pb-10q_20190331.htm

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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:

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, 2019, there were 69,862,259 outstanding shares of the registrant’s Common Stock, par value $1.00 per share.

	March 31,			December 31,
	2019			2018
	(unaudited)
	(Dollars in thousands, except par value)
ASSETS
Cash and due from banks	$	291,498		$	410,575
Federal funds sold		566			552
Total cash and cash equivalents		292,064			411,127
Available for sale securities, at fair value		79,776			84,155
Held to maturity securities, at cost (fair value of $8,975,295 and $9,081,236, respectively)		9,057,869			9,324,811
Total securities		9,137,645			9,408,966
Loans held for sale		24,398			29,367
Loans held for investment		10,389,624			10,340,946
Total loans		10,414,022			10,370,313
Less: allowance for credit losses		(86,091	)		(86,440	)
Loans, net		10,327,931			10,283,873
Accrued interest receivable		55,867			56,532
Goodwill		1,900,845			1,900,845
Core deposit intangibles, net		31,564			32,883
Bank premises and equipment, net		257,595			257,046
Other real estate owned		2,096			1,805
Bank owned life insurance (BOLI)		260,404			260,335
Federal Home Loan Bank of Dallas stock		48,524			55,959
Other assets		39,706			24,031
TOTAL ASSETS	$	22,354,241		$	22,693,402
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	5,673,707		$	5,666,115
Interest-bearing		11,524,063			11,590,443
Total deposits		17,197,770			17,256,558
Other borrowings		680,952			1,031,126
Securities sold under repurchase agreements		254,573			284,720
Accrued interest payable		4,425			4,201
Other liabilities		106,731			63,973
Total liabilities		18,244,451			18,640,578
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; 69,845,925 shares issued and outstanding at March 31, 2019; 69,846,825 shares issued and outstanding at December 31, 2018		69,846			69,847
Capital surplus		2,048,156			2,045,351
Retained earnings		1,991,081			1,937,316
Accumulated other comprehensive income —net unrealized gain on available for sale securities, net of tax expense of $188 and $82, respectively		707			310
Total shareholders’ equity		4,109,790			4,052,824
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	22,354,241		$	22,693,402

	Three Months Ended
	March 31,
	2019			2018
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	130,065		$	116,246
Securities		55,648			54,457
Federal funds sold and other earning assets		402			315
Total interest income		186,115			171,018
INTEREST EXPENSE:
Deposits		25,128			14,472
Other borrowings		5,317			2,973
Securities sold under repurchase agreements		759			350
Total interest expense		31,204			17,795
NET INTEREST INCOME		154,911			153,223
PROVISION FOR CREDIT LOSSES		700			9,000
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		154,211			144,223
NONINTEREST INCOME:
Nonsufficient funds (NSF) fees		7,816			7,827
Credit card, debit card and ATM card income		5,971			5,961
Service charges on deposit accounts		4,998			5,275
Trust income		2,595			2,728
Mortgage income		722			763
Brokerage income		673			625
Gain on sale of assets		58			—
Other		5,311			4,759
Total noninterest income		28,144			27,938
NONINTEREST EXPENSE:
Salaries and employee benefits		51,073			50,399
Net occupancy and equipment		5,466			5,609
Credit and debit card, data processing and software amortization		4,573			4,448
Regulatory assessments and FDIC insurance		2,374			3,575
Core deposit intangibles amortization		1,319			1,568
Depreciation		3,104			3,033
Communications		2,270			2,580
Other real estate expense, net		(94	)		211
Other		8,486			8,631
Total noninterest expense		78,571			80,054
INCOME BEFORE INCOME TAXES		103,784			92,107
PROVISION FOR INCOME TAXES		21,382			17,746
NET INCOME	$	82,402		$	74,361
EARNINGS PER SHARE:
Basic	$	1.18		$	1.07
Diluted	$	1.18		$	1.07

													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, 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 issuance of 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

BALANCE AT DECEMBER 31, 2018		69,846,825		$	69,847		$	2,045,351		$	1,937,316		$	310		$	4,052,824
Net income											82,402						82,402
Other comprehensive income														397			397
Common stock issued in connection with the issuance of restricted stock awards, net		(900	)		(1	)		1									—
Stock based compensation expense								2,804									2,804
Cash dividends declared, $0.41 per share											(28,637	)					(28,637	)
BALANCE AT MARCH 31, 2019		69,845,925		$	69,846		$	2,048,156		$	1,991,081		$	707		$	4,109,790

	Three Months Ended
	March 31,
	2019			2018
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	82,402		$	74,361
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization		4,423			4,601
Provision for credit losses		700			9,000
Net amortization of premium on investments		6,589			8,450
Net (gain) loss on sale of other real estate		(177	)		122
Gain on sale of assets		(58	)		—
Net accretion of discount on loans		(1,793	)		(2,326	)
Net amortization of premium on deposits		—			(53	)
Gain on sale of loans		(711	)		(705	)
Proceeds from sale of loans held for sale		39,556			40,916
Originations of loans held for sale		(33,876	)		(43,373	)
Stock based compensation expense		2,804			2,607
Decrease (increase) in accrued interest receivable and other assets		7,034			(7,406	)
Increase (decrease) in accrued interest payable and other liabilities		26,672			(8,666	)
Net cash provided by operating activities		133,565			77,528

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of held to maturity securities		391,109			440,176
Purchase of held to maturity securities		(130,760	)		(497,004	)
Proceeds from maturities and principal paydowns of available for sale securities		3,004,707			1,610,394
Purchase of available for sale securities		(2,999,821	)		(1,599,954	)
Net (increase) decrease in loans held for investment		(49,963	)		5,331
Purchase of bank premises and equipment		(3,633	)		(3,078	)
Proceeds from sale of bank premises, equipment and other real estate		1,347			634
Proceeds from insurance claims		2,132			1,028
Net cash provided by (used in) investing activities		215,118			(42,473	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits		7,592			84,672
Net decrease in interest-bearing deposits		(66,380	)		(573,200	)
Net (repayments of) proceeds from other short-term borrowings		(350,000	)		315,000
Repayments of other long-term borrowings		(174	)		(144	)
Net (decrease) increase in securities sold under repurchase agreements		(30,147	)		15,422
Payments of cash dividends		(28,637	)		(25,135	)
Net cash used in financing activities		(467,746	)		(183,385	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(119,063	)		(148,330	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		411,127			392,313
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	292,064		$	243,983

NONCASH ACTIVITIES:
Acquisition of real estate through foreclosure of collateral	$	1,370		$	47

SUPPLEMENTAL INFORMATION:
Income taxes paid	$	—		$	62,230
Interest paid		30,980			17,748

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, 2018. Operating results for the three-month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other period.

As of March 31, 2019, all stock options have been exercised and there are no options outstanding.

The following table illustrates the computation of basic and diluted earnings per share:

	Three Months Ended March 31,
	2019				2018
	Amount		Per Share Amount		Amount		Per Share Amount
	(Amounts in thousands, except per share data)
Net income	$	82,402			$	74,361
Basic:
Weighted average shares outstanding		69,847	$	1.18		69,768	$	1.07
Diluted:
Weighted average shares outstanding		69,847	$	1.18		69,768	$	1.07

There were no stock options exercisable during the three months ended March 31, 2019 or 2018 that would have had an anti-dilutive effect on the above computation.

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 has formed a working group comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others, to assist in the implementation of ASU 2016-13. The Company is currently working through an implementation plan that includes assessment of processes, portfolio segmentation and model development. The Company is working with a third-party vendor to assist with implementation and model development. CECL compliant models are currently in the development stage, with model testing and documentation being performed concurrently. The Company continues to evaluate 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 recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The requirements for lessors under ASU 2016-02 are largely unchanged from existing guidance, however certain necessary changes have been made to align with specific changes to lessee accounting and key aspects of the revenue recognition guidance (Topic 606).

The Company’s leases relate primarily to office space and banking centers. The Company identified and reviewed existing leases applicable to ASU 2016-02 and elected certain optional practical expedients: 1) not to reassess whether any expired or existing contracts are or contain leases, 2) not to reassess the lease classification for any expired or existing lease, 3) not to reassess initial direct cost for any existing leases and 4) not to separately identify lease and non-lease components. Additionally, the Company elected the short-term lease exemption for lease terms less than 12 months. The Company adopted ASU 2016-02 on January 1, 2019 using a modified retrospective transition approach without adjusting comparative periods. With the adoption of the new standard, the Company recognized right-of-use assets and lease liabilities of $17.3 million as of January 1, 2019. See Note 9 “Contractual Obligations and Off-Balance Sheet Items — Contractual Obligations — Leases” for additional information.

	March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
States and political subdivisions	$	1,004	$	4	$	—		$	1,008
Collateralized mortgage obligations		12,164		29		(32	)		12,161
Mortgage-backed securities		65,713		900		(6	)		66,607
Total	$	78,881	$	933	$	(38	)	$	79,776
Held to Maturity
U.S. Treasury securities and obligations of U.S. Government agencies	$	22,823	$	19	$	(56	)	$	22,786
States and political subdivisions		225,757		4,158		(82	)		229,833
Collateralized mortgage obligations		489		3		(2	)		490
Mortgage-backed securities		8,808,800		28,624		(115,238	)		8,722,186
Total	$	9,057,869	$	32,804	$	(115,378	)	$	8,975,295

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
States and political subdivisions	$	1,159	$	7	$	—		$	1,166
Collateralized mortgage obligations		12,724		69		(37	)		12,756
Mortgage-backed securities		69,880		553		(200	)		70,233
Total	$	83,763	$	629	$	(237	)	$	84,155
Held to Maturity
U.S. Treasury securities and obligations of U.S. Government agencies	$	25,778	$	—	$	(100	)	$	25,678
States and political subdivisions		253,198		3,440		(777	)		255,861
Collateralized mortgage obligations		509		1		(2	)		508
Mortgage-backed securities		9,045,326		5,798		(251,935	)		8,799,189
Total	$	9,324,811	$	9,239	$	(252,814	)	$	9,081,236

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, 2019, 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, 2019, 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.

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

	March 31, 2019
	Less than 12 Months					12 Months or More					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	$	3,337	$	(6	)	$	2,007	$	(26	)	$	5,344	$	(32	)
Mortgage-backed securities		23,664		(5	)		74		(1	)		23,738		(6	)
Total	$	27,001	$	(11	)	$	2,081	$	(27	)	$	29,082	$	(38	)
Held to Maturity

Prosperity Bank Plaza
4295 San Felipe, Houston, Texas	77027
(Address of principal executive offices)	(Zip Code)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, par value $1.00 per share		PB		New York Stock Exchange, Inc.

PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	50

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
Signatures		53

Large Accelerated Filer	☒	Accelerated Filer	☐

Non-accelerated Filer	☐	Smaller Reporting Company	☐

		Emerging Growth Company	☐