10-Q 1 pb20150930_10q.htm FORM 10-Q pb20150930_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, 2015

 

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

(I.R.S. Employer

of incorporation or organization) 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, 2015, there were 70,030,090 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.

Financial Statements

 

 

Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 (unaudited)

3

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)

4

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)

5

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014 (unaudited)

6

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (unaudited)

7

 

Notes to Interim Consolidated Financial Statements (unaudited)

8

Item 2.

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

36

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

56

Item 4.

Controls and Procedures

56

   

PART II—OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

56

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

57

Item 5.

Other Information

57

Item 6.

Exhibits

57

Signatures

58

 

 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands, except par value)

 

ASSETS

               

Cash and due from banks

  $ 300,230     $ 677,285  

Federal funds sold

    996       569  

Total cash and cash equivalents

    301,226       677,854  
                 

Available for sale securities, at fair value

    110,855       145,399  

Held to maturity securities, at cost (fair value of $9,494,664 and $8,948,692, respectively)

    9,419,906       8,900,377  

Total securities

    9,530,761       9,045,776  
                 

Loans held for sale

    12,564       8,602  

Loans held for investment

    9,192,424       9,235,581  

Total loans

    9,204,988       9,244,183  

Less: allowance for credit losses

    (81,003 )     (80,762 )

Loans, net

    9,123,985       9,163,421  
                 

Accrued interest receivable

    48,719       51,941  

Goodwill

    1,881,955       1,874,191  

Core deposit intangibles, net

    51,712       58,947  

Bank premises and equipment, net

    271,650       281,549  

Other real estate owned

    3,271       3,237  

Bank owned life insurance (BOLI)

    234,046       230,095  

Federal Home Loan Bank of Dallas stock

    61,843       15,432  

Other assets

    58,068       105,290  

TOTAL ASSETS

  $ 21,567,236     $ 21,507,733  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

LIABILITIES:

               

Deposits:

               

Noninterest-bearing

  $ 5,093,175     $ 4,936,420  

Interest-bearing

    11,846,762       12,756,738  

Total deposits

    16,939,937       17,693,158  

Other borrowings

    786,571       8,724  

Securities sold under repurchase agreements

    310,038       315,523  

Junior subordinated debentures

    -       167,531  

Accrued interest payable

    2,002       3,190  

Other liabilities

    117,449       74,781  

Total liabilities

    18,155,997       18,262,907  
                 

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; 70,077,578 and 69,816,653 shares issued at September 30, 2015 and December 31, 2014, respectively; 70,040,490 and 69,779,565 shares outstanding at September 30, 2015 and December 31, 2014, respectively

    70,078       69,817  

Capital surplus

    2,033,737       2,025,235  

Retained earnings

    1,305,569       1,146,652  

Accumulated other comprehensive income—net unrealized gain on available for sale securities, net of tax of $1,326 and $2,008, respectively

    2,462       3,729  

Less treasury stock, at cost, 37,088 shares

    (607 )     (607 )

Total shareholders’ equity

    3,411,239       3,244,826  

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $ 21,567,236     $ 21,507,733  

 

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,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

                               

Loans, including fees

  $ 116,911     $ 140,521     $ 361,193     $ 386,320  

Securities

    48,610       46,910       145,702       141,636  

Federal funds sold

    22       35       234       261  

Total interest income

    165,543       187,466       507,129       528,217  
                                 

INTEREST EXPENSE:

                               

Deposits

    8,753       10,240       27,499       30,545  

Other borrowings

    473       225       967       572  

Securities sold under repurchase agreements

    209       245       620       736  

Junior subordinated debentures

    -       1,099       791       2,961  

Total interest expense

    9,435       11,809       29,877       34,814  
                                 

NET INTEREST INCOME

    156,108       175,657       477,252       493,403  

PROVISION FOR CREDIT LOSSES

    5,310       5,000       7,060       11,925  

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

    150,798       170,657       470,192       481,478  
                                 

NONINTEREST INCOME:

                               

Nonsufficient funds (NSF) fees

    9,082       9,734       25,310       27,703  

Credit card, debit card and ATM card income

    5,955       5,921       17,596       17,103  

Service charges on deposit accounts

    4,438       4,255       12,806       12,189  

Trust income

    1,986       2,099       6,042       5,943  

Mortgage income

    1,770       1,414       4,431       3,215  

Brokerage income

    1,596       1,743       4,546       4,413  

Net gain on sale of assets

    173       23       1,822       4,634  

Other

    6,780       5,002       17,945       16,252  

Total noninterest income

    31,780       30,191       90,498       91,452  
                                 

NONINTEREST EXPENSE:

                               

Salaries and employee benefits

    46,587       52,179       144,372       149,713  

Net occupancy and equipment

    6,088       6,801       17,864       18,136  

Credit and debit card, data processing and software amortization

    3,924       4,044       11,786       11,237  

Regulatory assessments and FDIC insurance

    3,366       4,051       11,973       10,663  

Core deposit intangibles amortization

    2,356       2,598       7,235       7,273  

Depreciation

    3,313       3,516       9,649       10,239  

Communications

    2,663       2,960       8,307       8,616  

Other real estate expense

    123       72       384       656  

Other

    8,010       9,319       24,057       27,393  

Total noninterest expense

    76,430       85,540       235,627       243,926  
                                 

INCOME BEFORE INCOME TAXES

    106,148       115,308       325,063       329,004  

PROVISION FOR INCOME TAXES

    35,550       38,738       108,892       109,791  

NET INCOME

  $ 70,598     $ 76,570     $ 216,171     $ 219,213  
                                 

EARNINGS PER SHARE:

                               

Basic

  $ 1.01     $ 1.10     $ 3.09     $ 3.20  

Diluted

  $ 1.01     $ 1.10     $ 3.09     $ 3.19  

 

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,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 
                                 

Net income

  $ 70,598     $ 76,570     $ 216,171     $ 219,213  

Other comprehensive loss, before tax:

                               

Securities available for sale:

                               

Change in unrealized gain during period

    (867 )     (951 )     (1,949 )     (1,757 )

Total other comprehensive loss

    (867 )     (951 )     (1,949 )     (1,757 )

Deferred tax benefit related to other comprehensive loss

    303       333       682       615  

Other comprehensive loss, net of tax

    (564 )     (618 )     (1,267 )     (1,142 )

Comprehensive income

  $ 70,034     $ 75,952     $ 214,904     $ 218,071  

  

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, 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, $0.7200 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  
                                                         

BALANCE AT DECEMBER 31, 2014

    69,816,653     $ 69,817     $ 2,025,235     $ 1,146,652     $ 3,729     $ (607 )   $ 3,244,826  

Net income

                            216,171                       216,171  

Other comprehensive loss

                                    (1,267 )             (1,267 )

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

    260,925       261       (38 )                             223  

Stock based compensation expense

                    8,540                               8,540  

Cash dividends declared, $0.8175 per share

                            (57,254 )                     (57,254 )

BALANCE AT SEPTEMBER 30, 2015

    70,077,578     $ 70,078     $ 2,033,737     $ 1,305,569     $ 2,462     $ (607 )   $ 3,411,239  

 

 

 

See notes to interim consolidated financial statements.

 

  

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Nine Months Ended

 
   

September 30,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 216,171     $ 219,213  

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

               

Depreciation and core deposit intangibles amortization

    16,884       17,512  

Provision for credit losses

    7,060       11,925  

Net amortization of premium on investments

    44,456       38,647  

Gain on sale of other real estate

    (86 )     (1,315 )

Gain on sale of assets

    (1,822 )     (4,634 )

Net accretion of discount on loans

    (44,283 )     (67,285 )

Net accretion of discount on deposits

    (860 )     (113 )

Gain on sale of loans

    (4,267 )     (3,096 )

Proceeds from sale of loans held for sale

    185,319       140,611  

Originations of loans held for sale

    (185,014 )     (143,829 )

Stock based compensation expense

    8,540       5,933  

Increase in accrued interest receivable and other assets

    (1,388 )     (11,110 )

Increase in accrued interest payable and other liabilities

    38,413       77,571  

Net cash provided by operating activities

    279,123       280,030  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Proceeds from maturities and principal paydowns of held to maturity securities

    1,261,788       3,521,830  

Purchase of held to maturity securities

    (1,825,802 )     (4,152,203 )

Proceeds from maturities and principal paydowns of available for sale securities

    4,642,623       3,140,424  

Purchase of available for sale securities

    (4,609,999 )     (3,099,998 )

Net decrease in loans held for investment

    78,211       75,213  

Purchase of bank premises and equipment

    (7,959 )     (8,864 )

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

    9,948       22,239  

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

          487,599  

Net cash used in investing activities

    (451,190 )     (13,760 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Net increase in noninterest-bearing deposits

    156,755       208,924  

Net decrease in interest-bearing deposits

    (909,116 )     (752,091 )

Net proceeds from other short-term borrowings

    780,000       280,000  

Repayments of other long-term borrowings

    (2,153 )     (717 )

Net decrease in securities sold under repurchase agreements

    (5,485 )     (6,304 )

Redemption of junior subordinated debentures

    (167,531 )     -  

Proceeds from stock option exercises

    223       3,335  

Payments of cash dividends

    (57,254 )     (49,371 )

Net cash used in financing activities

    (204,561 )     (316,224 )
                 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (376,628 )     (49,954 )

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    677,854       381,390  

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 301,226     $ 331,436  
                 

NONCASH ACTIVITIES:

               

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

  $ -     $ 218,164  

Acquisition of real estate through foreclosure of collateral

    2,079       5,900  
                 

SUPPLEMENTAL INFORMATION:

               

Income taxes paid

  $ 73,274     $ 77,995  

Interest paid

    35,069       34,719  

 

See notes to interim consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)

 

1. BASIS OF PRESENTATION

 

The interim consolidated financial statements include the accounts of Prosperity Bancshares, Inc.® (“Bancshares”) and its wholly-owned subsidiary, Prosperity Bank® (the “Bank”, collectively referred to as the “Company”). All intercompany transactions and balances have been eliminated.

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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, 2014. Operating results for the nine-month period ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 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,

 
   

2015

   

2014

   

2015

   

2014

 
           

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

  $ 70,598             $ 76,570             $ 216,171             $ 219,213          

Basic:

                                                               

Weighted average shares outstanding

    70,041     $ 1.01       69,751     $ 1.10       70,037     $ 3.09       68,548     $ 3.20  
                                                                 

Diluted:

                                                               

Add incremental shares for:

                                                               

Effect of dilutive securities - options

    12               40               17               66          

Total

    70,053     $ 1.01       69,791     $ 1.10       70,054     $ 3.09       68,614     $ 3.19  

  

      There were no stock options exercisable during the three and nine months ended September 30, 2015 or 2014 that would have had an anti-dilutive effect on the above computation.

 

3. NEW ACCOUNTING STANDARDS 

 

Accounting Standards Updates (“ASU”)

 

ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Additionally, the entity is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for the Company beginning January 1, 2016, though early adoption is permitted. ASU 2015-16 is not expected to have a significant impact on the Company’s financial statements.

   

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)

 

ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. ASU 2015-01 is effective for the Company beginning January 1, 2016, though early adoption is permitted. ASU 2015-01 is not expected to have a significant impact on the Company’s financial statements.

 

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 financial statements. 

 

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 became effective for the Company on January 1, 2015 and did not have a significant impact on the Company’s 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, 2018, with retrospective application to each prior reporting period presented. The Company is currently evaluating the requirements of ASU 2014-09, but it is not expected to have a significant impact on the Company’s 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 became effective for the Company on January 1, 2015 and did not have a significant impact on the Company’s financial statements.

  

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)

 

4. SECURITIES

 

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

 

   

September 30, 2015

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

Available for Sale

                               

States and political subdivisions

  $ 5,939     $ 40     $ -     $ 5,979  

Collateralized mortgage obligations

    27,721       78       (11 )     27,788  

Mortgage-backed securities

    60,818       3,564       (16 )     64,366  

Other securities

    12,588       181       (47 )     12,722  

Total

  $ 107,066     $ 3,863     $ (74 )   $ 110,855  
                                 

Held to Maturity

                               

U.S. Treasury securities and obligations of U.S. Government agencies

  $ 50,982     $ 1,259     $ -     $ 52,241  

States and political subdivisions

    366,076       6,571       (854 )     371,793  

Collateralized mortgage obligations

    4,093       32       (2 )     4,123  

Mortgage-backed securities

    8,998,755       116,314       (48,562 )     9,066,507  

Total

  $ 9,419,906     $ 124,176     $ (49,418 )   $ 9,494,664  

 

   

December 31, 2014

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

Available for Sale

                               

States and political subdivisions

  $ 14,402     $ 183     $ -     $ 14,585  

Collateralized mortgage obligations

    33,519       91       (37 )     33,573  

Mortgage-backed securities

    79,153       5,344       (14 )     84,483  

Other securities

    12,588       201       (31 )     12,758  

Total

  $ 139,662     $ 5,819     $ (82 )   $ 145,399  
                                 

Held to Maturity

                               

U.S. Treasury securities and obligations of U.S. Government agencies

  $ 52,353     $ 360     $ (74 )   $ 52,639  

States and political subdivisions

    404,356       6,147       (1,422 )     409,081  

Collateralized mortgage obligations

    19,585       215       (8 )     19,792  

Mortgage-backed securities

    8,424,083       96,650       (53,553 )     8,467,180  

Total

  $ 8,900,377     $ 103,372     $ (55,057 )   $ 8,948,692  

 

  

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least 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 analysis. 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, 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, 2015, management does not have the intent to sell any of its investment 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 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, 2015, management believes any impairment in the Company’s securities is temporary and 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, 2015

(UNAUDITED)

 

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

 

   

September 30, 2015

 
   

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

  $ 308     $ (4 )   $ 4,937     $ (7 )   $ 5,245     $ (11 )

Mortgage-backed securities

    982       (4 )     2,586       (12 )     3,568       (16 )

Other securities

    -       -       1,689       (47 )     1,689       (47 )

Total

  $ 1,290     $ (8 )   $ 9,212     $ (66 )   $ 10,502     $ (74 )
                                                 

Held to Maturity

                                               

U.S. Treasury securities and obligations of U.S. Government agencies

  $ 500     $ -     $ -     $ -     $ 500     $ -  

States and political subdivisions

    14,440       (102 )     45,514       (752 )     59,954       (854 )

Collateralized mortgage obligations

    -       -       109       (2 )     109       (2 )

Mortgage-backed securities

    1,702,410       (14,624 )     1,731,754       (33,938 )     3,434,164       (48,562 )

Total

  $ 1,717,350     $ (14,726 )   $ 1,777,377     $ (34,692 )   $ 3,494,727     $ (49,418 )

 

   

December 31, 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

  $ 6,675     $ (36 )   $ 45     $ (1 )   $ 6,720     $ (37 )

Mortgage-backed securities

    358       -       2,837       (14 )     3,195       (14 )

Other securities

    1,706       (31 )     -       -       1,706       (31 )

Total

  $ 8,739     $ (67 )   $ 2,882     $ (15 )   $ 11,621     $ (82 )
                                                 

Held to Maturity

                                               

U.S. Treasury securities and obligations of U.S. Government agencies

  $ 17,098     $ (74 )   $ -     $ -     $ 17,098     $ (74 )

States and political subdivisions

    45,680       (425 )     44,760       (997 )     90,440       (1,422 )

Collateralized mortgage obligations

    670       (5 )     322       (3 )     992       (8 )

Mortgage-backed securities

    1,149,380       (2,600 )     2,349,143       (50,953 )     3,498,523       (53,553 )

Total

  $ 1,212,828     $ (3,104 )   $ 2,394,225     $ (51,953 )   $ 3,607,053     $ (55,057 )

 

At September 30, 2015 and December 31, 2014, there were 472 securities and 501 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, 2015

(UNAUDITED)

 

The amortized cost and fair value of investment securities at September 30, 2015, 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

  $ 34,896     $ 34,984     $ 12,588     $ 12,722  

Due after one year through five years

    179,932       182,259       3,289       3,308  

Due after five years through ten years

    150,563       154,621       2,650       2,671  

Due after ten years

    51,667       52,170       -       -  

Subtotal

    417,058       424,034       18,527       18,701  

Mortgage-backed securities and collateralized mortgage obligations

    9,002,848       9,070,630       88,539       92,154  

Total

  $ 9,419,906     $ 9,494,664     $ 107,066     $ 110,855  

 

The Company recorded no gain or loss on sale of securities for the three and nine months ended September 30, 2015 and 2014. As of September 30, 2015, the Company did not own any non-agency collateralized mortgage obligations.

 

At September 30, 2015 and December 31, 2014, 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 $5.02 billion and $5.08 billion and a fair value of $5.06 billion and $5.10 billion at September 30, 2015 and December 31, 2014, respectively, were pledged to collateralize public deposits and for other purposes required or permitted by law.

 

 

5. LOANS AND ALLOWANCE FOR CREDIT LOSSES

 

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

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

Residential mortgage loans held for sale

  $ 12,564     $ 8,602  
                 

Commercial and industrial

    1,648,832       1,806,267  

Real estate:

               

Construction, land development and other land loans

    1,072,985       1,026,475  

1-4 family residential (including home equity)

    2,584,021       2,513,579  

Commercial real estate (including multi-family residential)

    2,992,726       3,030,340  

Farmland

    420,366       361,943  

Agriculture

    198,197       189,703  

Consumer and other

    275,297       307,274  

Total loans held for investment

    9,192,424       9,235,581  

Total

  $ 9,204,988     $ 9,244,183  

 

  

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)

 

(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 as well as 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 thorough underwriting and more active servicing than other types of loans.

 

(ii) Commercial Real Estate. The Company makes commercial real estate loans collateralized by owner-occupied and nonowner-occupied real estate to finance the purchase of real estate. The Company’s commercial real estate 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 nonowner-occupied 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, 2015, approximately 47.8% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

 

(iii) 1-4 Family Residential Loans. The Company’s lending activities also include the origination of 1-4 family residential mortgage loans (including home equity loans) 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 Home Loan Center 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 Home Loan Center into the secondary market.

 

(iv) 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.

 

(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.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)

  

(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), credit cards 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.

 

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, 2015 and December 31, 2014, 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 was not significant at September 30, 2015 or December 31, 2014.

 

Related Party Loans. As of September 30, 2015 and December 31, 2014, loans outstanding to directors, officers and their affiliates totaled $4.3 million and $4.9 million, respectively. All transactions entered into between the Company and such related parties are done in the ordinary course of business and 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,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

Beginning balance on January 1

  $ 4,940     $ 6,187  

New loans

    206       4,913  

Repayments and reclassified related loans

    (853 )     (6,160 )

Ending balance

  $ 4,293     $ 4,940  

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)

 

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.

 

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

 

   

September 30, 2015

 
   

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

  $ 387     $ -     $ 387     $ 215     $ 1,072,383     $ 1,072,985  

Agriculture and agriculture real estate (includes farmland)

    2,606       -       2,606       376       615,581       618,563  

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

    3,578       -       3,578       2,447       2,590,560       2,596,585  

Commercial real estate (includes multi-family residential)

    5,821       21       5,842       15,799       2,971,085       2,992,726  

Commercial and industrial

    9,237       240       9,477       25,828       1,613,527       1,648,832  

Consumer and other

    306       -       306       270       274,721       275,297  

Total

  $ 21,935     $ 261     $ 22,196     $ 44,935     $ 9,137,857     $ 9,204,988  

 

   

December 31, 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

  $ 7,667     $ -     $ 7,667     $ 526     $ 1,018,282     $ 1,026,475  

Agriculture and agriculture real estate (includes farmland)

    2,995       377       3,372       96       548,178       551,646  

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

    2,261       82       2,343       3,570       2,516,268       2,522,181  

Commercial real estate (includes multi-family residential)

    12,679       65       12,744       6,340       3,011,256       3,030,340  

Commercial and industrial

    18,305       869       19,174       20,537       1,766,556       1,806,267  

Consumer and other

    612       800       1,412       353       305,509       307,274  

Total

  $ 44,519