10-Q 1 pb20140930_10q.htm FORM 10-Q pb20140930_10q.htm

Table Of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

 

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: 001-35388

  


PROSPERITY BANCSHARES, INC.®

(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  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer

Accelerated Filer

       

Non-accelerated Filer

  (Do not check if a smaller reporting company)

Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

As of November 4, 2014, there were 69,769,522 outstanding shares of the registrant’s Common Stock, par value $1.00 per share.

 



 

 

  

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

 

PART I—FINANCIAL INFORMATION

 

     

Item 1.

Interim Consolidated Financial Statements

 

 

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (unaudited)

1

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

2

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

3

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2014 and 2013 (unaudited)

4

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)

5

 

Notes to Interim Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

57

Item 4.

Controls and Procedures

57

   

PART II—OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults upon Senior Securities

57

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

58

Signatures

59

 

 

 

PART I—FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   

September 30,

   

December 31,

 
   

2014

   

2013

 
   

(Dollars in thousands, except par value)

 

ASSETS

               

Cash and due from banks

  $ 330,952     $ 380,990  

Federal funds sold

    484       400  

Total cash and cash equivalents

    331,436       381,390  
                 

Available for sale securities, at fair value

    155,216       157,478  

Held to maturity securities, at cost (fair value of $8,671,934 and $7,987,342, respectively)

    8,690,693       8,066,970  

Total securities

    8,845,909       8,224,448  
                 

Loans held for sale

    8,524       2,210  

Loans held for investment

    9,360,364       7,773,011  

Total loans

    9,368,888       7,775,221  

Less: allowance for credit losses

    (77,613 )     (67,282 )

Loans, net

    9,291,275       7,707,939  
                 

Accrued interest receivable

    50,019       49,246  

Goodwill

    1,892,255       1,671,520  

Core deposit intangibles, net

    34,474       42,049  

Bank premises and equipment, net

    283,011       282,925  

Other real estate owned

    5,504       7,299  

Bank owned life insurance (BOLI)

    228,704       160,056  

Federal Home Loan Bank of Dallas stock

    44,747       24,499  

Other assets

    109,980       90,657  

TOTAL ASSETS

  $ 21,117,314     $ 18,642,028  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

LIABILITIES:

               

Deposits:

               

Noninterest-bearing

  $ 4,968,867     $ 4,108,835  

Interest-bearing

    12,045,160       11,182,436  

Total deposits

    17,014,027       15,291,271  

Other borrowings

    289,972       10,689  

Securities sold under repurchase agreements

    358,053       364,357  

Junior subordinated debentures

    167,531       124,231  

Accrued interest payable

    2,569       2,500  

Other liabilities

    102,212       62,162  

Total liabilities

    17,934,364       15,855,210  
                 

COMMITMENTS AND CONTINGENCIES

    -       -  

SHAREHOLDERS’ EQUITY:

               

Preferred stock, $1 par value; 20,000,000 shares authorized; none issued or outstanding

    -       -  

Common stock, $1 par value; 200,000,000 shares authorized; 69,793,335 and 66,085,179 shares issued at September 30, 2014 and December 31, 2013, respectively; 69,756,247 and 66,048,091 shares outstanding at September 30, 2014 and December 31, 2013, respectively

    69,793       66,085  

Capital surplus

    2,022,586       1,798,862  

Retained earnings

    1,087,437       917,595  

Accumulated other comprehensive income—net unrealized gain on available for sale securities, net of tax of $2,015 and $2,630, respectively

    3,741       4,883  

Less treasury stock, at cost, 37,088 shares

    (607 )     (607 )

Total shareholders’ equity

    3,182,950       2,786,818  

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $ 21,117,314     $ 18,642,028  

 

See notes to interim consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

    Three Months Ended     Nine Months Ended  
   

September 30,

   

September 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

                               

Loans, including fees

  $ 140,521     $ 94,236     $ 386,320     $ 265,542  

Securities

    46,910       41,961       141,636       117,893  

Federal funds sold

    35       16       261       111  

Total interest income

    187,466       136,213       528,217       383,546  
                                 

INTEREST EXPENSE:

                               

Deposits

    10,240       8,314       30,545       26,174  

Securities sold under repurchase agreements

    245       439       736       1,273  

Junior subordinated debentures

    1,099       317       2,961       921  

Other borrowings

    225       610       572       1,821  

Total interest expense

    11,809       9,680       34,814       30,189  
                                 

NET INTEREST INCOME

    175,657       126,533       493,403       353,357  

PROVISION FOR CREDIT LOSSES

    5,000       4,025       11,925       9,375  

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

    170,657       122,508       481,478       343,982  

NONINTEREST INCOME:

                               

Nonsufficient funds (NSF) fees

    9,734       8,649       27,703       25,504  

Credit card, debit card and ATM card income

    5,921       4,307       17,103       17,801  

Service charges on deposit accounts

    4,255       3,169       12,189       9,404  

Trust income

    2,099       901       5,943       2,814  

Mortgage income

    1,414       931       3,215       3,489  

Brokerage income

    1,743       233       4,413       798  

Net gain (loss) on sale of assets

    23       126       4,634       (53 )

Other

    4,972       3,238       17,566       10,512  

Total noninterest income

    30,161       21,554       92,766       70,269  

NONINTEREST EXPENSE:

                               

Salaries and employee benefits

    52,179       37,135       149,713       107,861  

Net occupancy and equipment

    6,801       5,094       18,136       14,041  

Debit card, data processing and software amortization

    4,044       2,756       11,237       8,575  

Regulatory assessments and FDIC insurance

    4,051       2,516       10,663       7,490  

Core deposit intangibles amortization

    2,598       1,455       7,273       4,551  

Depreciation

    3,516       2,679       10,239       7,521  

Communications

    2,960       2,397       8,616       7,003  

Other real estate expense

    72       75       656       535  

Other

    9,289       7,430       28,707       21,027  

Total noninterest expense

    85,510       61,537       245,240       178,604  

INCOME BEFORE INCOME TAXES

    115,308       82,525       329,004       235,647  

PROVISION FOR INCOME TAXES

    38,738       27,247       109,791       77,220  

NET INCOME

  $ 76,570     $ 55,278     $ 219,213     $ 158,427  
                                 

EARNINGS PER SHARE:

                               

Basic

  $ 1.10     $ 0.92     $ 3.20     $ 2.68  

Diluted

  $ 1.10     $ 0.91     $ 3.19     $ 2.67  

 

See notes to interim consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

    Three Months Ended     Nine Months Ended  
   

September 30,

   

September 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(Dollars in thousands)

 
                                 

Net income

  $ 76,570     $ 55,278     $ 219,213     $ 158,427  

Other comprehensive loss, before tax:

                               

Securities available for sale:

                               

Change in unrealized gain during period

    (951 )     (1,136 )     (1,757 )     (5,237 )

Total other comprehensive loss

    (951 )     (1,136 )     (1,757 )     (5,237 )

Deferred tax benefit related to other comprehensive loss

    333       398       615       1,833  

Other comprehensive loss, net of tax

    (618 )     (738 )     (1,142 )     (3,404 )

Comprehensive income

  $ 75,952     $ 54,540     $ 218,071     $ 155,023  

 

See notes to interim consolidated financial statements.

 

  

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

                                   

Accumulated

                 
                                   

Other

           

Total

 
   

Common Stock

   

Capital

   

Retained

   

Comprehensive

   

Treasury

   

Shareholders’

 
   

Shares

   

Amount

   

Surplus

   

Earnings

   

Income

   

Stock

   

Equity

 
   

(In thousands, except share and per share data)

 

BALANCE AT DECEMBER 31, 2012

    56,484,234     $ 56,484     $ 1,274,290     $ 750,236     $ 8,986     $ (607 )   $ 2,089,389  

Net income

                            158,427                       158,427  

Other comprehensive loss

                                    (3,404 )             (3,404 )

Common stock issued in connection with the exercise of stock options and restricted stock awards

    146,088       146       2,893                               3,039  

Common stock issued in connection with the acquisition of East Texas Financial Services, Inc.

    530,940       531       21,769                               22,300  

Common stock issued in connection with the acquisition of Coppermark Bancshares, Inc.

    3,258,718       3,259       151,172                               154,431  

Stock based compensation expense

                    3,139                               3,139  

Cash dividends declared, $0.65 per share

                            (38,209 )                     (38,209 )

BALANCE AT SEPTEMBER 30, 2013

    60,419,980     $ 60,420     $ 1,453,263     $ 870,454     $ 5,582     $ (607 )   $ 2,389,112  
                                                         

BALANCE AT DECEMBER 31, 2013

    66,085,179     $ 66,085     $ 1,798,862     $ 917,595     $ 4,883     $ (607 )   $ 2,786,818  

Net income

                            219,213                       219,213  

Other comprehensive loss

                                    (1,142 )             (1,142 )

Common stock issued in connection with the exercise of stock options and restricted stock awards

    410,134       410       2,925                               3,335  

Common stock issued in connection with the acquisition of F&M Bancorporation Inc.

    3,298,022       3,298       214,866                               218,164  

Stock based compensation expense

                    5,933                               5,933  

Cash dividends declared, $0.72 per share

                            (49,371 )                     (49,371 )

BALANCE AT SEPTEMBER 30, 2014

    69,793,335     $ 69,793     $ 2,022,586     $ 1,087,437     $ 3,741     $ (607 )   $ 3,182,950  

 

See notes to interim consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Nine Months Ended  
   

September 30,

 
   

2014

   

2013

 
   

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 219,213     $ 158,427  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and core deposit intangibles amortization

    17,512       12,072  

Provision for credit losses

    11,925       9,375  

Net amortization of premium on investments

    38,647       56,825  

(Gain) loss on sale of other real estate

    (1,315 )     785  

(Gain) loss on sale of assets

    (4,634 )     53  

Net accretion of discount on loans

    (67,285 )     (42,744 )

Gain on sale of loans

    (3,096 )     (3,218 )

Proceeds from sale of loans held for sale

    140,611       146,963  

Originations of loans held for sale

    (143,829 )     (140,715 )

Stock based compensation expense

    5,933       3,139  

(Increase) decrease in accrued interest receivable and other assets

    (11,110 )     25,058  

Increase in accrued interest payable and other liabilities

    77,458       22,663  

Net cash provided by operating activities

    280,030       248,683  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Proceeds from maturities and principal paydowns of held to maturity securities

    3,521,830       1,814,877  

Purchase of held to maturity securities

    (4,152,203 )     (2,245,685 )

Proceeds from maturities and principal paydowns of available for sale securities

    3,140,424       2,012,178  

Purchase of available for sale securities

    (3,099,998 )     (1,954,999 )

Net decrease (increase) in loans held for investment

    75,213       (47,466 )

Purchase of bank premises and equipment

    (8,864 )     (20,937 )

Proceeds from sale of bank premises, equipment and other real estate

    22,239       11,232  

Net cash and cash equivalents acquired in the purchase of East Texas Financial Services, Inc.

    -       3,471  

Net cash and cash equivalents acquired in the purchase of Coppermark Bancshares, Inc.

    -       288,795  

Net cash and cash equivalents acquired in the purchase of F&M Bancorporation Inc.

    487,599       -  

Net cash used in investing activities

    (13,760 )     (138,534 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Net increase in noninterest-bearing deposits

    208,924       43,221  

Net decrease in interest-bearing deposits

    (752,091 )     (459,351 )

Net proceeds from other short-term borrowings

    280,000       349,583  

Repayments of other long-term borrowings

    (717 )     (41,095 )

Net increase in securities sold under repurchase agreements

    (6,304 )     (22,533 )

Proceeds from stock option exercises

    3,335       3,039  

Payments of cash dividends

    (49,371 )     (38,209 )

Net cash used in financing activities

    (316,224 )     (165,345 )
                 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (49,954 )     (55,196 )

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    381,390       326,304  

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 331,436     $ 271,108  
                 

NONCASH ACTIVITIES:

               

Stock issued in connection with the East Texas Financial Services, Inc. acquisition

  $ -     $ 22,300  

Stock issued in connection with the Coppermark Bancshares, Inc. acquisition

    -       154,431  

Stock issued in connection with the F&M Bancorporation Inc. acquisition

    218,164       -  

Acquisition of real estate through foreclosure of collateral

    5,900       3,044  
                 

SUPPLEMENTAL INFORMATION:

               

Income taxes paid

  $ 77,995     $ 69,659  

Interest paid

    34,719       29,673  

 

See notes to interim consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

1. BASIS OF PRESENTATION

 

The interim consolidated financial statements include the accounts of Prosperity Bancshares, Inc.® (the “Company”) and its wholly-owned subsidiary, Prosperity Bank® (the “Bank”). All intercompany 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, 2013. Operating results for the nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other period.

 

  

2. INCOME PER COMMON SHARE

 

Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. The following table illustrates the computation of basic and diluted earnings per share:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 
           

Per Share

           

Per Share

           

Per Share

           

Per Share

 
   

Amount

   

Amount

   

Amount

   

Amount

   

Amount

   

Amount

   

Amount

   

Amount

 
   

(Amounts in thousands, except per share data)

 

Net income

  $ 76,570             $ 55,278             $ 219,213             $ 158,427          

Basic:

                                                               

Weighted average shares outstanding

    69,751     $ 1.10       60,344     $ 0.92       68,548     $ 3.20       59,207     $ 2.68  
                                                                 

Diluted:

                                                               

Add incremental shares for:

                                                               

Effect of dilutive securities - options

    40               160               66               155          

Total

    69,791     $ 1.10       60,504     $ 0.91       68,614     $ 3.19       59,362     $ 2.67  

 

      There were no stock options exercisable during the three and nine months ended September 30, 2014 or 2013 that would have had an anti-dilutive effect on the above computation.

 

3. NEW ACCOUNTING STANDARDS 

 

Accounting Standards Updates (“ASU”)

  

ASU 2014-12Compensation-Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.”  ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 is effective for the Company beginning January 1, 2016 and is not expected to have a significant impact on the Company’s consolidated financial statements. 

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

 

ASU 2014-11 “Transfers and Servicing (Topic 860) - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure.”  ASU 2014-11 changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. It also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting and disclosure for the repurchase agreement. ASU 2014-11 is effective for the Company beginning January 1, 2016 and is not expected to have a significant impact on the Company’s consolidated financial statements. 

 

ASU 2014-09 “Revenue from Contract with Customers (Topic 606).”  ASU 2014-09  supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and most industry-specific guidance throughout the Industry Topics of the Codification.  Additionally, ASU 2014-09  supersedes some cost guidance included in Revenue Recognition—Construction-Type and Production-Type Contracts (Subtopic 605-35).  In addition, the existing requirements for the recognition  of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement.   The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 is effective for the Company beginning January 1, 2017, with retrospective application to each prior reporting period presented, and is not expected to have a significant impact on the Company’s consolidated financial statements. 

 

ASU 2014-04 “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40)Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” ASU 2014-04 intends to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 will become effective for the Company on January 1, 2015 and is not expected to have a significant impact on the Company’s consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

4. SECURITIES

  

The amortized cost and fair value of investment securities were as follows:

  

   

September 30, 2014

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

Available for Sale

                               

States and political subdivisions

  $ 15,410     $ 294     $ -     $ 15,704  

Collateralized mortgage obligations

    35,688       100       (39 )     35,749  

Mortgage-backed securities

    85,774       5,538       (16 )     91,296  

Other securities

    12,588       -       (121 )     12,467  

Total

  $ 149,460     $ 5,932     $ (176 )   $ 155,216  
                                 

Held to Maturity

                               

U.S. Treasury securities and obligations of U.S. Government sponsored entities

  $ 58,559     $ 218     $ (136 )   $ 58,641  

States and political subdivisions

    406,437       5,547       (1,657 )     410,327  

Collateralized mortgage obligations

    27,306       357       (32 )     27,631  

Mortgage-backed securities

    8,198,391       82,239       (105,295 )     8,175,335  

Total

  $ 8,690,693     $ 88,361     $ (107,120 )   $ 8,671,934  

  

   

December 31, 2013

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

Available for Sale

                               

States and political subdivisions

  $ 28,578     $ 797     $ -     $ 29,375  

Collateralized mortgage obligations

    483       7       (1 )     489  

Mortgage-backed securities

    108,316       6,843       (22 )     115,137  

Other securities

    12,589       14       (126 )     12,477  

Total

  $ 149,966     $ 7,661     $ (149 )   $ 157,478  
                                 

Held to Maturity

                               

U.S. Treasury securities and obligations of U.S. Government sponsored entities

  $ 62,931     $ 46     $ (935 )   $ 62,042  

States and political subdivisions

    439,235       4,317       (2,207 )     441,345  

Corporate debt securities

    513       5       -       518  

Collateralized mortgage obligations

    50,034       1,017       (58 )     50,993  

Mortgage-backed securities

    7,514,257       84,166       (165,979 )     7,432,444  

Total

  $ 8,066,970     $ 89,551     $ (169,179 )   $ 7,987,342  

 

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

Management evaluates debt securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held to maturity are evaluated for OTTI under Financial Accounting Standards Board (“FASB”): Accounting Standards Codification (“ASC”) Topic 320, “Investments-Debt and Equity Securities.”

 

In determining OTTI, for a majority of the Company's debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

When OTTI occurs, the amount of the other-than-temporary impairment recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit-related portion of the impairment loss (“credit loss”) and the noncredit portion of the impairment loss (“noncredit portion”). The amount of the total OTTI related to the credit loss is determined based on the difference between the present value of cash flows expected to be collected and the amortized cost basis and such difference is recognized in earnings. The amount of the total OTTI related to the noncredit portion is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

 

As of September 30, 2014, management does not have the intent to sell any of its securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The unrealized losses in the Company's securities as of September 30, 2014 are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2014, management believes any impairment in the Company’s securities is temporary, and therefore no impairment loss has been realized in the Company’s consolidated statements of income.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

Securities with unrealized losses, segregated by length of time, that have been in a continuous loss position were as follows:

  

   

September 30, 2014

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Estimated

   

Unrealized

   

Estimated

   

Unrealized

   

Estimated

   

Unrealized

 
   

Fair Value

   

Losses

   

Fair Value

   

Losses

   

Fair Value

   

Losses

 
   

(Dollars in thousands)

 

Available for Sale

                                               

Collateralized mortgage obligations

  $ 6,998     $ (38 )   $ 47     $ (1 )   $ 7,045     $ (39 )

Mortgage-backed securities

    709       (1 )     2,920       (15 )     3,629       (16 )

Other securities

    12,467       (121 )     -       -       12,467       (121 )

Total

  $ 20,174     $ (160 )   $ 2,967     $ (16 )   $ 23,141     $ (176 )
                                                 

Held to Maturity

                                               

U.S. Treasury securities and obligations of U.S. Government sponsored entities

  $ 27,559     $ (136 )   $ -     $ -     $ 27,559     $ (136 )

States and political subdivisions

    64,902       (599 )     46,133       (1,058 )     111,035       (1,657 )

Collateralized mortgage obligations

    675       (9 )     1,534       (23 )     2,209       (32 )

Mortgage-backed securities

    1,407,286       (4,160 )     3,023,150       (101,135 )     4,430,436       (105,295 )

Total

  $ 1,500,422     $ (4,904 )   $ 3,070,817     $ (102,216 )   $ 4,571,239     $ (107,120 )

  

   

December 31, 2013

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Estimated

   

Unrealized

   

Estimated

   

Unrealized

   

Estimated

   

Unrealized

 
   

Fair Value

   

Losses

   

Fair Value

   

Losses

   

Fair Value

   

Losses

 
   

(Dollars in thousands)

 

Available for Sale

                                               

Collateralized mortgage obligations

  $ 5     $ -     $ 50     $ (1 )   $ 55     $ (1 )

Mortgage-backed securities

    651       (1 )     3,313       (21 )     3,964       (22 )

Other securities

    6,911       (126 )     -       -       6,911       (126 )

Total

  $ 7,567     $ (127 )   $ 3,363     $ (22 )   $ 10,930     $ (149 )
                                                 

Held to Maturity

                                               

U.S. Treasury securities and obligations of U.S. Government sponsored entities

  $ 48,389     $ (935 )   $ -     $ -     $ 48,389     $ (935 )

States and political subdivisions

    113,063       (1,581 )     28,639       (626 )     141,702       (2,207 )

Collateralized mortgage obligations

    2,109       (32 )     433       (26 )     2,542       (58 )

Mortgage-backed securities

    3,702,569       (106,816 )     998,380       (59,163 )     4,700,949       (165,979 )

Total

  $ 3,866,130     $ (109,364 )   $ 1,027,452     $ (59,815 )   $ 4,893,582     $ (169,179 )

 

At September 30, 2014 and December 31, 2013, there were 503 securities and 450 securities, respectively, in an unrealized loss position for more than 12 months.

 

  

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

The amortized cost and fair value of investment securities at September 30, 2014, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations at any time with or without call or prepayment penalties.

 

   

Held to Maturity

   

Available for Sale

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
   

(Dollars in thousands)

 

Due in one year or less

  $ 33,042     $ 33,097     $ 12,689     $ 12,571  

Due after one year through five years

    179,743       180,662       5,520       5,621  

Due after five years through ten years

    187,065       189,586       9,158       9,332  

Due after ten years

    65,146       65,623       631       647  

Subtotal

    464,996       468,968       27,998       28,171  

Mortgage-backed securities and collateralized mortgage obligations

    8,225,697       8,202,966       121,462       127,045  

Total

  $ 8,690,693     $ 8,671,934     $ 149,460     $ 155,216  

 

The Company recorded no gain or loss on sale of securities for the three and nine months ended September 30, 2014 and 2013. As of September 30, 2014, the Company had 8 non-agency collateralized mortgage obligations remaining with a total book value of $1.3 million and total market value of $1.3 million.

 

At September 30, 2014 and December 31, 2013, the Company did not own securities of any one issuer (other than the U.S. government and its agencies) for which aggregate adjusted cost exceeded 10% of the consolidated shareholders’ equity at such respective dates.

 

Securities with an amortized cost of $5.13 billion and $4.46 billion and a fair value of $5.11 billion and $4.47 billion at September 30, 2014 and December 31, 2013, respectively, were pledged to collateralize public deposits and for other purposes required or permitted by law.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

5. LOANS AND ALLOWANCE FOR CREDIT LOSSES

 

The loan portfolio consists of various types of loans made primarily to borrowers located within the states of Texas and Oklahoma and is classified by major type as follows:

 

   

September 30,

   

December 31,

 
   

2014

   

2013

 
   

(Dollars in thousands)

 

Residential mortgage loans held for sale

  $ 8,524     $ 2,210  
                 

Commercial and industrial

    2,061,589       1,279,777  

Real estate:

               

Construction, land development and other land loans

    1,041,300       865,511  

1-4 family residential (including home equity)

    2,471,467       2,129,510  

Commercial real estate (including multi-family residential)

    3,091,090       2,753,797  

Farmland

    348,640       332,648  

Agriculture

    186,032       198,610  

Consumer and other

    160,246       213,158  

Total loans held for investment

    9,360,364       7,773,011  

Total

  $ 9,368,888     $ 7,775,221  

  

(i) Commercial and Industrial Loans. In nearly all cases, the Company’s commercial loans are made in the Company’s market areas and are underwritten on the basis of the borrower’s ability to service the debt from income. As a general practice, the Company takes as collateral a lien on any available real estate, equipment or other assets owned by the borrower and obtains a personal guaranty of the borrower or principal. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans is due to the type of collateral securing these loans. The increased risk also derives from the expectation that commercial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and servicing than other types of loans.

 

(ii) Construction, Land Development and Other Land Loans. The Company makes loans to finance the construction of residential and, to a lesser extent, nonresidential properties. Construction loans generally are collateralized by first liens on real estate and have floating interest rates. The Company conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above are also used in the Company’s construction lending activities. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover all of the unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.

 

   

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

(iii) 1-4 Family Residential Loans. The Company originates 1-4 family residential mortgage loans (including home equity loans and residential mortgage loans held for sale) collateralized by owner-occupied residential properties located in the Company’s market areas. The Company offers a variety of mortgage loan portfolio products which generally are amortized over five to 25 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 89% of appraised value or have mortgage insurance. The Company requires mortgage title insurance and hazard insurance. The Company retains these portfolio loans for its own account rather than selling them into the secondary market. By doing so, the Company incurs interest rate risk as well as the risks associated with nonpayments on such loans. The Company’s Mortgage Department offers a variety of mortgage loan products which are generally amortized over 30 years, including FHA and VA loans. The Company sells the loans originated by the Mortgage Department into the secondary market.

 

(vi) Commercial Real Estate. The Company makes commercial real estate related loans collateralized by owner-occupied and non-owner-occupied real estate to finance the purchase of real estate. The Company’s commercial real estate related loans are collateralized by first liens on real estate, typically have variable interest rates (or five year or less fixed rates) and amortize over a 15 to 20 year period. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. The Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition in connection with underwriting these loans. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower. At September 30, 2014, approximately 50.5% of the outstanding principal balance of the Company’s commercial real estate related loans was secured by owner-occupied properties.

 

(v) Agriculture Loans. The Company provides agriculture loans for short-term crop production, including rice, cotton, milo and corn, farm equipment financing and agriculture real estate financing. The Company evaluates agriculture borrowers primarily based on their historical profitability, level of experience in their particular agriculture industry, overall financial capacity and the availability of secondary collateral to withstand economic and natural variations common to the industry. Because agriculture loans present a higher level of risk associated with events caused by nature, the Company routinely makes on-site visits and inspections in order to identify and monitor such risks.

 

(vi) Consumer Loans. Consumer loans made by the Company include direct “A” credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 180 months and vary based upon the nature of collateral and size of loan. Generally, consumer loans entail greater risk than do real estate secured loans, particularly in the case of consumer loans that are unsecured or collateralized by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans.

 

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

Concentrations of Credit. Most of the Company’s lending activity occurs within the states of Texas and Oklahoma. The majority of the Company’s loan portfolio consists of commercial real estate, 1-4 family residential loans, and commercial and industrial loans. As of September 30, 2014 and December 31, 2013, there were no concentrations of loans related to any single industry in excess of 10% of total loans.

 

Foreign Loans. The Company has U.S. dollar-denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at September 30, 2014 or December 31, 2013.

 

Related Party Loans. As of September 30, 2014 and December 31, 2013, loans outstanding to directors, officers and their affiliates totaled $3.1 million and $6.2 million, respectively. All transactions entered into between the Company and such related parties are done in the ordinary course of business, made on the same terms and conditions as similar transactions with unaffiliated persons.

 

An analysis of activity with respect to these related party loans is as follows:  

 

   

September 30,

   

December 31,

 
   

2014

   

2013

 
   

(Dollars in thousands)

 

Beginning balance on January 1

  $ 6,187     $ 6,682  

New loans and reclassified related loans

    2,952       306  

Repayments

    (6,078 )     (801 )

Ending balance

  $ 3,061     $ 6,187  

 

Nonperforming Assets and Nonaccrual and Past Due Loans. The Company has several procedures in place to assist it in maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed by its officers and the Company also monitors its delinquency levels for any negative or adverse trends. There can be no assurance, however, that the Company’s loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

 

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 requires appraisals on loans collateralized by real estate. With respect to potential problem loans, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible writedowns or appropriate additions to the allowance for credit losses.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

 

An aging analysis of past due loans, segregated by class of loans, is presented below:

 

   

September 30, 2014

 
   

Loans Past Due and Still Accruing

                         
           

90 or More

   

Total Past

   

Nonaccrual

   

Current

   

Total

 
   

30-89 Days

   

Days

   

Due Loans

   

Loans

   

Loans

   

Loans

 
   

(Dollars in thousands)

 
                                                 

Construction, land development and other land loans other land loans

  $ 14,387     $ 3,531     $ 17,918     $ 745     $ 1,022,637     $ 1,041,300  

Agriculture and agriculture real estate (includes farmland)

    4,209       78       4,287       104       530,281       534,672  

1-4 family (includes home equity) (1)

    7,545       968       8,513       4,228       2,467,250       2,479,991  

Commercial real estate (includes multi-family residential)

    7,379       4,336       11,715       3,930       3,075,445       3,091,090  

Commercial and industrial

    52,215       8,839       61,054       17,327       1,983,208       2,061,589  

Consumer and other

    1,695       1       1,696       470       158,080       160,246  

Total

  $ 87,430     $ 17,753     $ 105,183     $ 26,804     $ 9,236,901     $ 9,368,888  

 

 

   

December 31, 2013

 
   

Loans Past Due and Still Accruing

                         
           

90 or More

   

Total Past

   

Nonaccrual

   

Current

   

Total

 
   

30-89 Days

   

Days

   

Due Loans

   

Loans

   

Loans

   

Loans

 
   

(Dollars in thousands)

 

Construction, land development and other land loans

  $ 6,258     $ 2     $ 6,260     $ 386     $ 858,865     $ 865,511  

Agriculture and agriculture real estate (includes farmland)

    5,634       218       5,852       62       525,344       531,258  

1-4 family (includes home equity) (1)

    8,684       2,012       10,696       3,086       2,117,938       2,131,720  

Commercial real estate (includes multi-family residential)

    8,163       1,752       9,915       4,333       2,739,549       2,753,797  

Commercial and industrial

    9,552       933       10,485       2,208       1,267,084       1,279,777  

Consumer and other

    1,344       30