PROSPERITY BANCSHARES INC - 10-Q Quarterly Report

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, 2004

¨	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 or organization)		(I.R.S. Employer Identification No.)

Prosperity Bank Plaza

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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

As of August 4, 2004, there were 22,235,005 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding.

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, 2004 (unaudited) and December 31, 2003 (unaudited)	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)	4
	Consolidated Statements of Shareholders’ Equity for the Year Ended December 31, 2003 (unaudited) and for the Six Months Ended June 30, 2004 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (unaudited)	6
	Notes to Interim Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	23

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	24
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	24
Item 3.	Defaults upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits and Reports on Form 8-K	25
Signatures		25

PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.^SM AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	June 30, 2004			December 31, 2003
	(Dollars in thousands, except share data)
ASSETS
Cash and due from banks	$	48,782		$	71,983
Federal funds sold		7,749			11,730

Total cash and cash equivalents		56,531			83,713
Interest-bearing deposits in financial institutions		100			262
Available for sale securities, at fair value (amortized cost of $203,008 and $260,533, respectively)		198,525			263,648
Held to maturity securities, at cost (fair value of $1,196,402 and $1,122,451, respectively)		1,219,839			1,113,232
Loans		790,920			770,053
Less allowance for credit losses		(10,371	)		(10,345	)

Loans, net		780,549			759,708
Accrued interest receivable		10,033			10,119
Goodwill		116,557			118,012
Core deposit intangibles, net of accumulated amortization of $1,775 and $1,010, respectively		8,080			6,743
Bank premises and equipment, net		32,762			34,299
Other real estate owned		48			246
Other assets		11,320			10,505

TOTAL	$	2,434,344		$	2,400,487

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	444,067		$	467,389
Interest-bearing		1,635,850			1,616,359

Total deposits		2,079,917			2,083,748
Other borrowings		40,647			11,929
Securities sold under repurchase agreements		18,293			19,007
Accrued interest payable		2,360			2,522
Other liabilities		5,097			3,889
Junior subordinated debentures		59,804			59,804

Total liabilities		2,206,118			2,180,899
SHAREHOLDERS’ EQUITY:
Common stock, $1 par value; 50,000,000 shares authorized; 21,026,902 and 20,966,706 shares issued at June 30, 2004 and December 31, 2003, respectively; 20,989,814 and 20,929,618 shares outstanding at June 30, 2004 and December 31, 2003, respectively		21,027			20,967
Capital surplus		102,830			102,594
Retained earnings		107,890			94,610
Accumulated other comprehensive income (loss) — net unrealized (loss) gain on available for sale securities, net of tax benefit of $1,569 and tax of $1,090, respectively		(2,914	)		2,024
Less treasury stock, at cost, 37,088 shares at June 30, 2004 and December 31, 2003, respectively		(607	)		(607	)

Total shareholders’ equity		228,226			219,588

TOTAL	$	2,434,344		$	2,400,487

See notes to interim consolidated financial statements.

PROSPERITY BANCSHARES, INC.^SM AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	12,149	$	11,524	$	24,462	$	22,955
Securities:
Taxable		13,553		9,809		26,721		19,673
Nontaxable		371		407		756		833
70% nontaxable preferred dividends		190		423		642		875
Federal funds sold		49		5		102		11
Deposits in financial institutions		1		46		2		80

Total interest income		26,313		22,214		52,685		44,427

INTEREST EXPENSE:
Deposits		5,686		5,789		11,467		11,615
Junior subordinated debentures		971		578		1,967		1,165
Note payable and federal funds sold		305		286		553		541

Total interest expense		6,962		6,653		13,987		13,321

NET INTEREST INCOME		19,351		15,561		38,698		31,106
PROVISION FOR CREDIT LOSSES		120		120		240		240

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		19,231		15,441		38,458		30,866

NONINTEREST INCOME:
Customer service fees		4,830		3,370		9,590		6,625
Other		625		635		1,137		1,219

Total noninterest income		5,455		4,005		10,727		7,844

NONINTEREST EXPENSE:
Salaries and employee benefits		6,608		5,277		13,312		10,685
Net occupancy expense		1,286		989		2,556		1,943
Depreciation expense		689		615		1,390		1,221
Data processing		490		660		933		1,275
Core deposit intangible amortization		382		190		765		383
Other		2,612		2,194		5,570		4,351

Total noninterest expense		12,067		9,925		24,526		19,858

INCOME BEFORE INCOME TAXES		12,619		9,521		24,659		18,852
PROVISION FOR INCOME TAXES		4,257		3,024		8,234		5,966

NET INCOME	$	8,362	$	6,497	$	16,425	$	12,886

EARNINGS PER SHARE
Basic	$	0.40	$	0.34	$	0.78	$	0.68

Diluted	$	0.39	$	0.34	$	0.77	$	0.67

See notes to interim consolidated financial statements.

PROSPERITY BANCSHARES, INC.^SM AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)


		Common Stock			Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders’ Equity
		Shares	Amount		Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders’ Equity
		(Amounts in thousands, except share data)
BALANCE AT DECEMBER 31, 2002		18,903,028	$	18,903	$	60,312	$	72,917	$	2,644		$	(37	)	$	154,739
Net income								26,548								26,548
Net change in unrealized gain on available for sale securities										(620	)					(620	)

Total comprehensive income																25,928

Exercise of stock options		170,638		171		824										995
Refund of escrow shares in connection with the Paradigm acquisition													(570	)		(570	)
Common stock issued in connection with the MainBancorp acquisition		1,499,966		1,500		33,149										34,649
Common stock issued in connection with the FSBNT acquisition	&n

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