume Rate Total
--------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans..................................... $ 641 $(1,146) $ (505)
Securities................................ 2,125 (1,576) 549
Federal funds sold and other temporary
investments............................. (6) (75) (81)
------ ------- -------
Total increase (decrease) in interest
income................................ 2,760 (2,797) (37)
------ ------- -------
Interest-bearing liabilities:
Interest-bearing demand deposits.......... 302 (706) (404)
Savings and money market accounts......... 384 (1,192) (808)
Certificates of deposit................... 712 (2,545) (1,833)
Federal funds purchased and other
borrowings.............................. (38) (41) (79)
------- ------- -------
Total increase (decrease) in interest
expense............................... 1,360 (4,484) (3,124)
------- ------- -------
Increase in net interest income............. $ 1,400 $ 1,687 $ 3,087
======= ======= =======
Six Months Ended June 30,
-----------------------------------
2002 vs. 2001
-----------------------------------
Increase
(Decrease)
Due to
----------------------
Volume Rate Total
--------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans........................................ $ 865 $ (2,487) $ (1,622)
Securities................................... 4,979 (3,339) 1,640
Federal funds sold and other temporary
investments................................ (757) (238) (995)
--------- --------- ---------
Total increase (decrease) in interest
income.................................. 5,087 (6,064) (977)
--------- --------- ---------
Interest-bearing liabilities:
Interest-bearing demand deposits............. 621 (1,721) (1,100)
Savings and money market accounts............ 674 (2,602) (1,928)
Certificates of deposit...................... 1,188 (4,822) (3,634)
Federal funds purchased and other borrowings. (79) (46) (125)
--------- --------- ---------
Total increase (decrease) in interest
expense................................. 2,404 (9,191) (6,787)
--------- --------- ---------
Increase in net interest income................ $ 2,683 $ 3,127 $ 5,810
========= ========= =========
14
Provision for Credit Losses
Management actively monitors the Company's asset quality and provides
specific loss provisions when necessary. 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 credit 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.
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.
There was a $120,000 provision for credit losses for the quarter ended June
30, 2002 compared with no provision for the corresponding period in 2001. There
was a $240,000 provision for credit losses for the six months ended June 30,
2002, compared with no provision for the same period in 2001.
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:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2002 2001 2002 2001
-------- ------- --------- ---------
(Dollars in thousands)
Service charges on deposit accounts. ........ $ 2,001 $ 1,789 $ 3,859 $ 3,577
Other noninterest income .................... 325 269 628 516
------- ------- ------- --------
Total noninterest income. ................ $ 2,326 $ 2,058 $ 4,487 $ 4,093
======= ======= ======= ========
Noninterest income totaled $2.3 million for the three months ended June 30,
2002 compared with $2.1 million for the same period in 2001, an increase of
$268,000, or 13.0%. Noninterest income increased $394,000, or 9.6%, to $4.5
million for the six months ended June 30, 2002 from $4.1 million for the same
period in 2001.
Noninterest Expense
Noninterest expense totaled $8.1 million for the quarter ended June 30,
2002 compared with $6.7 million for the quarter ended June 30, 2001, an increase
of $1.4 million, or 20.6%. This increase is principally due to increases in
salaries and employee benefits, increases in minority interest expense related
to trust preferred securities issued by the Company's subsidiary trusts and
acquisition expenses.
Noninterest expense totaled $15.8 million for the six months ended June 30,
2002, a decrease of $79,000, or 0.50%, from $15.9 million for the same period in
2001. The decrease was primarily due to the $2.4 million in merger-related
expenses and other charges incurred in connection with the merger of Commercial
with the Company in February 2001. The $2.4 million in merger-related charges
include closing costs, legal fees, accounting fees, broker fees, employee
related costs, and contract terminations. Had the Company not incurred the $2.4
million in merger-related expenses in 2001, noninterest expense for the six
months ended June 30, 2002 would have increased $2.3 million or 17.5% compared
with the same period in 2001. This increase is principally due to increases in
salaries and employee benefits, increases in minority interest expense related
to the trust preferred securities and acquisition expenses, partially offset by
a decrease in goodwill amortization expense due to a recent accounting change.
15
The following table presents, for the periods indicated, the major
categories of noninterest expense:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2002 2001 2002 2001
--------- --------- -------- --------
(Dollars in thousands)
Salaries and employee benefits ........................... $ 3,405 $ 3,178 $ 7,314 $ 6,513
Non-staff expenses:
Net occupancy expense ................................ 516 474 995 990
Depreciation ......................................... 398 383 771 798
Data processing ...................................... 506 520 963 1,025
Regulatory assessments and FDIC insurance ............ 81 71 154 122
Ad valorem and franchise taxes. ...................... 127 119 248 245
Core deposit intangibles and goodwill amortization ... 4 340 4 681
Minority interest expense trust preferred
securities ......................................... 496 288 994 576
Merger-related expenses .............................. -- -- -- 2,425
Other ................................................ 2,592 1,364 4,344 2,491
--------- --------- -------- -------
Total non-staff expenses ................................. 4,720 3,559 8,473 9,353
Total noninterest expense. ............................... $ 8,125 $ 6,737 $ 15,787 $ 15,866
========= ========= ======== ========
Salaries and employee benefit expenses were $3.4 million for the quarter
ended June 30, 2002 compared with $3.2 million for the quarter ended June 30,
2001, an increase of $227,000, or 7.1%. For the six months ended June 30, 2002,
salaries and employee benefits increased $801,000 or 12.3% compared with the
same period in 2001. Both increases were principally due to annual employee
salary increases. The increase for the six months ended June 30, 2002 was also
attributable to additional accumulations for 2002 anticipated incentive
compensation.
Non-staff expenses increased $1.2 million, or 32.7%, to $4.7 million for
the quarter ended June 30, 2002 compared with the same period in 2001. The
increase was principally due to acquisition expenses for the three months ended
June 30, 2002 and a decrease in goodwill amortization due to a recent accounting
change. For the six month period ended June 30, 2002, non-staff expenses
decreased $880,000, or 9.4%, to $8.5 million from $9.4 million for the same
period in 2001. The decrease was principally due to the $2.4 million one-time
merger- related charges incurred in 2001 and a decrease in goodwill amortization
due to a recent accounting change partially offset by acquisition expenses
incurred during the six months ended June 30, 2002.
Goodwill Amortization
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 142 as of January 1, 2002.
Goodwill and intangible assets determined to have an indefinite useful life
acquired in a purchase business combination completed after June 30, 2001 are no
longer amortized. For the six months ended June 30, 2002, the Company did not
record approximately $680,000 in goodwill amortization that would have been
recorded prior to the adoption of SFAS 142.
16
Income Taxes
Income tax expense increased $622,000, or 41.8%, to $2.1 million for the
three months ended June 30, 2002 from $1.5 million for the same period in 2001.
For the six month period ended June 30, 2002, income tax expense increased $1.9
million, or 98.4%, to $4.0 million from $2.0 million for the same period in
2001. The increase was primarily attributable to higher pretax net earnings
which resulted from an increase in the net interest margin and lower net
interest expense for the six months ended June 30, 2002 when compared to the
same period in 2001. In addition, the Company incurred $2.4 million in
merger-related expenses during the six months ended June 30, 2001 which had a
tax benefit of approximately $849,000.
FINANCIAL CONDITION
Loan Portfolio
Total loans were $478.9 million at June 30, 2002, an increase of $54.5
million, or 12.8% from $424.4 million at December 31, 2001. Loans from the Texas
Guaranty Acquisition totaled $45.7 million. Loan growth occurred primarily in
construction and land development loans and commercial mortgage loans. Period
end loans comprised 38.8% of average earning assets at June 30, 2002 compared
with 38.0% at December 31, 2001.
The following table summarizes the loan portfolio of the Company by type of
loan as of June 30, 2002 and December 31, 2001:
June 30, December 31,
2002 2001
------------------ -------------------
Amount Percent Amount Percent
--------- ------- -------- -------
(Dollars in thousands)
Commercial and industrial ............... $ 54,752 11.4% $ 46,986 11.1%
Real estate:
Construction and land development. .... 31,134 6.5 20,963 4.9
1-4 family residential ................ 181,140 37.8 175,253 41.3
Home equity ........................... 22,315 4.7 20,541 4.8
Commercial mortgages .................. 106,550 22.2 78,446 18.5
Farmland .............................. 12,254 2.6 10,686 2.5
Multifamily residential ............... 12,001 2.5 9,694 2.3
Agriculture ............................. 22,316 4.7 15,757 3.7
Other ................................... 963 0.2 953 0.2
Consumer................................. 35,510 7.4 45,121 10.7
-------- ----- -------- ----
Total loans......................... $478,935 100.0% $ 424,400 100.0%
======== ===== ========= =====
Nonperforming Assets
The Company had $444,000 in nonperforming assets at June 30, 2002 and
$1,000 in nonperforming assets at December 31, 2001. 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:
June 30, December 31,
2002 2001
----------- ---------
(Dollars in thousands)
Nonaccrual loans. .................................. $ 287 $ 1
Accruing loans 90 or more days past due. ........... -- --
------ -------
Total nonperforming loans ....................... 287 --
Other real estate .................................. 157 --
------ -------
Total nonperforming assets ...................... $ 444 $ 1
====== =======
17
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, 2002, the allowance for credit losses amounted to
$6.9 million, or 1.43% of total loans compared with $6.0 million, or 1.41% of
total loans at December 31, 2001.
Set forth below is an analysis of the allowance for credit losses for the
periods indicated:
Six Months Ended Year Ended
June 30, 2002 December 31, 2001
----------------- -----------------
(Dollars in thousands)
Average loans outstanding ........................... $ 456,520 $ 419,553
========== ==========
Gross loans outstanding at end of period. ........... $ 478,935 $ 424,400
========== ==========
Allowance for credit losses at
beginning of period ............................... $ 5,985 $ 5,523
Balance acquired with the Texas Guaranty Bank
Acquisition ....................................... 545 --
Provision for credit losses ......................... 240 700
Charge-offs:
Commercial and industrial ......................... (6) (180)
Real estate and agriculture ....................... (34) (175)
Consumer........................................... (27) (74)
Recoveries:
Commercial and industrial ......................... 14 15
Real estate and agriculture ....................... 113 121
Consumer........................................... 39 55
------- ---------
Net recoveries (charge-offs). ....................... 99 (238)
Allowance for credit losses at end of period. ....... $ 6,869 $ 5,985
======= =========
Ratio of allowance to end of period loans ........... 1.43% 1.41%
Ratio of net (recoveries) charge-offs to average
loans ............................................. (0.02)% 0.06%
Ratio of nonperforming loans to end of
period loans ...................................... 0.06% n/m(1)
- -----------------
(1) Amount not meaningful. Nonperforming loans totaled $1,000 at December 31,
2001.
Securities
Securities totaled $785.9 million at June 30, 2002 compared with $752.3
million at December 31, 2001, an increase of $33.5 million, or 4.5%. At June 30,
2002, securities represented 57.8% of total assets compared with 59.6% of total
assets at December 31, 2001.
Premises and Equipment
Premises and equipment, net of accumulated depreciation, totaled $16.3
million at June 30, 2002 and $15.1 million at December 31, 2001.
18
Deposits
Total deposits were $1.21 billion at June 30, 2002 compared with $1.12
billion at December 31, 2001, an increase of $88.5 million. At June 30, 2002,
noninterest-bearing deposits accounted for 16.3% of total deposits compared with
16.8% of total deposits at December 31, 2001. Interest-bearing deposits totaled
$1.01 billion, or 83.7%, of total deposits at June 30, 2002 compared with $934.6
million, or 83.2%, of total deposits at December 31, 2001.
Other Borrowings
Deposits are the primary source of funds for the Company's lending and
investment activities. Occasionally, the Company obtains additional funds from
the Federal Home Loan Bank ("FHLB") and correspondent banks. At June 30, 2002,
the Company had $15.5 million in FHLB borrowings, all of which consisted of FHLB
notes payable. The maturity dates on the FHLB notes payable range from the years
2004 to 2018 and have interest rates ranging from 5.95% to 6.48%. At December
31, 2001, the Company had $18.1 million in FHLB borrowings of which $13.3
million consisted of FHLB notes payable and $4.8 million consisted of FHLB
advances. Any FHLB advances are secured by a blanket lien on the Bank's first
mortgage loans against one-to-four family residential properties.
At June 30, 2002 and December 31, 2001, the Company had no outstanding
borrowings under a revolving line of credit extended by a commercial bank.
Trust Preferred Securities
At June 30, 2002 and December 31, 2001, the Company's subsidiary trusts had
outstanding $27.0 million in trust preferred securities.
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. The 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, 2002, the Company had
cash and cash equivalents of $42.4 million, an increase from $41.7 million at
December 31, 2001.
Capital Resources
Total shareholders' equity was $97.4 million at June 30, 2002 compared with
$88.7 million at December 31, 2001, an increase of $8.7 million, or 9.8%. The
increase was primarily due to net earnings of $9.3 million and a net change in
unrealized gain on available for sale securities of $1.0 million, offset by cash
dividends paid of $1.8 million.
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, 2002, the Company's Tier 1 capital, total risk-based capital and
leverage capital ratios were 17.03%, 18.24% and 7.37%, respectively. As of June
30, 2002, 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 14.95%, 16.16%
and 6.47%, respectively.
19
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 Annual Report on Form 10-K filing on March 8, 2002. See Form 10-K,
Item 7 "Management's Discussion and Analysis and Results of Operations-Interest
Rate Sensitivity and Liquidity".
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 16, 2002, the Company held its Annual Meeting of Shareholders to
consider and act upon the items listed below. All share information has been
restated to give effect to the two-for-one stock split effective May 31, 2002.
1. A. Virgil Pace, Jr., Perry Mueller, Jr., Charles M. Slavik and
Harrison Stafford II were elected as a Class II directors to serve on
the Board of Directors of the Company until the Company's 2005 Annual
Meeting of Shareholders and until their successors are duly elected
and qualified. A total of 11,010,796 shares were voted in favor of the
election of A. Virgil Pace, Jr. and 341,086 shares were withheld from
voting. A total of 11,064,796 shares were voted in favor of the
election of Perry Mueller and 287,086 shares were withheld from
voting. A total of 10,858,572 shares were voted in favor of the
election of Charles M. Slavik and 493,310 shares were withheld from
voting. A total of 11,072,916 shares were voted in favor of the
election of Harrison Stafford II and 278,966 shares were withheld from
voting.
The following Class I and Class III directors continued in office
after the Annual Meeting: Harry L. Bayne, James A. Bouligny, Charles
A. Davis, Ned S. Holmes, Tracy T. Rudolph, Robert Steelhammer, H.E.
Timanus, Jr. and David Zalman.
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, 2002. A total of 11,099,166 shares were
voted in favor of the appointment, 250,336 shares were voted against
the appointment and 2,380 shares abstained from voting.
20
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
Number Description
------- -----------
99.1 - Certification of Chief Executive Officer
pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 - Certification of Chief Financial Officer
pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b. (i) The Company filed a Current Report on Form 8-K under Item 5 of
Form 8-K on May 2, 2002 to report the signing of a definitive
agreement with Paradigm Bancorporation, Inc. pursuant to which
Paradigm will be merged into the Company.
(ii) The Company filed a Current Report on Form 8-K under Item 5 of
Form 8-K on May 8, 2002 to announce a two-for-one stock split to
be effected in the form of a 100% stock dividend.
(iii) The Company filed a Current Report on Form 8-K under Item 5 of
Form 8-K on May 9, 2002 to report the completion of the
acquisition of Texas Guaranty Bank, N.A.
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.SM
(Registrant)
Date: 08/14/02 /s/ David Zalman
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David Zalman
Chief Executive Officer/President
Date: 08/14/02
/s/ David Hollaway
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David Hollaway
Chief Financial Officer
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