pb-10q_20170630.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 JUNE 30, 2017

☐	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 August 3, 2017, there were 69,486,262 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 June 30, 2017 and December 31, 2016 (unaudited)	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2017 and 2016 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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	54
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	57
Signatures		58

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30,			December 31,
	2017			2016
	(Dollars in thousands, except par value)
ASSETS
Cash and due from banks	$	321,958		$	436,203
Federal funds sold		757			1,178
Total cash and cash equivalents		322,715			437,381
Available for sale securities, at fair value		253,130			221,176
Held to maturity securities, at cost (fair value of $9,301,875 and $9,339,455, respectively)		9,329,065			9,504,910
Total securities		9,582,195			9,726,086
Loans held for sale		26,094			26,975
Loans held for investment		9,837,925			9,595,085
Total loans		9,864,019			9,622,060
Less: allowance for credit losses		(83,783	)		(85,326	)
Loans, net		9,780,236			9,536,734
Accrued interest receivable		52,661			53,310
Goodwill		1,900,845			1,900,845
Core deposit intangibles, net		42,150			45,784
Bank premises and equipment, net		256,511			262,083
Other real estate owned		15,472			15,463
Bank owned life insurance (BOLI)		252,365			247,116
Federal Home Loan Bank of Dallas stock		69,510			55,430
Other assets		21,883			50,840
TOTAL ASSETS	$	22,296,543		$	22,331,072
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	5,397,293		$	5,190,973
Interest-bearing		11,673,237			12,116,329
Total deposits		17,070,530			17,307,302
Other borrowings		1,035,506			990,781
Securities sold under repurchase agreements		346,324			320,430
Accrued interest payable		2,833			2,319
Other liabilities		105,162			67,929
Total liabilities		18,560,355			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; 69,488,012 shares issued and outstanding at June 30, 2017; 69,491,012 shares issued and outstanding at December 31, 2016		69,488			69,491
Capital surplus		2,031,684			2,028,129
Retained earnings		1,633,150			1,543,280
Accumulated other comprehensive income—net unrealized gain on available for sale securities, net of tax of $1,005 and $760, respectively		1,866			1,411
Total shareholders’ equity		3,736,188			3,642,311
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	22,296,543		$	22,331,072

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,
	2017			2016		2017			2016
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	114,975		$	118,297	$	226,685		$	242,819
Securities		52,912			51,097		106,069			103,670
Federal funds sold		160			65		343			161
Total interest income		168,047			169,459		333,097			346,650
INTEREST EXPENSE:
Deposits		11,441			10,045		21,349			20,251
Other borrowings		4,040			710		6,516			1,192
Securities sold under repurchase agreements		335			234		566			446
Junior subordinated debentures		—			3		—			37
Total interest expense		15,816			10,992		28,431			21,926
NET INTEREST INCOME		152,231			158,467		304,666			324,724
PROVISION FOR CREDIT LOSSES		2,750			6,000		5,425			20,000
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		149,481			152,467		299,241			304,724
NONINTEREST INCOME:
Nonsufficient funds (NSF) fees		7,805			8,031		15,894			16,220
Credit card, debit card and ATM card income		6,186			5,929		12,139			11,756
Service charges on deposit accounts		5,405			4,610		10,826			9,200
Trust income		2,271			1,762		4,426			3,789
Mortgage income		1,107			1,772		2,373			3,243
Brokerage income		427			1,286		915			2,576
Net (loss) gain on sale of assets		(3,783	)		332		(2,024	)		1,352
Gain on sale of securities		3,270			—		3,270			—
Other		5,092			4,751		10,785			11,130
Total noninterest income		27,780			28,473		58,604			59,266
NONINTEREST EXPENSE:
Salaries and employee benefits		47,343			48,224		95,787			98,338
Net occupancy and equipment		5,460			5,741		10,963			11,365
Credit and debit card, data processing and software amortization		4,216			4,164		8,301			8,594
Regulatory assessments and FDIC insurance		3,548			3,447		7,097			6,877
Core deposit intangibles amortization		1,719			2,334		3,634			4,556
Depreciation		3,051			3,286		6,154			6,635
Communications		2,664			2,981		5,366			5,920
Other real estate expense		57			50		142			92
Other		8,384			9,008		17,060			17,386
Total noninterest expense		76,442			79,235		154,504			159,763
INCOME BEFORE INCOME TAXES		100,819			101,705		203,341			204,227
PROVISION FOR INCOME TAXES		32,265			33,634		66,222			67,205
NET INCOME	$	68,554		$	68,071	$	137,119		$	137,022
EARNINGS PER SHARE:
Basic	$	0.99		$	0.98	$	1.97		$	1.96
Diluted	$	0.99		$	0.98	$	1.97		$	1.96

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,
	2017			2016			2017			2016
	(Dollars in thousands)
Net income	$	68,554		$	68,071		$	137,119		$	137,022
Other comprehensive gain, before tax:
Securities available for sale:
Change in unrealized gain during period		671			(790	)		700			(642	)
Total other comprehensive gain		671			(790	)		700			(642	)
Deferred taxes related to other comprehensive gain		(235	)		277			(245	)		225
Other comprehensive gain, net of tax		436			(513	)		455			(417	)
Comprehensive income	$	68,990		$	67,558		$	137,574		$	136,605

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, 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 income														(417	)					(417	)
Common stock issued in connection with the exercise of stock options and restricted stock awards, net		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

BALANCE AT DECEMBER 31, 2016		69,491,012		$	69,491		$	2,028,129		$	1,543,280		$	1,411		$	—		$	3,642,311
Net income											137,119									137,119
Other comprehensive income														455						455
Common stock issued in connection with the exercise of stock options and restricted stock awards, net		(3,000	)		(3	)		151												148
Stock based compensation expense								3,404												3,404
Cash dividends declared, $0.6800 per share											(47,249	)								(47,249	)
BALANCE AT JUNE 30, 2017		69,488,012		$	69,488		$	2,031,684		$	1,633,150		$	1,866		$	—		$	3,736,188

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	June 30,
	2017			2016
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	137,119		$	137,022
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization		9,788			11,191
Provision for credit losses		5,425			20,000
Net amortization of premium on investments		19,286			20,660
Net (gain) loss on sale of other real estate		(81	)		333
Gain on sale of investment securities		(3,270	)		—
Net loss (gain) on sale of assets		2,024			(1,352	)
Net accretion of discount on loans		(9,224	)		(23,798	)
Net accretion of discount on deposits		(138	)		(360	)
Gain on sale of loans		(2,180	)		(2,961	)
Proceeds from sale of loans held for sale		110,953			128,340
Originations of loans held for sale		(108,374	)		(133,277	)
Stock based compensation expense		3,404			5,166
Decrease in accrued interest receivable and other assets		5,410			56,165
Increase in accrued interest payable and other liabilities		37,747			9,817
Net cash provided by operating activities		207,889			226,946

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of held to maturity securities		921,196			883,538
Purchase of held to maturity securities		(761,188	)		(395,228	)
Proceeds from maturities and principal paydowns of available for sale securities		7,221,960			7,314,308
Purchase of available for sale securities		(7,253,393	)		(7,351,075	)
Net (increase) decrease in loans held for investment		(241,520	)		27,634
Purchase of bank premises and equipment		(3,490	)		(3,361	)
Proceeds from sale of bank premises, equipment and other real estate		6,996			6,910
Net cash used in the purchase of Tradition Bancshares, Inc.		—			(8,963	)
Net cash (used in) provided by investing activities		(109,439	)		473,763

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits		206,320			(429,921	)
Net decrease in interest-bearing deposits		(442,954	)		(520,620	)
Net proceeds from other short-term borrowings		45,000			115,000
Repayments of other long-term borrowings		(275	)		(350	)
Net increase in securities sold under repurchase agreements		25,894			4,748
Redemption of junior subordinated debentures		—			(7,217	)
Proceeds from stock option exercises		148			198
Repurchase of common stock		—			(51,057	)
Payments of cash dividends		(47,249	)		(41,760	)
Net cash used in financing activities		(213,116	)		(930,979	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(114,666	)		(230,270	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		437,381			563,962
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	322,715		$	333,692

NONCASH ACTIVITIES:
Stock issued in connection with the Tradition Bancshares, Inc. acquisition	$	—		$	32,522
Acquisition of real estate through foreclosure of collateral		1,371			13,855

SUPPLEMENTAL INFORMATION:
Income taxes paid	$	63,785		$	48,832
Interest paid		27,917			21,597

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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,” and together with Bancshares, 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 six-month period ended June 30, 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 June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	Amount		Per Share Amount	Amount		Per Share Amount	Amount		Per Share Amount	Amount		Per Share Amount
	(Amounts in thousands, except per share data)
Net income	$	68,554		$	68,071		$	137,119		$	137,022
Basic: