10-Q 1 pb-10q_20180331.htm 10-Q pb-10q_20180331.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, 2018

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 3, 2018, there were 69,844,886 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, 2018 and December 31, 2017 (unaudited)

3

 

Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)

4

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)

5

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2018 and 2017 (unaudited)

6

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)

7

 

Notes to Consolidated Financial Statements (unaudited)

8

Item 2.

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

32

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

51

Item 4.

Controls and Procedures

51

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

52

Item 1A.

Risk Factors

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

Signatures

54

 

 

 

2


PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except par value)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

243,514

 

 

$

391,616

 

Federal funds sold

 

 

469

 

 

 

697

 

Total cash and cash equivalents

 

 

243,983

 

 

 

392,313

 

Available for sale securities, at fair value

 

 

207,489

 

 

 

217,870

 

Held to maturity securities, at cost (fair value of $9,239,443 and $9,323,482 respectively)

 

 

9,502,765

 

 

 

9,454,246

 

Total securities

 

 

9,710,254

 

 

 

9,672,116

 

Loans held for sale

 

 

34,551

 

 

 

31,389

 

Loans held for investment

 

 

9,976,865

 

 

 

9,989,384

 

Total loans

 

 

10,011,416

 

 

 

10,020,773

 

Less: allowance for credit losses

 

 

(83,600

)

 

 

(84,041

)

Loans, net

 

 

9,927,816

 

 

 

9,936,732

 

Accrued interest receivable

 

 

51,526

 

 

 

56,368

 

Goodwill

 

 

1,900,845

 

 

 

1,900,845

 

Core deposit intangibles, net

 

 

37,274

 

 

 

38,842

 

Bank premises and equipment, net

 

 

257,057

 

 

 

257,065

 

Other real estate owned

 

 

10,538

 

 

 

11,152

 

Bank owned life insurance (BOLI)

 

 

256,443

 

 

 

255,132

 

Federal Home Loan Bank of Dallas stock

 

 

55,394

 

 

 

49,764

 

Other assets

 

 

21,184

 

 

 

16,963

 

TOTAL ASSETS

 

$

22,472,314

 

 

$

22,587,292

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

5,707,994

 

 

$

5,623,322

 

Interest-bearing

 

 

11,624,885

 

 

 

12,198,138

 

Total deposits

 

 

17,332,879

 

 

 

17,821,460

 

Other borrowings

 

 

820,079

 

 

 

505,223

 

Securities sold under repurchase agreements

 

 

339,576

 

 

 

324,154

 

Accrued interest payable

 

 

2,992

 

 

 

2,945

 

Other liabilities

 

 

100,643

 

 

 

109,356

 

Total liabilities

 

 

18,596,169

 

 

 

18,763,138

 

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; 69,819,286 shares issued and outstanding at March 31, 2018; 69,490,910 shares issued and  outstanding at December 31, 2017

 

 

69,819

 

 

 

69,491

 

Capital surplus

 

 

2,037,498

 

 

 

2,035,219

 

Retained earnings

 

 

1,768,783

 

 

 

1,719,557

 

Accumulated other comprehensive income (loss)—net unrealized gain (loss) on available for sale securities, net of tax expense (benefit) of $12 and ($30), respectively

 

 

45

 

 

 

(113

)

Total shareholders’ equity

 

 

3,876,145

 

 

 

3,824,154

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

22,472,314

 

 

$

22,587,292

 

 

See notes to consolidated financial statements.

 

3


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

Loans, including fees

 

$

116,246

 

 

$

111,710

 

Securities

 

 

54,457

 

 

 

53,157

 

Federal funds sold

 

 

315

 

 

 

183

 

Total interest income

 

 

171,018

 

 

 

165,050

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

Deposits

 

 

14,472

 

 

 

9,908

 

Other borrowings

 

 

2,973

 

 

 

2,476

 

Securities sold under repurchase agreements

 

 

350

 

 

 

231

 

Total interest expense

 

 

17,795

 

 

 

12,615

 

NET INTEREST INCOME

 

 

153,223

 

 

 

152,435

 

PROVISION FOR CREDIT LOSSES

 

 

9,000

 

 

 

2,675

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

 

144,223

 

 

 

149,760

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

 

Nonsufficient funds (NSF) fees

 

 

7,827

 

 

 

8,089

 

Credit card, debit card and ATM card income

 

 

5,961

 

 

 

5,953

 

Service charges on deposit accounts

 

 

5,275

 

 

 

5,421

 

Trust income

 

 

2,728

 

 

 

2,155

 

Mortgage income

 

 

763

 

 

 

1,266

 

Brokerage income

 

 

625

 

 

 

488

 

Net gain on sale of assets

 

 

 

 

 

1,759

 

Other

 

 

4,759

 

 

 

5,693

 

Total noninterest income

 

 

27,938

 

 

 

30,824

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

50,399

 

 

 

48,444

 

Net occupancy and equipment

 

 

5,609

 

 

 

5,503

 

Credit and debit card, data processing and software amortization

 

 

4,448

 

 

 

4,085

 

Regulatory assessments and FDIC insurance

 

 

3,575

 

 

 

3,549

 

Core deposit intangibles amortization

 

 

1,568

 

 

 

1,915

 

Depreciation

 

 

3,033

 

 

 

3,103

 

Communications

 

 

2,580

 

 

 

2,702

 

Other real estate expense

 

 

211

 

 

 

85

 

Other

 

 

8,631

 

 

 

8,676

 

Total noninterest expense

 

 

80,054

 

 

 

78,062

 

INCOME BEFORE INCOME TAXES

 

 

92,107

 

 

 

102,522

 

PROVISION FOR INCOME TAXES

 

 

17,746

 

 

 

33,957

 

NET INCOME

 

$

74,361

 

 

$

68,565

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

1.07

 

 

$

0.99

 

Diluted

 

$

1.07

 

 

$

0.99

 

 

See notes to consolidated financial statements.

 

4


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

 

Net income

 

$

74,361

 

 

$

68,565

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

Change in unrealized gain during period

 

 

200

 

 

 

29

 

Total other comprehensive income

 

 

200

 

 

 

29

 

Deferred taxes related to other comprehensive income

 

 

(42

)

 

 

(10

)

Other comprehensive income, net of tax

 

 

158

 

 

 

19

 

Comprehensive income

 

$

74,519

 

 

$

68,584

 

 

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

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Surplus

 

 

Earnings

 

 

Income

 

 

Equity

 

 

 

(In thousands, except share and per share data)

 

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, $0.34 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2017

 

 

69,490,910

 

 

$

69,491

 

 

$

2,035,219

 

 

$

1,719,557

 

 

$

(113

)

 

$

3,824,154

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74,361

 

 

 

 

 

 

 

74,361

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

158

 

 

 

158

 

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

 

 

328,376

 

 

 

328

 

 

 

(328

)

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

 

 

 

 

 

 

 

 

2,607

 

 

 

 

 

 

 

 

 

 

 

2,607

 

Cash dividends declared, $0.36 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,135

)

 

 

 

 

 

 

(25,135

)

BALANCE AT MARCH 31, 2018

 

 

69,819,286

 

 

$

69,819

 

 

$

2,037,498

 

 

$

1,768,783

 

 

$

45

 

 

$

3,876,145

 

 

See notes to consolidated financial statements.

 

 

6


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

74,361

 

 

$

68,565

 

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

 

 

 

 

 

 

 

 

Depreciation and core deposit intangibles amortization

 

 

4,601

 

 

 

5,018

 

Provision for credit losses

 

 

9,000

 

 

 

2,675

 

Net amortization of premium on investments

 

 

8,450

 

 

 

9,883

 

Net loss (gain) on sale of other real estate

 

 

122

 

 

 

(10

)

Net gain on sale of assets

 

 

 

 

 

(1,759

)

Net accretion of discount on loans

 

 

(2,326

)

 

 

(4,753

)

Net amortization of premium on deposits

 

 

(53

)

 

 

(99

)

Gain on sale of loans

 

 

(705

)

 

 

(1,162

)

Proceeds from sale of loans held for sale

 

 

40,916

 

 

 

59,037

 

Originations of loans held for sale

 

 

(43,373

)

 

 

(52,904

)

Stock based compensation expense

 

 

2,607

 

 

 

1,662

 

Increase in accrued interest receivable and other assets

 

 

(7,406

)

 

 

(17,703

)

(Decrease) increase in accrued interest payable and other liabilities

 

 

(8,666

)

 

 

75,998

 

Net cash provided by operating activities

 

 

77,528

 

 

 

144,448

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities and principal paydowns of held to maturity securities

 

 

440,176

 

 

 

424,808

 

Purchase of held to maturity securities

 

 

(497,004

)

 

 

(574,333

)

Proceeds from maturities and principal paydowns of available for sale securities

 

 

1,610,394

 

 

 

1,211,622

 

Purchase of available for sale securities

 

 

(1,599,954

)

 

 

(1,199,985

)

Net decrease (increase) in loans held for investment

 

 

5,331

 

 

 

(121,679

)

Purchase of bank premises and equipment

 

 

(3,078

)

 

 

(1,123

)

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

 

 

634

 

 

 

4,401

 

Proceeds from insurance claims

 

 

1,028

 

 

 

 

Net cash used in investing activities

 

 

(42,473

)

 

 

(256,289

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net increase in noninterest-bearing deposits

 

 

84,672

 

 

 

108,291

 

Net decrease in interest-bearing deposits

 

 

(573,200

)

 

 

(379,922

)

Net proceeds from other short-term borrowings

 

 

315,000

 

 

 

280,000

 

Repayments of other long-term borrowings

 

 

(144

)

 

 

(137

)

Net increase in securities sold under repurchase agreements

 

 

15,422

 

 

 

15,445

 

Proceeds from stock option exercises

 

 

 

 

 

148

 

Payments of cash dividends

 

 

(25,135

)

 

 

(23,623

)

Net cash (used in) provided by financing activities

 

 

(183,385

)

 

 

202

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(148,330

)

 

 

(111,639

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

392,313

 

 

 

437,381

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

243,983

 

 

$

325,742

 

 

 

 

 

 

 

 

 

 

NONCASH ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of real estate through foreclosure of collateral

 

$

47

 

 

$

320

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

62,230

 

 

$

 

Interest paid

 

 

17,748

 

 

 

12,706

 

 

See notes to consolidated financial statements.

 

7


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(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, 2017. Operating results for the three-month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 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,

 

 

 

2018

 

 

2017

 

 

 

Amount

 

 

Per Share Amount

 

 

Amount

 

 

Per Share Amount

 

 

 

(Amounts in thousands, except per share data)

 

Net income

 

$

74,361

 

 

 

 

 

 

$

68,565

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

69,768

 

 

$

1.07

 

 

 

69,480

 

 

$

0.99

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add incremental shares for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - options

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

Total

 

 

69,768

 

 

$

1.07

 

 

 

69,482

 

 

$

0.99

 

 

There were no stock options exercisable during the three months ended March 31, 2018 or 2017 that would have had an anti-dilutive effect on the above computation.

 

 

8


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

3. NEW ACCOUNTING STANDARDS

Accounting Standards Updates (“ASU”)

ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments of ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for all entities beginning January 1, 2019 and is not expected to have a significant impact on the Company’s financial statements.

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 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 2016-02, "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 became effective for the Company on January 1, 2018, and did not have a material financial 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. 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.  In addition, the FASB has issued targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10 -

9


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

Identifying Performance Obligations and Licensing, ASU 2016-12 - Narrow-Scope Improvements and Practical Expedients and ASU 2016-20 - Technical Corrections and Improvements to Topic 606 - Revenue from Contract with Customers. These amendments do not change the core principles in ASU 2014-09. The Company’s primary sources of revenue are comprised of net interest income on financial assets and liabilities, which are not within the scope of ASU 2014-09. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU. Based on this assessment, the Company concluded the ASU did not significantly change the method in which the Company currently recognizes revenue. ASU 2014-09 became effective for the Company on January 1, 2018 and did not have a material financial impact on the Company’s financial statements.

The following provides further detail on other revenue streams within noninterest income that are within the scope of this update.

Nonsufficient Funds (NSF) Fees – NSF fees are generated on a transactional basis from nonsufficient funds. Revenue is recognized once the performance obligation is satisfied.

Credit card, debit card and ATM card income – Credit card and debit card income is primarily comprised of interchange fees earned on a transactional basis through card payment networks. ATM card income is generated when the Company’s card holders use foreign ATMs or when non-customers utilize the Company’s ATMs. Revenue is recognized after the performance obligation is satisfied generally after the transaction is completed.  

Service Charges on Deposit Accounts – Services charges on deposit accounts consist of account maintenance or transaction-based fees. The Company’s performance obligation is satisfied over a period of time for account maintenance and at the time of service for transaction-based fees. Revenue is recognized after the performance obligation is satisfied.

Trust Income – Trust income represents monthly income from trust and estate administration, investment management services, and employee benefits services. The Company’s performance obligation is generally performed over a period of time and varies by the type of trust services being provided to the customer. Revenue is recognized after the performance obligation is satisfied.

Brokerage Income – Brokerage income represents fees and commissions from asset management services and transaction processing. The Company’s performance obligation is generally performed over a period of time for asset management services and at a point in time for transaction processing. Revenue is recognized after the performance obligation is satisfied.

 

4. SECURITIES

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

 

 

 

March 31, 2018

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,668

 

 

$

4

 

 

$

 

 

$

1,672

 

Collateralized mortgage obligations

 

 

95,544

 

 

 

770

 

 

 

(53

)

 

 

96,261

 

Mortgage-backed securities

 

 

97,632

 

 

 

986

 

 

 

(1,331

)

 

 

97,287

 

Other securities

 

 

12,588

 

 

 

 

 

 

(319

)

 

 

12,269

 

Total

 

$

207,432

 

 

$

1,760

 

 

$

(1,703

)

 

$

207,489

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

32,289

 

 

$

43

 

 

$

(39

)

 

$

32,293

 

States and political subdivisions

 

 

290,040

 

 

 

4,058

 

 

 

(538

)

 

 

293,560

 

Collateralized mortgage obligations

 

 

615

 

 

 

2

 

 

 

(4

)

 

 

613

 

Mortgage-backed securities

 

 

9,179,821

 

 

 

6,063

 

 

 

(272,907

)

 

 

8,912,977

 

Total

 

$

9,502,765

 

 

$

10,166

 

 

$

(273,488

)

 

$

9,239,443

 

 

10


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,817

 

 

$

3

 

 

$

 

 

$

1,820

 

Collateralized mortgage obligations

 

 

99,996

 

 

 

122

 

 

 

(57

)

 

 

100,061

 

Mortgage-backed securities

 

 

103,612

 

 

 

1,204

 

 

 

(1,327

)

 

 

103,489

 

Other securities

 

 

12,588

 

 

 

13

 

 

 

(101

)

 

 

12,500

 

Total

 

$

218,013

 

 

$

1,342

 

 

$

(1,485

)

 

$

217,870

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

32,235

 

 

$

150

 

 

$

(5

)

 

$

32,380

 

States and political subdivisions

 

 

328,666

 

 

 

4,263

 

 

 

(807

)

 

 

332,122

 

Collateralized mortgage obligations

 

 

653

 

 

 

2

 

 

 

(5

)

 

 

650

 

Mortgage-backed securities

 

 

9,092,692

 

 

 

9,382

 

 

 

(143,744

)

 

 

8,958,330

 

Total

 

$

9,454,246

 

 

$

13,797

 

 

$

(144,561

)

 

$

9,323,482

 

 

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 the time of such determination.

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.

Management has the ability and intent to hold the securities classified as held-to-maturity until they mature, at which time the Company will receive full value for the securities. Furthermore, as of March 31, 2018, management does not have the intent to sell any of the securities classified as available for sale before a recovery of cost. In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2018, management believes any impairment in the Company’s securities is temporary, and therefore no impairment loss has been recognized in the Company’s consolidated statement of income.

11


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

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

 

 

 

March 31, 2018

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Estimated Fair Value

 

 

Unrealized Losses

 

 

Estimated Fair Value

 

 

Unrealized Losses

 

 

Estimated Fair Value

 

 

Unrealized Losses

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations