10-Q 1 pb-10q_20190331.htm 10-Q pb-10q_20190331.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, 2019

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 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:

 

Large Accelerated Filer

 

Accelerated Filer

 

 

 

 

 

Non-accelerated Filer

 

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  

Securities registered pursuant to Section 12(b) of the Act:

 

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.

As of May 3, 2019, there were 69,862,259 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, 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

 

 

 

2


PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

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

 

 

 

See notes to consolidated financial statements.

 

3


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

 

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

 

 

See notes to consolidated financial statements.

 

4


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in thousands)

 

Net income

 

$

82,402

 

 

$

74,361

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

Change in unrealized gain during the period

 

 

503

 

 

 

200

 

Total other comprehensive income

 

 

503

 

 

 

200

 

Deferred taxes related to other comprehensive income

 

 

(106

)

 

 

(42

)

Other comprehensive income, net of tax

 

 

397

 

 

 

158

 

Comprehensive income

 

$

82,799

 

 

$

74,519

 

 

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, 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

 

 

See notes to consolidated financial statements.

 

 

6


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

7


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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, 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.

 

 

2. INCOME PER COMMON SHARE

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.

 

 

3. NEW ACCOUNTING STANDARDS

Accounting Standards Updates (“ASU”)

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

8


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(UNAUDITED)

 

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.

 

4. SECURITIES

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

 

 

 

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

 

 

9


PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(UNAUDITED)

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI analysis.  Investment securities classified as available for sale or held to maturity are evaluated for OTTI under Financial Accounting Standards Board (“FASB”):  Accounting Standards Codification (“ASC”) Topic 320, “Investments-Debt and Equity Securities.”

In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at 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