FORM 11-K for the Year Ended 12/31/2002
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 11-K

 

(Mark One)

 

x   ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2002

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[NO FEE REQUIRED]

 

For the transition period from                                          to                                         .

 

Commission File Number: 000-25051

 

A.   Full title of the plan and the address of the plan, if different from that of the issuer named below:

 

PROSPERITY BANCSHARES, INC.

401(k) PROFIT SHARING PLAN

 

B.   Name of issuer of the securities held pursuant to the plan and the address of its principal executive office:

 

PROSPERITY BANCSHARES, INC.

PROSPERITY BANK PLAZA

4295 SAN FELIPE

HOUSTON, TEXAS 77027

 


Table of Contents

Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Audited Financial Statements

 

December 31, 2002 and 2001

 

Contents

 

Independent Auditor’s Report

   1

Statement of Net Assets Available for Benefits

   2

Statement of Changes in Net Assets Available for Benefits

   3

Notes to Financial Statements

   4

Schedule H, Item 4I—Assets Held for Investment Purposes

   14


Table of Contents

LUBY & BIRDWELL, LLP

Certified Public Accountants and Business Advisors


101 N. Shoreline Blvd., Suite 580, Corpus Christi, Texas 78401

  Ph. (361) 883-0292

email—jluby@sbcglogal.net

  Fax (361) 883-0151

 

Independent Auditors’ Report

 

To the Audit Committee of

the Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

We have audited the accompanying statements of net assets available for benefits of Prosperity Bancshares, Inc. 401K Profit Sharing Plan as of December 31, 2002 and 2001 and the related statements of changes in net assets available for benefits for the three years ended December 31, 2002, 2001, and 2000. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of Prosperity Bancshares, Inc. 401K Profit Sharing Plan as of December 31, 2002 and 2001 and the changes in its net assets available for benefits for the years ended December 31, 2002, 2001, and 2000 in conformity with accounting principles generally accepted in the United States.

 

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets held for investment purposes as of December 31, 2002 is presented for purposes of complying with the Department of Labor Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 and is not a required part of the basic financial statements. The supplemental schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.

 

Corpus Christi, Texas

June 27, 2003


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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Statement of Net Assets Available For Benefits

 

     December 31,

     2002

   2001

ASSETS

             

Cash

   $ —      $ 19,059

First Trust Money Market Account

     91,551      —  

Prosperity Bank—Interest Bearing Account

     3,507,681      2,742,946

Prosperity Bancshares, Inc. Common Stock

     5,862,868      3,362,196

Loans to Participants

     376,332      229,175

U. S. Government Securities Fund

     63,570      149,709

Fundamental Investors

     73,494      109,044

New Economy Fund

     40,304      38,172

New Perspective Fund

     475,523      638,718

Washington Mutual Investors Fund

     239,938      321,648

Capital Income Builder

     185,021      49,351

The Cash Management Trust of America

     396,833      464,529

Capital World Growth and Income Fund

     85,452      83,318

American Balance Fund

     179,963      182,804

The Bond Fund of America

     383,944      326,870

Euro Pacific Growth Fund

     127,747      160,693

The Growth Fund of America

     535,749      600,202

American High Income Trust

     23,849      23,833

Intermediate Bond Fund of America

     22,545      13,311

The Investment Company of America

     542,652      630,389

AMCAP Fund

     153,637      162,839

The Income Fund of America

     51,886      27,936

American Mutual Fund

     41,543      24,108

Capital World Bond Fund

     14,379      4,252

The U. S. Treasury Money Fund of America

     39,415      17,994

SMALLCAP World Fund

     112,523      129,059
    

  

NET ASSETS AVAILABLE FOR PLAN BENEFITS

   $ 13,628,399    $ 10,512,155
    

  

 

See accompanying notes.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Statement of Changes in Net Assets Available For Benefits

 

     Year Ended December 31,

     2002

   2001

    2000

ADDITIONS

                     

ADDITIONS TO NET ASSETS ATTRIBUTED TO:

                     

Net appreciation (depreciation) in fair value of investments

   $ 959,065    $ (626,813 )   $ 60,388

Interest and dividends

     248,359      1,511,972       491,177
    

  


 

       1,207,424      885,159       551,565

CONTRIBUTIONS:

                     

Participants’ rollovers and other

     142,384      288,768       44,500

Participants’ elective deferrals

     924,696      693,316       398,371

Employer’s

     428,491      344,429       207,245
    

  


 

       1,495,571      1,326,513       650,116
    

  


 

TOTAL ADDITIONS

     2,702,995      2,211,672       1,201,681

DEDUCTIONS

                     

Deductions from net assets attributable to rollovers or withdrawals paid to participants

     188,260      128,490       395,710

Other

     5,062      —         —  
    

  


 

       193,322      128,490       395,710
    

  


 

       2,509,673      2,083,182       805,971

OTHER TRANSFERS

                     

Transfer of assets related to merger

     606,571      2,624,895       —  
    

  


 

Net increase in assets available for benefits

     3,116,244      4,708,077       805,971

NET ASSETS AVAILABLE FOR BENEFITS:

                     

Beginning of Year

     10,512,155      5,804,078       4,998,107
    

  


 

End of Year

   $ 13,628,399    $ 10,512,155     $ 5,804,078
    

  


 

 

See accompanying notes.

 

3


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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements

 

December 31, 2002 and 2001

 

1.    Description of Plan

 

The following description of the Prosperity Bancshares, Inc. 401K Profit Sharing Plan (the “Plan”) provides only general information. Participants should refer to the Summary Plan Description for a more complete description of the Plan’s provisions.

 

GENERAL

 

The Plan is a defined contribution plan covering all full-time employees of Prosperity Bank (the “Bank”), plan sponsor, who have completed at least three months of service and are twenty-one or older. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

 

CONTRIBUTIONS

 

Each year, participants may contribute up to 15% of pretax annual compensation, as defined in the Plan. Participants may also contribute amounts representing distributions from other qualified defined benefit or defined contribution plans. The Bank, at its discretion, may contribute to the Plan, on a participant’s behalf, a matching contribution which is determined annually. In 2002 and 2001, the Bank matched 50% of the employees’ contributions.

 

Upon enrollment, a participant may direct contributions in any increment to any of the Plan’s fund options. Participants may change their investment options quarterly. Employer contributions are matched to the funds designated by the participant.

 

PARTICIPANT ACCOUNTS

 

Each participant’s account is credited with the participant’s contributions and allocations of (a) the bank’s contributions and (b) plan earnings, and is charged with an allocation of administrative expenses. Allocations are based on participant earnings or account balances, as defined. Forfeited balances of terminated participants’ nonvested accounts are used to reduce future company contributions. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s account.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements (continued)

 

December 31, 2002 and 2001

 

1.    Description of Plan (continued)

 

VESTING

 

Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Bank contribution portion of their accounts plus actual earnings thereon is based on years of continuous service. A participant is vested ratable (20% at the end of the second year as a participant in the plan) over a six-year period.

 

PARTICIPANT LOANS

 

Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. Loan terms generally range from 1-5 years, but can be longer if the loan is used to purchase a principal residence. The loans are secured by the balance in the participant’s account and bear interest at a rate commensurate with the local prevailing rates. Principal and interest is paid ratable through monthly payroll deductions. Interest rates range from 5.25% to 11.5% on outstanding loans.

 

PAYMENT OF BENEFITS

 

On termination of service, a participant may receive a lump-sum amount, equal to the vested value of his or her account, or upon death, disability or retirement, elect to receive payment from the following options: (1) qualified joint and survivor annuities, (2) single payment of the employee’s entire benefit, (3) equal installments over a fixed period not to exceed the employee’s life expectancy or the joint and last survivor’s life expectancy, or (4) payments in the form of a joint and survivor annuity. The Plan does permit hardship distributions. In order to qualify for such hardship withdrawal, the participant must demonstrate that an immediate and necessary financial hardship has been incurred.

 

FORFEITURES

 

Any forfeiture subject to allocation during each Plan Year shall be allocated among all participants in accordance with the provisions of the Plan. On the basis of the information furnished by the administrator, the Trustee shall keep separate books and records concerning the affairs of each participant hereunder as to the accounts and credits of each participating employee.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements (continued)

 

December 31, 2002 and 2001

 

1.    Description of Plan (continued)

 

PLAN TERMINATION

 

Although it has not expressed any intent to do so, the Bank has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts.

 

INVESTMENT OPTIONS

 

Upon enrollment in the Plan, a participant may direct their contributions in various increments totaling 100% in the Prosperity Bancshares, Inc. Money Market Fund, or in any of the following investment options:

 

Prosperity Bancshares, Inc. Common Stock

 

Funds are invested in common stock of Prosperity Bancshares, Inc.

 

U.S. Government Securities Fund

 

Funds are generally invested in securities backed by the U.S. government including U.S. Treasury Bonds, GNMA mortgage-backed securities, and U.S. governmental agency securities.

 

Fundamental Investors

 

Funds are invested primarily in common stocks or securities convertible into common stocks to provide long-term growth of capital and income. The funds may also be invested in bonds and debt securities of issuers outside of the U.S.

 

New Economy Fund

 

Funds are invested primarily in common stocks or securities convertible into common stocks to provide long-term growth of capital through investments in services and information industries in the U.S. and around the world.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements (continued)

 

December 31, 2002 and 2001

 

1.    Description of Plan (continued)

 

New Perspective Fund

 

Funds are invested in common stocks, preferred stocks, securities convertible into common stocks, and bonds to provide long-term growth of capital through investments in blue-chip companies based in the U.S. and abroad with an emphasis on global or multinational companies and a focus on opportunities created by changes in global trade patterns and economic and political relationships.

 

Washington Mutual Investors Fund

 

Funds are primarily invested in common stocks of U.S. companies that meet strict standards based on requirements originally established by the U.S. District Court for the District of Columbia for the investment of trust funds. It may also invest up to 5% of its assets in non-U.S. companies that meet certain investment standards. Funds are invested to provide current income and an opportunity for growth.

 

Capital Income Builder

 

Funds are invested in common stocks or bonds to provide above-average current income, a growing stream of income, and growth of capital. Generally, at least 50% of investments will be in common stocks of large, established companies with a history of increasing dividends. Up to 40% of investments might be in securities of non-U.S. issuers.

 

The Cash Management Trust of America

 

Funds are invested in high-quality money market instruments such as commercial paper and commercial bank obligations to provide income on cash reserves, while preserving capital and maintaining liquidity.

 

Capital World Growth and Income Fund

 

Funds are primarily invested in blue chip common stocks of established companies in the world’s largest stock markets to provide long-term capital growth with current income.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements (continued)

 

December 31, 2002 and 2001

 

1.    Description of Plan (continued)

 

American Balance Fund

 

Funds are invested in blue chip common stocks, quality bonds, securities convertible to common stocks and money market instruments to provide conservation of capital, current income, and long-term growth of capital and income.

 

The Bond Fund of America

 

Funds are invested primarily in corporate bonds, mortgage and asset backed securities, U.S. Treasuries, and U.S. Agencies to provide a high level of current income as is consistent with preservation of capital.

 

Euro Pacific Growth Fund

 

Funds are invested in common stocks, preferred stocks, securities convertible to common stocks, American depository receipts, European depository receipts, bonds, and cash to provide long-term growth of capital primarily of issuers located in Europe and the Pacific Basin.

 

The Growth Fund of America

 

Funds are invested in common stocks, preferred stock, and securities convertible to common stocks of companies that appear to offer superior opportunities for long-term growth of capital, such as cyclical companies, those in depressed industries, and turnaround or value situations.

 

American High Income Trust

 

Funds are invested primarily in a broad range of lower quality, higher yielding debt securities that provide a high level of current income with capital appreciation as a secondary goal.

 

Intermediate Bond Fund of America

 

Funds are invested in a portfolio of corporate bonds, U.S. government bonds or notes, GNMA certificates and other mortgage-related securities to provide current income and preservation of capital through a bond portfolio with an average effective maturity of no greater than five years.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements (continued)

 

December 31, 2002 and 2001

 

1.    Description of Plan (continued)

 

The Investment Company of America

 

Funds are primarily invested in common stocks of well-established blue chip companies, representing a wide cross section of the U.S. economy to provide long-term growth of capital and income, placing greater emphasis on future dividends than on current income.

 

AMCAP Fund

 

Funds are primarily invested in undervalued common stocks of growing, profitable companies located in the U.S. that represent good opportunities to provide long-term growth of capital.

 

The Income Fund of America

 

Funds are primarily invested in common stocks and bonds of U.S. companies to provide current income and, secondarily, growth of capital.

 

American Mutual Fund

 

Funds are primarily invested in common stocks, securities convertible into common stocks, non-convertible preferred stocks, U.S. government securities, bonds rated A or better, and cash to provide the balanced accomplishment of current income, capital growth, and conservation of principal through investments in companies that participate in the growth of the American economy.

 

Capital World Bond Fund

 

Funds are primarily invested in quality, fixed income securities from major governments and corporations around the world and in the U.S. to provide high, long-term total return consistent with prudent management.

 

The U.S. Treasury Money Fund of America

 

Funds are invested in U.S. Treasury securities maturing in one year or less to provide income on cash reserves, while preserving capital and maintaining liquidity.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements (continued)

 

December 31, 2002 and 2001

 

1.    Description of Plan (continued)

 

SMALLCAP World Fund

 

Funds are invested primarily in common stocks and corporate debt of smaller companies in the United States and around the world to provide long-term growth of capital.

 

2.    Summary of Significant Accounting Policies

 

BASIS OF ACCOUNTING

 

The financial statements of the Plan are prepared using the accrual method of accounting.

 

INVESTMENT VALUATION AND INCOME RECOGNITION

 

The Plan’s investments are stated at fair value. Shares of registered investment companies are valued at quoted market prices, which represent the net asset value of the shares held by the Plan at year-end. The Prosperity Bancshares, Inc. common stock is valued at its quoted market price. The participant loans are valued at their outstanding balances, which approximate fair value. Money market accounts and certificates of deposit are valued based on amortized cost or original cost plus accrued interest.

 

Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.

 

PAYMENT OF BENEFITS

 

Benefits are recorded when paid.

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements (continued)

 

December 31, 2002 and 2001

 

2.    Summary of Significant Accounting Policies (continued)

 

NET APPRECIATION (DEPRECIATION) IN FAIR VALUE OF INVESTMENTS

 

The Plan presents in the statement of changes in net assets available for benefits the net appreciation (depreciation) in the fair value of its investments which consists of the realized gains or losses on sale of investments and unrealized appreciation (depreciation) on those investments.

 

3.    Credit Risk

 

The Plan provides for various investment options in any combination of stocks, bonds, fixed income securities, mutual funds and other investment securities. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risk. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the statements of net assets available for plan benefits and the amounts reported in participant accounts.

 

4.    Tax Status

 

The Plan has received a determination letter from the Internal Revenue Service stating that the Plan is qualified under Section 401(a) of the Internal Revenue Service Code (the “Code”) and, therefore, the related trust is exempt from taxation. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan Administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes that the Plan is qualified and the related trust is exempt.

 

5.    Party-in-Interest Transactions

 

Investment transactions in Prosperity Bank Interest Bearing Accounts and Prosperity Bancshares, Inc. Common Stock qualify as party-in-interest transactions.

 

During July 2002, the Plan entered into an agreement with First Trust Corporation (“FTC”) whereby FTC became the Trustee of the Plan. Compensation to FTC is based on .007% of assets, billed quarterly. No compensation was paid to FTC for the year ended December 31, 2002.

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Notes to Financial Statements (continued)

 

December 31, 2002 and 2001

 

6.    Mergers

 

In December, 2002 the Bank of the Southwest 401K Profit Sharing Plan (“Southwest Plan”) was merged into the Plan. Transfers of $361,793 from the Southwest Plan have been included on the statement of changes in net assets available for plan benefits as other transfers for the year ended December 31, 2002.

 

Also during 2002 certain assets of another plan were transferred into the Plan under a trust to trust transfer. Transfers of $229,691 from this transaction have been included on the statement of changes in net assets available for plan benefits as other transfers for the year ended December 31, 2002.

 

Loans totaling $15,087 were transferred to the plan during 2002 and have been included on the statement of changes in net assets available for plan benefits as other transfers for the year ended December 31, 2002.

 

In August 2001, The Commercial Bancshares Employee Savings Plan (“Commercial Plan”) was merged with the Plan. Transfers of $2,624,895 from the Commercial Plan have been included on the statement of changes in net assets available for plan benefits as other transfers for the year ended December 31, 2001.

 

The transferred net assets have been recognized in the accounts of the Plan at their balances as previously carried in the accounts of their predecessor plans.

 

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Supplemental Schedule

 

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Prosperity Bancshares, Inc.

401K Profit Sharing Plan

 

Schedule H, Item 4I—Assets Held for Investment Purposes

 

December 31, 2002

 

Identity


  

Description


  

Current

Value


 

First Trust Money Market Account

   Interest-Bearing    $ 91,551 *

Prosperity Bank—Interest Bearing Accounts

   Interest-Bearing      3,507,651 **

Prosperity Bancshares, Inc. Common Stock

   Common Stock      5,862,868 **

Loans

             N/A      376,332 ***

U.S. Government Securities Fund

   Mutual Fund      63,570  

Fundamental Investors

   Mutual Fund      73,494  

New Economy Fund

   Mutual Fund      40,304  

New Perspective Fund

   Mutual Fund      475,523  

Washington Mutual Investors Fund

   Mutual Fund      239,938  

Capital Income Builder

   Mutual Fund      185,021  

The Cash Management Trust of America

   Mutual Fund      396,833  

Capital World Growth and Income Fund

   Mutual Fund      85,452  

American Balance Fund

   Mutual Fund      179,963  

The Bond Fund of America

   Mutual Fund      383,944  

Euro Pacific Growth Fund

   Mutual Fund      127,747  

The Growth Fund of America

   Mutual Fund      535,749  

American High Income Trust

   Mutual Fund      23,849  

Intermediate Bond Fund of America

   Mutual Fund      22,545  

The Investment Company of America

   Mutual Fund      542,652  

AMCAP Fund

   Mutual Fund      153,637  

The Income Fund of America

   Mutual Fund      51,886  

American Mutual Fund

   Mutual Fund      41,543  

Capital World Bond Fund

   Mutual Fund      14,379  

The U. S. Treasury Money Fund of America

   Mutual Fund      39,415  

SMALLCAP World Fund

   Mutual Fund      112,523  

Note:   Cost information is not presented because all investments are participant directed.
*   Represents a party-in-interest.
**   Represents a party-in-interest and investments comprising at least 5% of net assets available for benefits.
***   Loans to participants bearing interest at rates ranging from 5.25% to 11.5%.

 

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SIGNATURES

 

The Plan.    Pursuant to the requirements of the Securities Exchange Act of 1934, the Prosperity Bancshares, Inc. 401(k) Profit Sharing Plan Committee has duly caused this annual report to be signed in its behalf by the undersigned hereunto duly authorized.

 

 

June 30, 2003

     

Prosperity Bancshares, Inc. 401(k) Profit Sharing Plan

           

/s/ Michael Harris


           

Michael Harris

Cashier, Prosperity Bank


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INDEX TO EXHIBITS

 

Exhibit No.

  

Description


23.1

   Consent of Luby & Birdwell, LLP