10-Q 1 pb20160331_10q.htm FORM 10-Q prosp.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 MARCH 31, 2016

 

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 May 5, 2016, there were 69,569,915 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 March 31, 2016 and December 31, 2015 (unaudited)

3

 

Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)

4

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)

5

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2016 and 2015 (unaudited)

6

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (unaudited)

7

 

Notes to Consolidated Financial Statements (unaudited)

8

Item 2.

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

34

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

55

Item 4.

Controls and Procedures

55

   

PART II—OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

56

Item 1A.

Risk Factors

56

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults upon Senior Securities

56

Item 4.

Mine Safety Disclosures

56

Item 5.

Other Information

56

Item 6.

Exhibits

56

Signatures 

58

 

 

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   

March 31,

2016

   

December 31,

2015

 
   

(Dollars in thousands, except par value)

 

ASSETS

               

Cash and due from banks

  $ 334,592     $ 562,544  

Federal funds sold

    1,386       1,418  

Total cash and cash equivalents

    335,978       563,962  
                 

Available for sale securities, at fair value

    96,349       103,064  

Held to maturity securities, at cost (fair value of $9,457,901 and $9,393,175, respectively)

    9,352,355       9,399,363  

Total securities

    9,448,704       9,502,427  
                 

Loans held for sale

    23,717       23,933  

Loans held for investment

    9,630,691       9,414,656  

Total loans

    9,654,408       9,438,589  

Less: allowance for credit losses

    (83,714 )     (81,384 )

Loans, net

    9,570,694       9,357,205  
                 

Accrued interest receivable

    50,082       51,924  

Goodwill

    1,903,451       1,868,827  

Core deposit intangibles, net

    47,195       49,417  

Bank premises and equipment, net

    277,951       267,996  

Other real estate owned

    16,695       2,963  

Bank owned life insurance (BOLI)

    245,337       235,429  

Federal Home Loan Bank of Dallas stock

    34,255       68,413  

Other assets

    48,003       68,653  

TOTAL ASSETS

  $ 21,978,345     $ 22,037,216  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

LIABILITIES:

               

Deposits:

               

Noninterest-bearing

  $ 5,112,943     $ 5,136,579  

Interest-bearing

    12,759,823       12,544,540  

Total deposits

    17,872,766       17,681,119  

Other borrowings

    186,225       491,399  

Securities sold under repurchase agreements

    304,204       315,253  

Junior subordinated debentures

    7,217       -  

Accrued interest payable

    2,164       1,896  

Other liabilities

    106,709       84,639  

Total liabilities

    18,479,285       18,574,306  
                 

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; 69,580,453 and 70,058,761 shares issued at March 31, 2016 and December 31, 2015, respectively; 69,543,365 and 70,021,673 shares outstanding at March 31, 2016 and December 31, 2015, respectively

    69,580       70,059  

Capital surplus

    2,024,849       2,036,378  

Retained earnings

    1,403,102       1,355,040  

Accumulated other comprehensive income—net unrealized gain on available for sale securities, net of tax of $1,150 and $1,098, respectively

    2,136       2,040  

Less treasury stock, at cost, 37,088 shares

    (607 )     (607 )

Total shareholders’ equity

    3,499,060       3,462,910  

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $ 21,978,345     $ 22,037,216  

 

See notes to consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

   

Three Months Ended

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

               

Loans, including fees

  $ 124,522     $ 124,878  

Securities

    52,573       48,562  

Federal funds sold

    96       165  

Total interest income

    177,191       173,605  
                 

INTEREST EXPENSE:

               

Deposits

    10,206       9,577  

Other borrowings

    482       129  

Securities sold under repurchase agreements

    212       203  

Junior subordinated debentures

    34       791  

Total interest expense

    10,934       10,700  
                 

NET INTEREST INCOME

    166,257       162,905  

PROVISION FOR CREDIT LOSSES

    14,000       1,250  

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

    152,257       161,655  

NONINTEREST INCOME:

               

Nonsufficient funds (NSF) fees

    8,189       7,918  

Credit card, debit card and ATM card income

    5,827       5,638  

Service charges on deposit accounts

    4,590       4,179  

Trust income

    2,027       2,009  

Mortgage income

    1,471       1,148  

Brokerage income

    1,290       1,409  

Net gain on sale of assets

    1,020       1,379  

Other

    6,379       4,741  

Total noninterest income

    30,793       28,421  

NONINTEREST EXPENSE:

               

Salaries and employee benefits

    50,114       49,966  

Net occupancy and equipment

    5,624       5,964  

Credit and debit card, data processing and software amortization

    4,430       3,817  

Regulatory assessments and FDIC insurance

    3,430       4,354  

Core deposit intangibles amortization

    2,222       2,489  

Depreciation

    3,349       2,916  

Communications

    2,939       2,809  

Other real estate expense

    42       132  

Other

    8,378       7,015  

Total noninterest expense

    80,528       79,462  

INCOME BEFORE INCOME TAXES

    102,522       110,614  

PROVISION FOR INCOME TAXES

    33,571       36,973  

NET INCOME

  $ 68,951     $ 73,641  
                 

EARNINGS PER SHARE:

               

Basic

  $ 0.98     $ 1.05  

Diluted

  $ 0.98     $ 1.05  

 

See notes to consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

   

Three Months Ended

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 
                 

Net income

  $ 68,951     $ 73,641  

Other comprehensive income (loss), before tax:

               

Securities available for sale:

               

Change in unrealized gain during period

    148       (442 )

Total other comprehensive income (loss)

    148       (442 )

Deferred taxes related to other comprehensive income (loss)

    (52 )     155  

Other comprehensive income (loss), net of tax

    96       (287 )

Comprehensive income

  $ 69,047     $ 73,354  

 

See notes to 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, 2014

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

Net income

                            73,641                       73,641  

Other comprehensive loss

                                    (287 )             (287 )

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

    244,225       244       (244 )                             -  

Stock based compensation expense

                    2,763                               2,763  

Cash dividends declared, $0.2725 per share

                            (19,082 )                     (19,082 )

BALANCE AT MARCH 31, 2015

    70,060,878     $ 70,061     $ 2,027,754     $ 1,201,211     $ 3,442     $ (607 )   $ 3,301,861  
                                                         

BALANCE AT DECEMBER 31, 2015

  70,058,761     $ 70,059     $ 2,036,378     $ 1,355,040     $ 2,040     $ (607 )   $ 3,462,910  

Net income

                            68,951                       68,951  

Other comprehensive income

                                    96               96  

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

    1,750       2       (2 )                             -  

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

    679,528       679       31,843                               32,522  

Stock repurchase

    (1,159,586 )     (1,160 )     (46,022 )                             (47,182 )

Stock based compensation expense

                    2,652                               2,652  

Cash dividends declared, $0.3000 per share

                            (20,889 )                     (20,889 )

BALANCE AT MARCH 31, 2016

    69,580,453     $ 69,580     $ 2,024,849     $ 1,403,102     $ 2,136     $ (607 )   $ 3,499,060  

 

See notes to consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Three Months Ended

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 68,951     $ 73,641  

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

               

Depreciation and core deposit intangibles amortization

    5,571       5,405  

Provision for credit losses

    14,000       1,250  

Net amortization of premium on investments

    10,253       14,144  

(Gain) loss on sale of other real estate

    (14 )     10  

Gain on sale of assets

    (1,020 )     (1,379 )

Net accretion of discount on loans

    (14,494 )     (19,647 )

Net accretion of discount on deposits

    (182 )     (420 )

Gain on sale of loans

    (1,341 )     (1,093 )

Proceeds from sale of loans held for sale

    58,460       45,327  

Originations of loans held for sale

    (56,903 )     (46,254 )

Stock based compensation expense

    2,652       2,763  

Decrease in accrued interest receivable and other assets

    62,906       30,543  

Increase in accrued interest payable and other liabilities

    12,159       12,276  

Net cash provided by operating activities

    160,998       116,566  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Proceeds from maturities and principal paydowns of held to maturity securities

    414,681       392,556  

Purchase of held to maturity securities

    (132,952 )     (954,084 )

Proceeds from maturities and principal paydowns of available for sale securities

    2,506,849       613,222  

Purchase of available for sale securities

    (2,499,989 )     (600,000 )

Net decrease in loans held for investment

    12,730       97,616  

Purchase of bank premises and equipment

    (1,778 )     (2,733 )

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

    1,832       5,198  

Net cash used in the purchase of Tradition Bancshares, Inc.

    (8,963 )     -  

Net cash provided by (used in) investing activities

    292,410       (448,225 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Net (decrease) increase in noninterest-bearing deposits

    (333,615 )     102,016  

Net increase (decrease) in interest-bearing deposits

    36,517       (233,402 )

Net (repayments) proceeds from other short-term borrowings

    (305,000 )     325,000  

Repayments of other long-term borrowings

    (174 )     (1,810 )

Net (decrease) increase in securities sold under repurchase agreements

    (11,049 )     2,895  

Redemption of junior subordinated debentures

    -       (167,531 )

Repurchase of common stock

    (47,182 )     -  

Payments of cash dividends

    (20,889 )     (19,082 )

Net cash (used in) provided by financing activities

    (681,392 )     8,086  
                 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (227,984 )     (323,573 )

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    563,962       677,854  

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 335,978     $ 354,281  
                 

NONCASH ACTIVITIES:

               

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

  $ 32,522     $ -  

Acquisition of real estate through foreclosure of collateral

    12,953       766  
                 

SUPPLEMENTAL INFORMATION:

               

Income taxes paid

  $ 5,400     $ 2,000  

Interest paid

    10,666       11,665  

 

See notes to consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

 

1. BASIS OF PRESENTATION

 

The 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 consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for 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 GAAP 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, 2015. Operating results for the three-month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 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 March 31,

 
   

2016

   

2015

 
   

Amount

   

Per Share

Amount

   

Amount

   

Per Share

Amount

 
   

(Amounts in thousands, except per share data)

 

Net income

  $ 68,951             $ 73,641          

Basic:

                               

Weighted average shares outstanding

    70,174     $ 0.98       70,034     $ 1.05  
                                 

Diluted:

                               

Add incremental shares for:

                               

Effect of dilutive securities - options

    7               21          

Total

    70,181     $ 0.98       70,055     $ 1.05  

 

      There were no stock options exercisable during the three months ended March 31, 2016 or 2015 that would have had an anti-dilutive effect on the above computation.

 

3. NEW ACCOUNTING STANDARDS 

 

Accounting Standards Updates (“ASU”) 

 

ASU 2016-09, “Compensation - Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This ASU covers accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will be effective for the Company as of January 1, 2017. The Company is currently evaluating the potential impact of ASU 2016-09 on the Company’s financial statements.

 

ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 is effective for public companies for annual periods beginning January 1, 2019, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of ASU 2016-02 on the Company’s financial statements.

 

ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 (i) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (iv) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (v) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (vi) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update affect all entities that hold financial assets or owe financial liabilities. ASU 2016-01 is effective for the Company beginning January 1, 2018, and is not expected to have a significant impact on the Company’s financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

 

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 became effective for the Company on January 1, 2016 and did not have a significant impact on the Company’s financial statements.

 

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 became effective for the Company on January 1, 2016 and did not have a significant impact on the Company’s financial statements.

 

ASU 2014-12,Compensation-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 became effective for the Company on January 1, 2016 and did not have a significant impact on the Company’s financial statements. 

 

ASU 2014-09, “Revenue from Contracts 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. 

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

 

4. SECURITIES

 

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

 

   

March 31, 2016

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
   

(Dollars in thousands)

 

Available for Sale

                               

States and political subdivisions

  $ 3,727     $ 11     $ -     $ 3,738  

Collateralized mortgage obligations

    24,517       85       (6 )     24,596  

Mortgage-backed securities

    52,230       2,999       (9 )     55,220  

Other securities

    12,588       253       (46 )     12,795  

Total

  $ 93,062     $ 3,348     $ (61 )   $ 96,349  
                                 

Held to Maturity

                               

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

  $ 44,138     $ 1,208     $ -     $ 45,346  

States and political subdivisions

    427,336       6,855       (444 )     433,747  

Collateralized mortgage obligations

    1,028       20       (1 )     1,047  

Mortgage-backed securities

    8,879,753       121,289       (23,380 )     8,977,662  

Other securities

    100       -       (1 )     99  

Total

  $ 9,352,355     $ 129,372     $ (23,826 )   $ 9,457,901  

 

 

   

December 31, 2015

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
   

(Dollars in thousands)

 

Available for Sale

                               

States and political subdivisions

  $ 5,463     $ 22     $ -     $ 5,485  

Collateralized mortgage obligations

    25,991       25       (100 )     25,916  

Mortgage-backed securities

    55,884       3,098       (11 )     58,971  

Other securities

    12,588       150       (46 )     12,692  

Total

  $ 99,926     $ 3,295     $ (157 )   $ 103,064  
                                 

Held to Maturity

                               

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

  $ 47,598     $ 798     $ -     $ 48,396  

States and political subdivisions

    363,505       7,080       (542 )     370,043  

Collateralized mortgage obligations

    2,107       17       (2 )     2,122  

Mortgage-backed securities

    8,986,153       68,868       (82,407 )     8,972,614  

Other securities

    -       -       -       -  

Total

  $ 9,399,363     $ 76,763     $ (82,951 )   $ 9,393,175  

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(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 OTTI 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 will 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 will 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 will become the new amortized cost basis of the investment.

 

As of March 31, 2016, 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 March 31, 2016, management believes any impairment in the Company’s securities is temporary, and therefore no impairment loss has been realized in the Company’s consolidated statement of income.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

 

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

 

   

March 31, 2016

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Estimated

Fair Value

   

Unrealized

Losses

   

Estimated

Fair Value

   

Unrealized

Losses

   

Estimated

Fair Value

   

Unrealized

Losses

 
   

(Dollars in thousands)

 

Available for Sale

                                               

Collateralized mortgage obligations

  $ 1,752     $ (6 )   $ 1     $ -     $ 1,753     $ (6 )

Mortgage-backed securities

    1,236       (1 )     2,338       (8 )     3,574       (9 )

Other securities

    -       -       1,691       (46 )     1,691       (46 )

Total

  $ 2,988     $ (7 )   $ 4,030     $ (54 )   $ 7,018     $ (61 )
                                                 

Held to Maturity

                                               

States and political subdivisions

  $ 51,880     $ (333 )   $ 17,422     $ (111 )   $ 69,302     $ (444 )

Collateralized mortgage obligations

    -       -       70       (1 )     70       (1 )

Mortgage-backed securities

    733,163       (3,258 )     1,981,019       (20,122 )     2,714,182       (23,380 )

Other securities

    99       (1 )     -       -       99       (1 )

Total

  $ 785,142     $ (3,592 )   $ 1,998,511     $ (20,234 )   $ 2,783,653     $ (23,826 )

 

 

   

December 31, 2015

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Estimated

Fair Value

   

Unrealized

Losses

   

Estimated

Fair Value

   

Unrealized

Losses

   

Estimated

Fair Value

   

Unrealized

Losses

 
   

(Dollars in thousands)

 

Available for Sale

                                               

Collateralized mortgage obligations

  $ 14,331     $ (100 )   $ 1     $ -     $ 14,332     $ (100 )

Mortgage-backed securities

    793       (1 )     2,465       (10 )     3,258       (11 )

Other securities

    -       -       1,691       (46 )     1,691       (46 )

Total

  $ 15,124     $ (101 )   $ 4,157     $ (56 )   $ 19,281     $ (157 )
                                                 

Held to Maturity

                                               

States and political subdivisions

  $ 15,700     $ (82 )   $ 45,952     $ (460 )   $ 61,652     $ (542 )

Collateralized mortgage obligations

    156       -       94       (2 )     250       (2 )

Mortgage-backed securities

    3,233,601       (36,016 )     1,662,482       (46,391 )     4,896,083       (82,407 )

Other securities

    -       -       -       -       -       -  

Total

  $ 3,249,457     $ (36,098 )   $ 1,708,528     $ (46,853 )   $ 4,957,985     $ (82,951 )

 

At March 31, 2016 and December 31, 2015, there were 454 securities and 474 securities, respectively, in an unrealized loss position for more than 12 months.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

 

The amortized cost and fair value of investment securities at March 31, 2016, 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

Cost

   

Fair

Value

   

Amortized

Cost

   

Fair

Value

 
   

(Dollars in thousands)

 

Due in one year or less

  $ 32,595     $ 32,643     $ 12,688     $ 12,898  

Due after one year through five years

    209,129       211,924       3,072       3,080  

Due after five years through ten years

    195,827       200,118       555       555  

Due after ten years

    34,023       34,507       -       -  

Subtotal

    471,574       479,192       16,315       16,533  

Mortgage-backed securities and collateralized mortgage obligations

    8,880,781       8,978,709       76,747       79,816  

Total

  $ 9,352,355     $ 9,457,901     $ 93,062     $ 96,349  

 

 

The Company recorded no gain or loss on sale of securities for the three months ended March 31, 2016 and 2015. As of March 31, 2016, the Company did not own any non-agency collateralized mortgage obligations.

 

At March 31, 2016 and December 31, 2015, 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 $6.08 billion and $5.81 billion and a fair value of $6.14 billion and $5.79 billion at March 31, 2016 and December 31, 2015, 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:

 

   

March 31,

2016

   

December 31,

2015

 
   

(Dollars in thousands)

 

Residential mortgage loans held for sale

  $ 23,717     $ 23,933  
                 

Commercial and industrial

    1,700,015       1,692,246  

Real estate:

               

Construction, land development and other land loans

    1,173,524       1,073,198  

1-4 family residential (including home equity)

    2,639,472       2,616,732  

Commercial real estate (including multi-family residential)

    3,229,706       3,131,083  

Farmland

    451,111       434,349  

Agriculture

    190,182       214,469  

Consumer and other

    246,681       252,579  

Total loans held for investment

    9,630,691       9,414,656  

Total

  $ 9,654,408     $ 9,438,589  

 

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(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 March 31, 2016 and December 31, 2015, 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 March 31, 2016 or December 31, 2015.

 

Related Party Loans. As of March 31, 2016 and December 31, 2015, loans outstanding to directors, officers and their affiliates totaled $4.0 million and $4.1 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:  

 

   

March 31,

2016

   

December 31,

2015

 
   

(Dollars in thousands)

 

Beginning balance on January 1

  $ 4,063     $ 4,940  

New loans

    -       428  

Repayments and reclassified related loans

    (32 )     (1,305 )

Ending balance

  $ 4,031     $ 4,063  

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(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. Nevertheless, the Company’s loan portfolio could 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:

 

   

March 31, 2016

 
   

Loans Past Due and Still Accruing

                         
   

30-89 Days

   

90 or More

Days

   

Total Past

Due Loans

   

Nonaccrual

Loans

   

Current

Loans

   

Total

Loans

 
   

(Dollars in thousands)

 
                                                 

Construction, land development and other land loans

  $ 9,051     $ -     $ 9,051     $ 1,670     $ 1,162,803     $ 1,173,524  

Agriculture and agriculture real estate (includes farmland)

    1,971       887       2,858       5,691       632,744       641,293  

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

    5,786       181       5,967       3,586       2,653,636       2,663,189  

Commercial real estate (includes multi-family residential)

    7,629       -       7,629       9,299       3,212,778       3,229,706  

Commercial and industrial

    9,471       25       9,496       18,621       1,671,898       1,700,015  

Consumer and other

    246       -       246       227       246,208       246,681  

Total

  $ 34,154     $ 1,093     $ 35,247     $ 39,094     $ 9,580,067     $ 9,654,408  

 

 

   

December 31, 2015

 
   

Loans Past Due and Still Accruing

                         
   

30-89 Days

   

90 or More

Days

   

Total Past

Due Loans

   

Nonaccrual

Loans

   

Current

Loans

   

Total

Loans

 
   

(Dollars in thousands)

 

Construction, land development and other land loans

  $ 4,097     $ -     $ 4,097     $ 134     $ 1,068,967     $ 1,073,198  

Agriculture and agriculture real estate (includes farmland)

    946       -       946       208       647,664       648,818  

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

    4,748       220       4,968       1,894       2,633,803       2,640,665  

Commercial real estate (includes multi-family residential)

    12,922       -       12,922       15,535       3,102,626       3,131,083  

Commercial and industrial

    4,793       394       5,187       21,692       1,665,367       1,692,246  

Consumer and other

    1,274       -       1,274       248       251,057       252,579  

Total

  $ 28,780     $ 614     $ 29,394     $ 39,711     $ 9,369,484     $ 9,438,589  

 

________________

(1)

Includes $23.7 million and $23.9 million of residential mortgage loans held for sale at March 31, 2016 and December 31, 2015, respectively.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

 

The following table presents information regarding nonperforming assets as of the dates indicated:

 

   

March 31,

2016

   

December 31,

2015

 
   

(Dollars in thousands)

 
                 

Nonaccrual loans (1)

  $ 39,094     $ 39,711  

Accruing loans 90 or more days past due

    1,093       614  

Total nonperforming loans

    40,187       40,325  

Repossessed assets

    161       171  

Other real estate

    16,695       2,963  

Total nonperforming assets

  $ 57,043     $ 43,459  
                 

Nonperforming assets to total loans and other real estate

    0.59 %     0.46 %

 

________________

 

(1)  Includes troubled debt restructurings of $593 thousand and $681 thousand as of March 31, 2016 and December 31, 2015, respectively.

 

The Company had $57.0 million in nonperforming assets at March 31, 2016 compared with $43.5 million at December 31, 2015. This increase was primarily due to an agricultural loan, as well as other real estate obtained from the acquisition of Tradition Bancshares, Inc. (“Tradition”) and its wholly-owned subsidiary Tradition Bank. Nonperforming assets were 0.59% of total loans and other real estate at March 31, 2016 compared with 0.46% of total loans and other real estate at December 31, 2015. These low nonperforming assets to total loans and other real estate ratios are reflective of the Company’s conservative lending approach.

 

If interest on nonaccrual loans had been accrued under the original loan terms, approximately $1.0 million and $910 thousand would have been recorded as income for the three months ended March 31, 2016 and 2015, respectively.

 

Acquired Loans. Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, interest rates, projected default rates, loss given default, and recovery rates (no allowance for credit losses was carried over from the acquisition completed during 2016). During the valuation process, the Company identified Purchased Credit-Impaired (“PCI”) and Non-PCI loans in the acquired loan portfolios. Loans acquired with evidence of credit quality deterioration at acquisition for which it was probable that the Company would not be able to collect all contractual amounts due were accounted for as PCI. PCI loan identification considers the following factors: payment history and past due status, debt service coverage, loan grading, collateral values and other factors that may indicate deterioration of credit quality since origination. Non-PCI loan identification considers the following factors: account types, remaining terms, annual interest rates or coupons, current market rates, interest types, past delinquencies, timing of principal and interest payments, loan to value ratios, loss exposures and remaining balances. Accretion of purchased discounts on PCI loans will be based on estimated future cash flows, regardless of contractual maturities. Accretion of purchased discounts on Non-PCI loans will be recognized on a level-yield basis based on contractual maturity of individual loans.

 

PCI Loans. The carrying amount of PCI loans included in the consolidated balance sheet and the related outstanding balance as of the dates indicated are presented in the table below. The outstanding balance represents the total amount owed as of March 31, 2016 and December 31, 2015.

 

   

March 31,

2016

   

December 31,

2015

 
   

(Dollars in thousands)

 

PCI loans:

               

Outstanding balance

  $ 73,590     $ 79,802  

Less: discount

    34,054       39,976  

Recorded investment

  $ 39,536     $ 39,826  

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

 

Changes in the accretable yield for acquired PCI loans as of the three months ended March 31, 2016 and 2015 were as follows:

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 5,664     $ 9,867  

Additions

    10,222       -  

Reclassifications from nonaccretable

    5,120       7,291  

Accretion

    (7,831 )     (9,288 )

Balance at March 31

  $ 13,175     $ 7,870  

 

Income recognition on PCI loans is subject to the Company’s ability to reasonably estimate both the timing and amount of future cash flows. PCI loans for which the Company is accruing interest income are not considered non-performing or impaired. The non-accretable difference represents contractual principal and interest the Company does not expect to collect.

 

Non-PCI Loans. The carrying amount of Non-PCI loans included in the consolidated balance sheet and the related outstanding balance as of the dates indicated are presented in the table below. The outstanding balance represents the total amount owed as of March 31, 2016 and December 31, 2015, including accrued but unpaid interest.

 

   

March 31,

2016

   

December 31,

2015

 
   

(Dollars in thousands)

 

Non-PCI loans:

               

Outstanding balance

  $ 1,506,292     $ 1,430,501  

Less: discount

    50,509       54,734  

Recorded investment

  $ 1,455,783     $ 1,375,767  

 

Changes in the discount accretion for Non-PCI loans for the three months ended March 31, 2016 and 2015 were as follows:

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 54,734     $ 89,105  

Additions

    3,491       -  

Accretion charge-offs

    (1,053 )     (457 )

Accretion

    (6,663 )     (10,359 )

Balance at March 31

  $ 50,509     $ 78,289  

 

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

 

Impaired loans are set forth in the following tables. No interest income was recognized on impaired loans subsequent to their classification as impaired. The average recorded investment presented in the tables below is reported on a year-to-date basis.

 

   

March 31, 2016

 
   

Recorded

Investment

   

Unpaid

Contractual

Principal

Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

 
   

(Dollars in thousands)

 

With no related allowance recorded:

                               

Construction, land development and other land loans

  $ 19     $ 336     $ -     $ 26  

Agriculture and agriculture real estate (includes farmland)

    5,517       12,520       -       2,768  

1-4 family (includes home equity)

    2,032       2,189       -       1,619  

Commercial real estate (includes multi-family residential)

    9,159       9,455       -       12,137  

Commercial and industrial

    769       1,050       -       1,062  

Consumer and other

    63       137       -       60  

Total

    17,559       25,687       -       17,672  
                                 

With an allowance recorded:

                               

Construction, land development and other land loans

    6       10       2       6  

Agriculture and agriculture real estate (includes farmland)

    174       192       37       181  

1-4 family (includes home equity)

    347       357       91       363  

Commercial real estate (includes multi-family residential)

    -       -       -       131  

Commercial and industrial

    17,672       30,230       7,464       16,133  

Consumer and other

    164       205       27       172  

Total