10-Q 1 pb-10q_20170331.htm 10-Q pb-10q_20170331.htm

 

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, 2017

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)

(Zip Code)

 

(281) 269-7199

(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, a smaller reporting company or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth 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

 

 

 

 

 

 

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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 4, 2017, there were 69,489,262 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

3

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)

3

 

Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)

4

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)

5

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2017 and  2016 (unaudited)

6

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (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

53

Item 4.

Controls and Procedures

54

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

55

Item 1A.

Risk Factors

55

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults upon Senior Securities

55

Item 4.

Mine Safety Disclosures

55

Item 5.

Other Information

55

Item 6.

Exhibits

56

Signatures

57

 

 

 

2


PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in thousands, except par value)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

324,797

 

 

$

436,203

 

Federal funds sold

 

 

945

 

 

 

1,178

 

Total cash and cash equivalents

 

 

325,742

 

 

 

437,381

 

Available for sale securities, at fair value

 

 

209,427

 

 

 

221,176

 

Held to maturity securities, at cost (fair value of $9,517,764 and $9,339,455, respectively)

 

 

9,644,693

 

 

 

9,504,910

 

Total securities

 

 

9,854,120

 

 

 

9,726,086

 

Loans held for sale

 

 

21,896

 

 

 

26,975

 

Loans held for investment

 

 

9,717,357

 

 

 

9,595,085

 

Total loans

 

 

9,739,253

 

 

 

9,622,060

 

Less: allowance for credit losses

 

 

(84,095

)

 

 

(85,326

)

Loans, net

 

 

9,655,158

 

 

 

9,536,734

 

Accrued interest receivable

 

 

49,721

 

 

 

53,310

 

Goodwill

 

 

1,900,845

 

 

 

1,900,845

 

Core deposit intangibles, net

 

 

43,869

 

 

 

45,784

 

Bank premises and equipment, net

 

 

257,558

 

 

 

262,083

 

Other real estate owned

 

 

15,698

 

 

 

15,463

 

Bank owned life insurance (BOLI)

 

 

250,775

 

 

 

247,116

 

Federal Home Loan Bank of Dallas stock

 

 

74,129

 

 

 

55,430

 

Other assets

 

 

49,804

 

 

 

50,840

 

TOTAL ASSETS

 

$

22,477,419

 

 

$

22,331,072

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

5,299,264

 

 

$

5,190,973

 

Interest-bearing

 

 

11,736,308

 

 

 

12,116,329

 

Total deposits

 

 

17,035,572

 

 

 

17,307,302

 

Other borrowings

 

 

1,270,644

 

 

 

990,781

 

Securities sold under repurchase agreements

 

 

335,875

 

 

 

320,430

 

Accrued interest payable

 

 

2,228

 

 

 

2,319

 

Other liabilities

 

 

144,018

 

 

 

67,929

 

Total liabilities

 

 

18,788,337

 

 

 

18,688,761

 

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; 69,479,912 shares issued and outstanding at March 31, 2017; 69,491,012 shares issued and  outstanding at December 31, 2016

 

 

69,480

 

 

 

69,491

 

Capital surplus

 

 

2,029,950

 

 

 

2,028,129

 

Retained earnings

 

 

1,588,222

 

 

 

1,543,280

 

Accumulated other comprehensive income—net unrealized gain on available for sale securities, net of tax of $770 and $760, respectively

 

 

1,430

 

 

 

1,411

 

Total shareholders’ equity

 

 

3,689,082

 

 

 

3,642,311

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

22,477,419

 

 

$

22,331,072

 

 

See notes to consolidated financial statements.

 

3


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

Loans, including fees

 

$

111,710

 

 

$

124,522

 

Securities

 

 

53,157

 

 

 

52,573

 

Federal funds sold

 

 

183

 

 

 

96

 

Total interest income

 

 

165,050

 

 

 

177,191

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

Deposits

 

 

9,908

 

 

 

10,206

 

Other borrowings

 

 

2,476

 

 

 

482

 

Securities sold under repurchase agreements

 

 

231

 

 

 

212

 

Junior subordinated debentures

 

 

 

 

 

34

 

Total interest expense

 

 

12,615

 

 

 

10,934

 

NET INTEREST INCOME

 

 

152,435

 

 

 

166,257

 

PROVISION FOR CREDIT LOSSES

 

 

2,675

 

 

 

14,000

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

 

149,760

 

 

 

152,257

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

 

Nonsufficient funds (NSF) fees

 

 

8,089

 

 

 

8,189

 

Credit card, debit card and ATM card income

 

 

5,953

 

 

 

5,827

 

Service charges on deposit accounts

 

 

5,421

 

 

 

4,590

 

Trust income

 

 

2,155

 

 

 

2,027

 

Mortgage income

 

 

1,266

 

 

 

1,471

 

Brokerage income

 

 

488

 

 

 

1,290

 

Net gain on sale of assets

 

 

1,759

 

 

 

1,020

 

Other

 

 

5,693

 

 

 

6,379

 

Total noninterest income

 

 

30,824

 

 

 

30,793

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

48,444

 

 

 

50,114

 

Net occupancy and equipment

 

 

5,503

 

 

 

5,624

 

Credit and debit card, data processing and software amortization

 

 

4,085

 

 

 

4,430

 

Regulatory assessments and FDIC insurance

 

 

3,549

 

 

 

3,430

 

Core deposit intangibles amortization

 

 

1,915

 

 

 

2,222

 

Depreciation

 

 

3,103

 

 

 

3,349

 

Communications

 

 

2,702

 

 

 

2,939

 

Other real estate expense

 

 

85

 

 

 

42

 

Other

 

 

8,676

 

 

 

8,378

 

Total noninterest expense

 

 

78,062

 

 

 

80,528

 

INCOME BEFORE INCOME TAXES

 

 

102,522

 

 

 

102,522

 

PROVISION FOR INCOME TAXES

 

 

33,957

 

 

 

33,571

 

NET INCOME

 

$

68,565

 

 

$

68,951

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

0.99

 

 

$

0.98

 

Diluted

 

$

0.99

 

 

$

0.98

 

 

See notes to consolidated financial statements.

 

 

4


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in thousands)

 

Net income

 

$

68,565

 

 

$

68,951

 

Other comprehensive gain, before tax:

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

Change in unrealized gain during period

 

 

29

 

 

 

148

 

Total other comprehensive gain

 

 

29

 

 

 

148

 

Deferred taxes related to other comprehensive gain

 

 

(10

)

 

 

(52

)

Other comprehensive gain, net of tax

 

 

19

 

 

 

96

 

Comprehensive income

 

$

68,584

 

 

$

69,047

 

 

See notes to consolidated financial statements.

 

 

5


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, 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, net

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2016

 

 

69,491,012

 

 

$

69,491

 

 

$

2,028,129

 

 

$

1,543,280

 

 

$

1,411

 

 

$

 

 

$

3,642,311

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68,565

 

 

 

 

 

 

 

 

 

 

 

68,565

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

 

19

 

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

 

 

(11,100

)

 

 

(11

)

 

 

159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

148

 

Stock based compensation expense

 

 

 

 

 

 

 

 

 

 

1,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,662

 

Cash dividends declared, $0.3400 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,623

)

 

 

 

 

 

 

 

 

 

 

(23,623

)

BALANCE AT MARCH 31, 2017

 

 

69,479,912

 

 

$

69,480

 

 

$

2,029,950

 

 

$

1,588,222

 

 

$

1,430

 

 

$

 

 

$

3,689,082

 

 

See notes to consolidated financial statements.

 

 

6


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

68,565

 

 

$

68,951

 

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

 

 

 

 

 

 

 

 

Depreciation and core deposit intangibles amortization

 

 

5,018

 

 

 

5,571

 

Provision for credit losses

 

 

2,675

 

 

 

14,000

 

Net amortization of premium on investments

 

 

9,883

 

 

 

10,253

 

Gain on sale of other real estate

 

 

(10

)

 

 

(14

)

Gain on sale of assets

 

 

(1,759

)

 

 

(1,020

)

Net accretion of discount on loans

 

 

(4,753

)

 

 

(14,494

)

Net accretion of discount on deposits

 

 

(99

)

 

 

(182

)

Gain on sale of loans

 

 

(1,162

)

 

 

(1,341

)

Proceeds from sale of loans held for sale

 

 

59,037

 

 

 

58,460

 

Originations of loans held for sale

 

 

(52,904

)

 

 

(56,903

)

Stock based compensation expense

 

 

1,662

 

 

 

2,652

 

(Increase) decrease in accrued interest receivable and other assets

 

 

(17,703

)

 

 

62,906

 

Increase in accrued interest payable and other liabilities

 

 

75,998

 

 

 

12,159

 

Net cash provided by operating activities

 

 

144,448

 

 

 

160,998

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities and principal paydowns of held to maturity securities

 

 

424,808

 

 

 

414,681

 

Purchase of held to maturity securities

 

 

(574,333

)

 

 

(132,952

)

Proceeds from maturities and principal paydowns of available for sale securities

 

 

1,211,622

 

 

 

2,506,849

 

Purchase of available for sale securities

 

 

(1,199,985

)

 

 

(2,499,989

)

Net (increase) decrease in loans held for investment

 

 

(121,679

)

 

 

12,730

 

Purchase of bank premises and equipment

 

 

(1,123

)

 

 

(1,778

)

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

 

 

4,401

 

 

 

1,832

 

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

 

 

 

 

 

(8,963

)

Net cash (used in) provided by investing activities

 

 

(256,289

)

 

 

292,410

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net increase (decrease) in noninterest-bearing deposits

 

 

108,291

 

 

 

(333,615

)

Net (decrease) increase in interest-bearing deposits

 

 

(379,922

)

 

 

36,517

 

Net proceeds (repayments) from other short-term borrowings

 

 

280,000

 

 

 

(305,000

)

Repayments of other long-term borrowings

 

 

(137

)

 

 

(174

)

Net increase (decrease) in securities sold under repurchase agreements

 

 

15,445

 

 

 

(11,049

)

Proceeds from stock option exercises

 

 

148

 

 

 

 

Repurchase of common stock

 

 

 

 

 

(47,182

)

Payments of cash dividends

 

 

(23,623

)

 

 

(20,889

)

Net cash provided by (used in) financing activities

 

 

202

 

 

 

(681,392

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(111,639

)

 

 

(227,984

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

437,381

 

 

 

563,962

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

325,742

 

 

$

335,978

 

 

 

 

 

 

 

 

 

 

NONCASH ACTIVITIES:

 

 

 

 

 

 

 

 

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

 

$

 

 

$

32,522

 

Acquisition of real estate through foreclosure of collateral

 

 

320

 

 

 

12,953

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

 

 

$

5,400

 

Interest paid

 

 

12,706

 

 

 

10,666

 

 

See notes to consolidated financial statements.

 

 

7


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(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, 2016. Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 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,

 

 

 

2017

 

 

2016

 

 

 

Amount

 

 

Per Share Amount

 

 

Amount

 

 

Per Share Amount

 

 

 

(Amounts in thousands, except per share data)

 

Net income

 

$

68,565

 

 

 

 

 

 

$

68,951

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

69,480

 

 

$

0.99

 

 

 

70,174

 

 

$

0.98

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add incremental shares for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - options

 

 

2

 

 

 

 

 

 

 

7

 

 

 

 

 

Total

 

 

69,482

 

 

$

0.99

 

 

 

70,181

 

 

$

0.98

 

 

There were no stock options exercisable during the three months ended March 31, 2017 or 2016 that would have had an anti-dilutive effect on the above computation.

 

 

3. NEW ACCOUNTING STANDARDS

Accounting Standards Updates (“ASU”)

ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20).” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for the Company on January 1, 2019 on a modified retrospective basis with a cumulative-effect adjustment as of the beginning of the period of adoption. The Company is currently evaluating the potential impact of ASU 2017-08 on the Company’s financial statements.

   

ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350).” ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test, which required computing the implied fair value of goodwill. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s financial statements.

 

8


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

ASU 2017-01, “Business Combinations (Topic 805).” ASU 2017-01 is intended to clarify or correct unintended application of ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Additionally, the amendments in this update provide a more robust framework to assist entities in evaluating whether a set of assets and activities constitutes a business. Lastly, the amendments in this update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. ASU 2017-01 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.

 

ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash.” ASU 2016-18 requires the Statement of Cash Flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, restricted cash or cash equivalents should be included with cash and cash equivalents when recording the beginning-of-period and end-of-period total amounts on the Statement of Cash Flows. ASU 2016-18 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.

 

ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 addresses certain cash receipts and cash payments with the objective of reducing the existing diversity in practice. ASU 2016‑15 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company's financial statements.

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.

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 Company’s 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 Company’s financial statements.

ASU 2016-09, “Compensation - Stock Compensation (Topic 718) — Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for share-based awards paid to employees. The amended guidance 1) requires excess tax benefits and tax deficiencies on share-based awards payments to employees to be recognized directly to income tax expense or benefit in the Consolidated Statement of Income rather than to capital surplus; 2) requires excess tax benefits to be included as operating activities on the Consolidated Statements of Cash Flows; 3) provides entities with the option of making an accounting policy election to account for forfeitures of share-based payments as they occur instead of estimating the awards expected to be forfeited; and 4) changes the threshold to qualify for equity classification to permit withholdings up to the maximum statutory tax rate in the

9


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

applicable jurisdiction. In addition, excess tax benefits and tax deficiencies are considered discrete items in the reporting period they occur and are not included in the estimate of an entity’s annual effective tax rate.  The Company adopted ASU 2016-09 on January 1, 2017 and elected to recognize forfeitures as they occur. Implementation of ASU 2016-09 will add volatility to tax expense as the Company’s stock price changes.  The adoption of ASU 2016-09 did not have a significant impact 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 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 1) 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; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; 4) 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; 5) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 6) 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; 7) 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 8) 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.

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. The Company will adopt ASU 2014-09, effective January 1, 2018, using the modified retrospective application with a cumulative-effect adjustment, if such adjustment is significant. The Company continues to evaluate the requirements of ASU 2014-09, but it is not expected to have a significant impact on the Company’s financial statements. 

 

 

10


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

4. SECURITIES

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

 

 

 

March 31, 2017

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,815

 

 

$

5

 

 

$

 

 

$

1,820

 

Collateralized mortgage obligations

 

 

115,235

 

 

 

648

 

 

 

(87

)

 

 

115,796

 

Mortgage-backed securities

 

 

77,588

 

 

 

1,853

 

 

 

(153

)

 

 

79,288

 

Other securities

 

 

12,588

 

 

 

22

 

 

 

(87

)

 

 

12,523

 

Total

 

$

207,226

 

 

$

2,528

 

 

$

(327

)

 

$

209,427

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

33,561

 

 

$

493

 

 

$

(3

)

 

$

34,051

 

States and political subdivisions

 

 

363,139

 

 

 

4,268

 

 

 

(299

)

 

 

367,108

 

Collateralized mortgage obligations

 

 

799

 

 

 

5

 

 

 

(3

)

 

 

801

 

Mortgage-backed securities

 

 

9,247,094

 

 

 

31,618

 

 

 

(163,008

)

 

 

9,115,704

 

Other securities

 

 

100

 

 

 

 

 

 

 

 

 

100

 

Total

 

$

9,644,693

 

 

$

36,384

 

 

$

(163,313

)

 

$

9,517,764

 

 

 

 

December 31, 2016

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,915

 

 

$

5

 

 

$

 

 

$

1,920

 

Collateralized mortgage obligations

 

 

120,478

 

 

 

240

 

 

 

(119

)

 

 

120,599

 

Mortgage-backed securities

 

 

84,024

 

 

 

2,004

 

 

 

(165

)

 

 

85,863

 

Other securities

 

 

12,588

 

 

 

252

 

 

 

(46

)

 

 

12,794

 

Total

 

$

219,005

 

 

$

2,501

 

 

$

(330

)

 

$

221,176