10-Q 1 pb20160630_10q.htm FORM 10-Q pb20160630_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 JUNE 30, 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 August 4, 2016, there were 69,479,611 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 June 30, 2016 and December 31, 2015 (unaudited)

3

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)

4

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)

5

 

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2016 and 2015 (unaudited)

6

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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

35

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

57

Item 4.

Controls and Procedures

57

   

PART II—OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

58

Item 1A.

Risk Factors

58

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults upon Senior Securities

58

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

58

Signatures

60

 

 

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   

June 30,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands, except par value)

 

ASSETS

               

Cash and due from banks

  $ 333,208     $ 562,544  

Federal funds sold

    484       1,418  

Total cash and cash equivalents

    333,692       563,962  
                 

Available for sale securities, at fair value

    139,202       103,064  

Held to maturity securities, at cost (fair value of $9,279,813 and $9,393,175, respectively)

    9,135,449       9,399,363  

Total securities

    9,274,651       9,502,427  
                 

Loans held for sale

    31,831       23,933  

Loans held for investment

    9,618,177       9,414,656  

Total loans

    9,650,008       9,438,589  

Less: allowance for credit losses

    (83,826 )     (81,384 )

Loans, net

    9,566,182       9,357,205  
                 

Accrued interest receivable

    51,486       51,924  

Goodwill

    1,903,451       1,868,827  

Core deposit intangibles, net

    44,861       49,417  

Bank premises and equipment, net

    273,104       267,996  

Other real estate owned

    15,677       2,963  

Bank owned life insurance (BOLI)

    247,057       235,429  

Federal Home Loan Bank of Dallas stock

    39,557       68,413  

Other assets

    46,592       68,653  

TOTAL ASSETS

  $ 21,796,310     $ 22,037,216  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

LIABILITIES:

               

Deposits:

               

Noninterest-bearing

  $ 5,016,637     $ 5,136,579  

Interest-bearing

    12,202,508       12,544,540  

Total deposits

    17,219,145       17,681,119  

Other borrowings

    606,049       491,399  

Securities sold under repurchase agreements

    320,001       315,253  

Accrued interest payable

    2,225       1,896  

Other liabilities

    104,306       84,639  

Total liabilities

    18,251,726       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; 69,480,111 shares issued and outstanding at June 30, 2016; 70,058,761 shares issued and 70,021,673 shares outstanding at December 31, 2015

    69,480       70,059  

Capital surplus

    2,023,179       2,036,378  

Retained earnings

    1,450,302       1,355,040  

Accumulated other comprehensive income—net unrealized gain on available for sale securities, net of tax of $873 and $1,098, respectively

    1,623       2,040  

Less treasury stock, at cost, 37,088 shares

    -       (607 )

Total shareholders’ equity

    3,544,584       3,462,910  

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $ 21,796,310     $ 22,037,216  

 

See notes to consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2016

   

2015

   

2016

   

2015

 
   

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

                               

Loans, including fees

  $ 118,297     $ 119,404     $ 242,819     $ 244,282  

Securities

    51,097       48,530       103,670       97,092  

Federal funds sold

    65       47       161       212  

Total interest income

    169,459       167,981       346,650       341,586  
                                 

INTEREST EXPENSE:

                               

Deposits

    10,045       9,169       20,251       18,746  

Other borrowings

    710       365       1,192       494  

Securities sold under repurchase agreements

    234       208       446       411  

Junior subordinated debentures

    3       -       37       791  

Total interest expense

    10,992       9,742       21,926       20,442  
                                 

NET INTEREST INCOME

    158,467       158,239       324,724       321,144  

PROVISION FOR CREDIT LOSSES

    6,000       500       20,000       1,750  

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

    152,467       157,739       304,724       319,394  

NONINTEREST INCOME:

                               

Nonsufficient funds (NSF) fees

    8,031       8,310       16,220       16,228  

Credit card, debit card and ATM card income

    5,929       6,003       11,756       11,641  

Service charges on deposit accounts

    4,610       4,189       9,200       8,368  

Trust income

    1,762       2,047       3,789       4,056  

Mortgage income

    1,772       1,513       3,243       2,661  

Brokerage income

    1,286       1,541       2,576       2,950  

Net gain on sale of assets

    332       270       1,352       1,649  

Other

    4,751       6,424       11,130       11,165  

Total noninterest income

    28,473       30,297       59,266       58,718  

NONINTEREST EXPENSE:

                               

Salaries and employee benefits

    48,224       47,819       98,338       97,785  

Net occupancy and equipment

    5,741       5,812       11,365       11,776  

Credit and debit card, data processing and software amortization

    4,164       4,045       8,594       7,862  

Regulatory assessments and FDIC insurance

    3,447       4,253       6,877       8,607  

Core deposit intangibles amortization

    2,334       2,390       4,556       4,879  

Depreciation

    3,286       3,420       6,635       6,336  

Communications

    2,981       2,835       5,920       5,644  

Other real estate expense

    50       129       92       261  

Other

    9,008       9,032       17,386       16,047  

Total noninterest expense

    79,235       79,735       159,763       159,197  

INCOME BEFORE INCOME TAXES

    101,705       108,301       204,227       218,915  

PROVISION FOR INCOME TAXES

    33,634       36,369       67,205       73,342  

NET INCOME

  $ 68,071     $ 71,932     $ 137,022     $ 145,573  
                                 

EARNINGS PER SHARE:

                               

Basic

  $ 0.98     $ 1.03     $ 1.96     $ 2.08  

Diluted

  $ 0.98     $ 1.03     $ 1.96     $ 2.08  

 

See notes to consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2016

   

2015

   

2016

   

2015

 
   

(Dollars in thousands)

 
                                 

Net income

  $ 68,071     $ 71,932     $ 137,022     $ 145,573  

Other comprehensive loss, before tax:

                               

Securities available for sale:

                               

Change in unrealized gain during period

    (790 )     (640 )     (642 )     (1,082 )

Total other comprehensive loss

    (790 )     (640 )     (642 )     (1,082 )

Deferred taxes related to other comprehensive loss

    277       224       225       379  

Other comprehensive loss, net of tax

    (513 )     (416 )     (417 )     (703 )

Comprehensive income

  $ 67,558     $ 71,516     $ 136,605     $ 144,870  

 

 

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

                            145,573                       145,573  

Other comprehensive loss

                                    (703 )             (703 )

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

    260,125       260       (193 )                             67  

Stock based compensation expense

                    5,690                               5,690  

Cash dividends declared, $0.5450 per share

                            (38,168 )                     (38,168 )

BALANCE AT JUNE 30, 2015

    70,076,778     $ 70,077     $ 2,030,732     $ 1,254,057     $ 3,026     $ (607 )   $ 3,357,285  
                                                         

BALANCE AT DECEMBER 31, 2015

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

Net income

                            137,022                       137,022  

Other comprehensive loss

                                    (417 )             (417 )

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

    23,800       24       174                               198  

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

    679,528       679       31,843                               32,522  

Treasury stock cancellation

    (37,088 )     (37 )     (570 )                     607        

Common stock repurchase

    (1,244,890 )     (1,245 )     (49,812 )                             (51,057 )

Stock based compensation expense

                    5,166                               5,166  

Cash dividends declared, $0.6000 per share

                            (41,760 )                     (41,760 )

BALANCE AT JUNE 30, 2016

    69,480,111     $ 69,480     $ 2,023,179     $ 1,450,302     $ 1,623     $ -     $ 3,544,584  

 

See notes to consolidated financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Six Months Ended

 
   

June 30,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 137,022     $ 145,573  

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

               

Depreciation and core deposit intangibles amortization

    11,191       11,215  

Provision for credit losses

    20,000       1,750  

Net amortization of premium on investments

    20,660       29,611  

Loss (gain) on sale of other real estate

    333       (18 )

Gain on sale of assets

    (1,352 )     (1,649 )

Net accretion of discount on loans

    (23,798 )     (33,249 )

Net accretion of discount on deposits

    (360 )     (640 )

Gain on sale of loans

    (2,961 )     (2,565 )

Proceeds from sale of loans held for sale

    128,340       107,027  

Originations of loans held for sale

    (133,277 )     (106,342 )

Stock based compensation expense

    5,166       5,690  

Decrease in accrued interest receivable and other assets

    56,165       14,699  

Increase in accrued interest payable and other liabilities

    9,817       25,370  

Net cash provided by operating activities

    226,946       196,472  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Proceeds from maturities and principal paydowns of held to maturity securities

    883,538       818,864  

Purchase of held to maturity securities

    (395,228 )     (1,522,964 )

Proceeds from maturities and principal paydowns of available for sale securities

    7,314,308       1,831,103  

Purchase of available for sale securities

    (7,351,075 )     (1,810,000 )

Net decrease in loans held for investment

    27,634       161,954  

Purchase of bank premises and equipment

    (3,361 )     (5,400 )

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

    6,910       6,418  

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

    (8,963 )     -  

Net cash provided by (used in) investing activities

    473,763       (520,025 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Net (decrease) increase in noninterest-bearing deposits

    (429,921 )     104,208  

Net decrease in interest-bearing deposits

    (520,620 )     (795,062 )

Net proceeds from other short-term borrowings

    115,000       880,000  

Repayments of other long-term borrowings

    (350 )     (1,983 )

Net increase in securities sold under repurchase agreements

    4,748       18,666  

Redemption of junior subordinated debentures

    (7,217 )     (167,531 )

Proceeds from stock option exercises

    198       67  

Repurchase of common stock

    (51,057 )     -  

Payments of cash dividends

    (41,760 )     (38,168 )

Net cash (used in) provided by financing activities

    (930,979 )     197  
                 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (230,270 )     (323,356 )

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    563,962       677,854  

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 333,692     $ 354,498  
                 

NONCASH ACTIVITIES:

               

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

  $ 32,522     $ -  

Acquisition of real estate through foreclosure of collateral

    13,855       1,166  
                 

SUPPLEMENTAL INFORMATION:

               

Income taxes paid

  $ 48,832     $ 42,580  

Interest paid

    21,597       21,517  

 

See notes to consolidated financial statements.

 

  

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 six-month period ended June 30, 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 June 30,

   

Six Months Ended June 30,

 
   

2016

   

2015

   

2016

   

2015

 
           

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

  $ 68,071             $ 71,932             $ 137,022             $ 145,573          

Basic:

                                                               

Weighted average shares outstanding

    69,565     $ 0.98       70,037     $ 1.03       69,869     $ 1.96       70,035     $ 2.08  
                                                                 

Diluted:

                                                               

Add incremental shares for:

                                                               

Effect of dilutive securities - options

    9               16               8               19          

Total

    69,574     $ 0.98       70,053     $ 1.03       69,877     $ 1.96       70,054     $ 2.08  

 

      There were no stock options exercisable during the three and six months ended June 30, 2016 or 2015 that would have had an anti-dilutive effect on the above computation.

 

3. NEW ACCOUNTING STANDARDS 

 

Accounting Standards Updates (“ASU”) 

 

ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Additionally, available for sale debt securities may realize value either through collection of contractual cash flows or through sale of the security at fair value. Therefore, the amendments limit the amount of the allowance for credit losses to the difference between amortized cost and fair value. ASU 2016-13 will be effective for the Company as of January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on the Company’s financial statements.

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

(UNAUDITED)

 

ASU 2016-12, “Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients.” ASU 2016-12 addresses narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is effective January 1, 2018. The Company is in the process of evaluating the impact of this guidance and does not currently anticipate a significant impact on the consolidated financial statements.

 

ASU 2016-10, “Revenue from Contracts with Customers (Topic 606)—Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies two aspects of “Revenue from Contracts with Customers (Topic 606)” (i) identifying performance obligations and (ii) the licensing implementation guidance. This ASU adds guidance on how to identify the promised goods or services in the contract and how to evaluate whether promised goods and services are distinct. Additionally, this update includes guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time) and when to recognize revenue for a sales-based or use-based royalty promised in exchange for a license of intellectual property. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606),” which is effective January 1, 2018. The Company is in the process of evaluating the impact of this guidance and does not currently anticipate a significant impact on the consolidated financial statements.

 

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 2016-08, “Revenue from Contracts with Customers (Topic 606)—Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU 2016-08 states that when another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). Additionally, when an principal entity satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer, but when an agent entity satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606),” which is effective January 1, 2018. The Company is in the process of evaluating the impact of this guidance and does not currently anticipate a significant impact on the consolidated 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

JUNE 30, 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 2015-14, “Revenue from Contracts with Customers (Topic 606)—Deferral of the Effective Date” deferred the effective date for ASU 2014-09 by one year to 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

JUNE 30, 2016

(UNAUDITED)

 

4. SECURITIES

 

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

 

   

June 30, 2016

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

Available for Sale

                               

States and political subdivisions

  $ 2,574     $ 6     $ -     $ 2,580  

Collateralized mortgage obligations

    22,960       92       (4 )     23,048  

Mortgage-backed securities

    98,583       2,759       (563 )     100,779  

Other securities

    12,588       253       (46 )     12,795  

Total

  $ 136,705     $ 3,110     $ (613 )   $ 139,202  
                                 

Held to Maturity

                               

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

  $ 33,437     $ 1,167     $ -     $ 34,604  

States and political subdivisions

    417,532       8,700       (78 )     426,154  

Collateralized mortgage obligations

    967       21       (1 )     987  

Mortgage-backed securities

    8,683,413       140,777       (6,221 )     8,817,969  

Other securities

    100       -       (1 )     99  

Total

  $ 9,135,449     $ 150,665     $ (6,301 )   $ 9,279,813  

 

   

December 31, 2015

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

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

JUNE 30, 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 June 30, 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 June 30, 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

JUNE 30, 2016

(UNAUDITED)

 

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

 

   

June 30, 2016

 
   

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

  $ 1,900     $ (2 )   $ 155     $ (2 )   $ 2,055     $ (4 )

Mortgage-backed securities

    51,975       (554 )     2,228       (9 )     54,203       (563 )

Other securities

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

Total

  $ 53,875     $ (556 )   $ 4,074     $ (57 )   $ 57,949     $ (613 )
                                                 

Held to Maturity

                                               

States and political subdivisions

  $ 20,904     $ (21 )   $ 10,621     $ (57 )   $ 31,525     $ (78 )

Collateralized mortgage obligations

    -       -       61       (1 )     61       (1 )

Mortgage-backed securities

    67,160       (741 )     1,189,259       (5,480 )     1,256,419       (6,221 )

Other securities

    99       (1 )     -       -       99       (1 )

Total

  $ 88,163     $ (763 )   $ 1,199,941     $ (5,538 )   $ 1,288,104     $ (6,301 )

 

   

December 31, 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

  $ 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 June 30, 2016 and December 31, 2015, there were 428 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

JUNE 30, 2016

(UNAUDITED)

 

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

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
   

(Dollars in thousands)

 

Due in one year or less

  $ 34,340     $ 34,454     $ 12,689     $ 12,895  

Due after one year through five years

    193,718       196,821       2,473       2,480  

Due after five years through ten years

    191,834       197,630       -       -  

Due after ten years

    31,177       31,952       -       -  

Subtotal

    451,069       460,857       15,162       15,375  

Mortgage-backed securities and collateralized mortgage obligations

    8,684,380       8,818,956       121,543       123,827  

Total

  $ 9,135,449     $ 9,279,813     $ 136,705     $ 139,202  

 

The Company recorded no gain or loss on sale of securities for the three and six months ended June 30, 2016 and 2015. As of June 30, 2016, the Company did not own any non-agency collateralized mortgage obligations.

 

At June 30, 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 $5.60 billion and $5.81 billion and a fair value of $5.68 billion and $5.79 billion at June 30, 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:

 

   

June 30,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Residential mortgage loans held for sale

  $ 31,831     $ 23,933  
                 

Commercial and industrial

    1,627,719       1,692,246  

Real estate:

               

Construction, land development and other land loans

    1,167,286       1,073,198  

1-4 family residential (includes home equity)

    2,676,249       2,616,732  

Commercial real estate (includes multi-family residential)

    3,229,556       3,131,083  

Farmland

    459,303       434,349  

Agriculture

    198,330       214,469  

Consumer and other

    259,734       252,579  

Total loans held for investment

    9,618,177       9,414,656  

Total

  $ 9,650,008     $ 9,438,589  

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 June 30, 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 June 30, 2016 or December 31, 2015.

 

Related Party Loans. As of June 30, 2016 and December 31, 2015, loans outstanding to directors, officers and their affiliates totaled $4.2 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:  

 

   

June 30,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Beginning balance on January 1

  $ 4,063     $ 4,940  

New loans

    160       428  

Repayments and reclassified related loans

    (64 )     (1,305 )

Ending balance

  $ 4,159     $ 4,063  

 

 

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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, including requiring appraisals on loans collateralized by real estate. 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.

 

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:

 

   

June 30, 2016

 
   

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

  $ 7,235     $ 286     $ 7,521     $ 109     $ 1,159,656     $ 1,167,286  

Agriculture and agriculture real estate (includes farmland)

    564       814        1,378       869       655,386       657,633  

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

    2,068             2,068       4,305       2,701,707       2,708,080  

Commercial real estate (includes multi-family residential)

    5,884       3,990       9,874       9,086       3,210,596       3,229,556  

Commercial and industrial

    16,938       1,683        18,621       14,953       1,594,145       1,627,719  

Consumer and other

    643       49        692       225       258,817       259,734  

Total

  $ 33,332     $ 6,822     $ 40,154     $ 29,547     $ 9,580,307     $ 9,650,008  

 

 

       
   

December 31, 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

  $ 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