NOTE
S TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements include the accounts of Prosperity Bancshares, Inc.
®
(the “Company”) and its wholly-owned subsidiaries, Prosperity Bank
®
(the “Bank”) and Prosperity Holdings of Delaware, LLC. All intercompany transactions and balances have been eliminated.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim 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 generally accepted accounting principles 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, 2013. Operating results for the six-month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 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,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Per Share
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
|
(Amounts in thousands, except per share data)
|
|
Net income
|
|
$
|
75,506
|
|
|
|
|
|
|
$
|
53,844
|
|
|
|
|
|
|
$
|
142,643
|
|
|
|
|
|
|
$
|
103,149
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
69,667
|
|
|
$
|
1.08
|
|
|
|
60,250
|
|
|
$
|
0.89
|
|
|
|
67,936
|
|
|
$
|
2.10
|
|
|
|
58,629
|
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add incremental shares for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities - options
|
|
|
61
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
145
|
|
|
|
|
|
Total
|
|
|
69,728
|
|
|
$
|
1.08
|
|
|
|
60,394
|
|
|
$
|
0.89
|
|
|
|
68,014
|
|
|
$
|
2.10
|
|
|
|
58,774
|
|
|
$
|
1.76
|
|
There were no stock options exercisable during the three and six months ended June 30, 2014 or 2013 that would have had an anti-dilutive effect on the above computation.
3. NEW ACCOUNTING STANDARDS
Accounting Standards Updates (“ASU”)
ASU 2014-1
2
“
Compensation-Stock Compensation (Topic 718) -
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
.
” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 is effective for the Company beginning after January 1, 2016 and is not expected to have a significant impact on the Company’s financial statements.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
ASU 2014-11 “Transfers and Servicing (Topic 860) - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure
.
” ASU 2014-11 changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. It also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting and disclosure for the repurchase agreement. ASU 2014-11 is effective for the Company beginning after January 1, 2016 and is not expected to have a significant impact on the Company’s financial statements.
ASU 2014-09 “Revenue from Contract with Customers (Topic 606).”
ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, ASU 2014-09 supersedes some cost guidance included in Revenue Recognition—Construction-Type and Production-Type Contracts (Subtopic 605-35). In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for the Company beginning after January 1, 2017, with retrospective application to each prior reporting period presented, and is not expected to have a significant impact on the Company’s financial statements.
ASU 2014-04 “
Receivables—Troubled Debt Restructurings by
Creditors (Subtopic 310-40)
—
Reclassification of Residential Real Estate
Collateralized Consumer Mortgage Loans
upon Foreclosure
.”
ASU 2014-04 intends to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 will become effective for the Company on January 1, 2015 and is not expected to have an impact on the Company’s financial statements.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
4
. SECURITIES
The amortized cost and fair value of investment securities were as follows:
|
|
June 30, 2014
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
21,979
|
|
|
$
|
441
|
|
|
$
|
-
|
|
|
$
|
22,420
|
|
Collateralized mortgage obligations
|
|
|
37,784
|
|
|
|
104
|
|
|
|
(46
|
)
|
|
|
37,842
|
|
Mortgage-backed securities
|
|
|
92,698
|
|
|
|
6,145
|
|
|
|
(18
|
)
|
|
|
98,825
|
|
Other securities
|
|
|
12,589
|
|
|
|
109
|
|
|
|
(29
|
)
|
|
|
12,669
|
|
Total
|
|
$
|
165,050
|
|
|
$
|
6,799
|
|
|
$
|
(93
|
)
|
|
$
|
171,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of
U.S. Government sponsored entities
|
|
$
|
63,005
|
|
|
$
|
232
|
|
|
$
|
(118
|
)
|
|
$
|
63,119
|
|
States and political subdivisions
|
|
|
420,592
|
|
|
|
5,617
|
|
|
|
(1,408
|
)
|
|
|
424,801
|
|
Corporate debt securities
|
|
|
504
|
|
|
|
2
|
|
|
|
-
|
|
|
|
506
|
|
Collateralized mortgage obligations
|
|
|
34,717
|
|
|
|
504
|
|
|
|
(34
|
)
|
|
|
35,187
|
|
Mortgage-backed securities
|
|
|
8,160,661
|
|
|
|
98,700
|
|
|
|
(90,672
|
)
|
|
|
8,168,689
|
|
Total
|
|
$
|
8,679,479
|
|
|
$
|
105,055
|
|
|
$
|
(92,232
|
)
|
|
$
|
8,692,302
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
28,578
|
|
|
$
|
797
|
|
|
$
|
-
|
|
|
$
|
29,375
|
|
Collateralized mortgage obligations
|
|
|
483
|
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
489
|
|
Mortgage-backed securities
|
|
|
108,316
|
|
|
|
6,843
|
|
|
|
(22
|
)
|
|
|
115,137
|
|
Other securities
|
|
|
12,589
|
|
|
|
14
|
|
|
|
(126
|
)
|
|
|
12,477
|
|
Total
|
|
$
|
149,966
|
|
|
$
|
7,661
|
|
|
$
|
(149
|
)
|
|
$
|
157,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of
U.S. Government sponsored entities
|
|
$
|
62,931
|
|
|
$
|
46
|
|
|
$
|
(935
|
)
|
|
$
|
62,042
|
|
States and political subdivisions
|
|
|
439,235
|
|
|
|
4,317
|
|
|
|
(2,207
|
)
|
|
|
441,345
|
|
Corporate debt securities
|
|
|
513
|
|
|
|
5
|
|
|
|
-
|
|
|
|
518
|
|
Collateralized mortgage obligations
|
|
|
50,034
|
|
|
|
1,017
|
|
|
|
(58
|
)
|
|
|
50,993
|
|
Mortgage-backed securities
|
|
|
7,514,257
|
|
|
|
84,166
|
|
|
|
(165,979
|
)
|
|
|
7,432,444
|
|
Total
|
|
$
|
8,066,970
|
|
|
$
|
89,551
|
|
|
$
|
(169,179
|
)
|
|
$
|
7,987,342
|
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
Management evaluates debt 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 model. 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 a point in time.
When OTTI occurs, the amount of the other-than-temporary impairment 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 shall 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 shall 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 shall become the new amortized cost basis of the investment.
As of June 30, 2014, the Company does not intend to sell any debt securities and management believes that the Company more likely than not will not be required to sell any debt securities before their anticipated recovery, at which time the Company will receive full value for the securities. Furthermore, as of June 30, 2014, management does not have the intent to sell any of its securities and believes that it is more likely than not that the Company will not have to sell any such 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 June 30, 2014, management believes any impairment in the Company’s securities is temporary, and therefore no impairment loss has been realized in the Company’s consolidated statements of income.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
Securities with unrealized losses, segregated by length of time, that have been in a continuous loss position were as follows:
|
|
June 30, 2014
|
|
|
|
Less than 12 Months
|
|
|
More than 12 Months
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
7,623
|
|
|
$
|
(45
|
)
|
|
$
|
45
|
|
|
$
|
(1
|
)
|
|
$
|
7,668
|
|
|
$
|
(46
|
)
|
Mortgage-backed securities
|
|
|
1,153
|
|
|
|
(2
|
)
|
|
|
2,970
|
|
|
|
(16
|
)
|
|
|
4,123
|
|
|
|
(18
|
)
|
Other securities
|
|
|
1,707
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,707
|
|
|
|
(29
|
)
|
Total
|
|
$
|
10,483
|
|
|
$
|
(76
|
)
|
|
$
|
3,015
|
|
|
$
|
(17
|
)
|
|
$
|
13,498
|
|
|
$
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of
U.S. Government sponsored entities
|
|
$
|
28,037
|
|
|
$
|
(118
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,037
|
|
|
$
|
(118
|
)
|
States and political subdivisions
|
|
|
46,970
|
|
|
|
(296
|
)
|
|
|
55,451
|
|
|
|
(1,112
|
)
|
|
|
102,421
|
|
|
|
(1,408
|
)
|
Collateralized mortgage obligations
|
|
|
1,135
|
|
|
|
(21
|
)
|
|
|
1,146
|
|
|
|
(13
|
)
|
|
|
2,281
|
|
|
|
(34
|
)
|
Mortgage-backed securities
|
|
|
543,876
|
|
|
|
(1,293
|
)
|
|
|
3,140,453
|
|
|
|
(89,379
|
)
|
|
|
3,684,329
|
|
|
|
(90,672
|
)
|
Total
|
|
$
|
620,018
|
|
|
$
|
(1,728
|
)
|
|
$
|
3,197,050
|
|
|
$
|
(90,504
|
)
|
|
$
|
3,817,068
|
|
|
$
|
(92,232
|
)
|
|
|
December 31, 2013
|
|
|
|
Less than 12 Months
|
|
|
More than 12 Months
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
$
|
(1
|
)
|
|
$
|
55
|
|
|
$
|
(1
|
)
|
Mortgage-backed securities
|
|
|
651
|
|
|
|
(1
|
)
|
|
|
3,313
|
|
|
|
(21
|
)
|
|
|
3,964
|
|
|
|
(22
|
)
|
Other securities
|
|
|
6,911
|
|
|
|
(126
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
6,911
|
|
|
|
(126
|
)
|
Total
|
|
$
|
7,567
|
|
|
$
|
(127
|
)
|
|
$
|
3,363
|
|
|
$
|
(22
|
)
|
|
$
|
10,930
|
|
|
$
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of
U.S. Government sponsored entities
|
|
$
|
48,389
|
|
|
$
|
(935
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,389
|
|
|
$
|
(935
|
)
|
States and political subdivisions
|
|
|
113,063
|
|
|
|
(1,581
|
)
|
|
|
28,639
|
|
|
|
(626
|
)
|
|
|
141,702
|
|
|
|
(2,207
|
)
|
Collateralized mortgage obligations
|
|
|
2,109
|
|
|
|
(32
|
)
|
|
|
433
|
|
|
|
(26
|
)
|
|
|
2,542
|
|
|
|
(58
|
)
|
Mortgage-backed securities
|
|
|
3,702,569
|
|
|
|
(106,816
|
)
|
|
|
998,380
|
|
|
|
(59,163
|
)
|
|
|
4,700,949
|
|
|
|
(165,979
|
)
|
Total
|
|
$
|
3,866,130
|
|
|
$
|
(109,364
|
)
|
|
$
|
1,027,452
|
|
|
$
|
(59,815
|
)
|
|
$
|
4,893,582
|
|
|
$
|
(169,179
|
)
|
At June 30, 2014 and December 31, 2013, there were 519 securities and 450 securities, respectively, in an unrealized loss position for more than 12 months.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
The amortized cost and fair value of investment securities at June 30, 2014, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations at any time with or without call or prepayment penalties.
|
|
Held to Maturity
|
|
|
Available for Sale
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
Due in one year or less
|
|
$
|
33,971
|
|
|
$
|
34,055
|
|
|
$
|
12,684
|
|
|
$
|
12,764
|
|
Due after one year through five years
|
|
|
159,966
|
|
|
|
160,668
|
|
|
|
5,369
|
|
|
|
5,513
|
|
Due after five years through ten years
|
|
|
207,136
|
|
|
|
208,453
|
|
|
|
14,844
|
|
|
|
15,119
|
|
Due after ten years
|
|
|
83,028
|
|
|
|
85,250
|
|
|
|
1,671
|
|
|
|
1,693
|
|
Subtotal
|
|
|
484,101
|
|
|
|
488,426
|
|
|
|
34,568
|
|
|
|
35,089
|
|
Mortgage-backed securities and
collateralized mortgage obligations
|
|
|
8,195,378
|
|
|
|
8,203,876
|
|
|
|
130,482
|
|
|
|
136,667
|
|
Total
|
|
$
|
8,679,479
|
|
|
$
|
8,692,302
|
|
|
$
|
165,050
|
|
|
$
|
171,756
|
|
The Company recorded no gain or loss on sale of securities for the three and six months ended June 30, 2014 and 2013. As of June 30, 2014, the Company had eight non-agency collateralized mortgage obligations remaining with a total book value of $1.4 million and total market value of $1.4 million.
At June 30, 2014 and December 31, 2013, the Company did not own securities of any one issuer (other than the U.S. government and its agencies) for which aggregate adjusted cost exceeded 10% of the consolidated shareholders’ equity at such respective dates.
Securities with an amortized cost of $5.21 billion and $4.46 billion and a fair value of $5.22 billion and $4.47 billion at June 30, 2014 and December 31, 2013, respectively, were pledged to collateralize public deposits and for other purposes required or permitted by law.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The loan portfolio consists of various types of loans made principally to borrowers located within the states of Texas and Oklahoma and is classified by major type as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Dollars in thousands)
|
|
Residential mortgage loans held for sale
|
|
$
|
8,408
|
|
|
$
|
2,210
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
2,144,027
|
|
|
|
1,279,777
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
1,005,099
|
|
|
|
865,511
|
|
1-4 family residential (including home equity)
|
|
|
2,413,152
|
|
|
|
2,129,510
|
|
Commercial real estate (including multi-family residential)
|
|
|
3,027,945
|
|
|
|
2,753,797
|
|
Farmland
|
|
|
346,917
|
|
|
|
332,648
|
|
Agriculture
|
|
|
195,443
|
|
|
|
198,610
|
|
Consumer and other
|
|
|
167,171
|
|
|
|
213,158
|
|
Total loans held for investment
|
|
|
9,299,754
|
|
|
|
7,773,011
|
|
Total
|
|
$
|
9,308,162
|
|
|
$
|
7,775,221
|
|
(i) Commercial and Industrial Loans
.
In nearly all cases, the Company’s commercial loans are made in the Company’s market areas and are underwritten on the basis of the borrower’s ability to service the debt from income. As a general practice, the Company takes as collateral a lien on any available real estate, equipment or other assets owned by the borrower and obtains a personal guaranty of the borrower or principal. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans is due to the type of collateral securing these loans. The increased risk also derives from the expectation that commercial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and servicing than other types of loans.
(ii) Construction, Land Development and Other Land Loans.
The Company makes loans to finance the construction of residential and, to a lesser extent, nonresidential properties. Construction loans generally are collateralized by first liens on real estate and have floating interest rates. The Company conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above are also used in the Company’s construction lending activities. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover all of the unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2014
(UNAUDITED)
(iii) 1-4 Family Residential Loans
.
The Company originates 1-4 family residential mortgage loans (including home equity loans and residential mortgage loans held for sale) collateralized by owner-occupied residential properties located in the Company’s market areas. The Company offers a variety of mortgage loan portfolio products which generally are amortized over five to 25 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 89% of appraised value or have mortgage insurance. The Company requires mortgage title insurance and hazard insurance. The Company retains these portfolio loans for its own account rather than selling them into the secondary market. By doing so, the Company incurs interest rate risk as well as the risks associated with nonpayments on such loans. The Company’s Mortgage Department offers a variety of mortgage loan products which are generally amortized over 30 years, including FHA and VA loans. The Company sells the loans originated by the Mortgage Department into the secondary market.
(iv) Commercial Real Estate
.
The Company makes commercial real estate related loans collateralized by owner-occupied and non-owner-occupied real estate to finance the purchase of real estate. The Company’s commercial real estate related loans are collateralized by first liens on real estate, typically have variable interest rates (or five year or less fixed rates) and amortize over a 15 to 20 year period. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. The Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition in connection with underwriting these loans. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower. At June 30, 2014, approximately 48.1% of the outstanding principal balance of the Company’s commercial real estate related loans was secured by owner-occupied properties.
(v) Agriculture Loans
.
The Company provides agriculture loans for short-term crop production, including rice, cotton, milo and corn, farm equipment financing and agriculture real estate financing. The Company evaluates agriculture borrowers primarily based on their historical profitability, level of experience in their particular agriculture industry, overall financial capacity and the availability of secondary collateral to withstand economic and natural variations common to the industry. Because agriculture loans present a higher level of risk associated with events caused by nature, the Company routinely makes on-site visits and inspections in order to identify and monitor such risks.
(vi) Consumer Loans
.
Consumer loans made by the Company include direct “A” credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 180 months and vary based upon the nature of collateral and size of loan. Generally, consumer loans entail greater risk than do real estate secured loans, particularly in the case of consumer loans that are unsecured or collateralized by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans.
The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
Concentrations of Credit.
Most of the Company’s lending activity occurs within the states of Texas and Oklahoma. The majority of the Company’s loan portfolio consists of commercial and industrial, commercial real estate and 1-4 family residential loans. As of June 30, 2014 and December 31, 2013, there were no concentrations of loans related to any single industry in excess of 10% of total loans.
Foreign Loans.
The Company has U.S. dollar-denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at June 30, 2014 or December 31, 2013.
Related Party Loans.
As of June 30, 2014 and December 31, 2013, loans outstanding to directors, officers and their affiliates totaled $5.9 million and $6.2 million, respectively. All transactions entered into between the Company and such related parties are done in the ordinary course of business, made on the same terms and conditions as similar transactions with unaffiliated persons.
An analysis of activity with respect to these related party loans is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Dollars in thousands)
|
|
Beginning balance on January 1
|
|
$
|
6,187
|
|
|
$
|
6,682
|
|
New loans and reclassified related loans
|
|
|
2,925
|
|
|
|
306
|
|
Repayments
|
|
|
(3,235
|
)
|
|
|
(801
|
)
|
Ending balance
|
|
$
|
5,877
|
|
|
$
|
6,187
|
|
Nonperforming Assets and Nonaccrual and Past Due Loans.
The Company has several procedures in place to assist it in maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed by its officers and the Company also monitors its delinquency levels for any negative or adverse trends. There can be no assurance, however, that the Company’s loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
The Company generally places a loan on nonaccrual status and ceases accruing interest when the payment of principal or interest is delinquent for 90 days, or earlier in some cases, unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan.
The Company requires appraisals on loans collateralized by real estate. With respect to potential problem loans, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible writedowns or appropriate additions to the allowance for credit losses.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
An aging analysis of past due loans, segregated by class of loans, is presented below:
|
|
June 30, 2014
|
|
|
|
Loans Past Due and Still Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 or More
|
|
|
Total Past
|
|
|
Nonaccrual
|
|
|
Current
|
|
|
Total
|
|
|
|
30-89 Days
|
|
|
Days
|
|
|
Due Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
other land loans
|
|
$
|
16,236
|
|
|
$
|
-
|
|
|
$
|
16,236
|
|
|
$
|
818
|
|
|
$
|
988,045
|
|
|
$
|
1,005,099
|
|
Agriculture and agriculture real
estate (includes farmland)
|
|
|
2,858
|
|
|
|
-
|
|
|
|
2,858
|
|
|
|
140
|
|
|
|
539,362
|
|
|
|
542,360
|
|
1-4 family (includes home equity) (1)
|
|
|
3,382
|
|
|
|
-
|
|
|
|
3,382
|
|
|
|
4,940
|
|
|
|
2,413,238
|
|
|
|
2,421,560
|
|
Commercial real estate (includes
multi-family residential)
|
|
|
16,916
|
|
|
|
-
|
|
|
|
16,916
|
|
|
|
2,477
|
|
|
|
3,008,552
|
|
|
|
3,027,945
|
|
Commercial and industrial
|
|
|
21,283
|
|
|
|
-
|
|
|
|
21,283
|
|
|
|
14,427
|
|
|
|
2,108,317
|
|
|
|
2,144,027
|
|
Consumer and other
|
|
|
655
|
|
|
|
335
|
|
|
|
990
|
|
|
|
280
|
|
|
|
165,901
|
|
|
|
167,171
|
|
Total
|
|
$
|
61,330
|
|
|
$
|
335
|
|
|
$
|
61,665
|
|
|
$
|
23,082
|
|
|
$
|
9,223,415
|
|
|
$
|
9,308,162
|
|
|
|
December 31, 2013
|
|
|
|
Loans Past Due and Still Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 or More
|
|
|
Total Past
|
|
|
Nonaccrual
|
|
|
Current
|
|
|
Total
|
|
|
|
30-89 Days
|
|
|
Days
|
|
|
Due Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
Construction, land development and
other land loans
|
|
$
|
6,258
|
|
|
$
|
2
|
|
|
$
|
6,260
|
|
|
$
|
386
|
|
|
$
|
858,865
|
|
|
$
|
865,511
|
|
Agriculture and agriculture real
estate (includes farmland)
|
|
|
5,634
|
|
|
|
218
|
|
|
|
5,852
|
|
|
|
62
|
|
|
|
525,344
|
|
|
|
531,258
|
|
1-4 family (includes home equity) (1)
|
|
|
8,684
|
|
|
|
2,012
|
|
|
|
10,696
|
|
|
|
3,086
|
|
|
|
2,117,938
|
|
|
|
2,131,720
|
|
Commercial real estate (includes
multi-family residential)
|
|
|
8,163
|
|
|
|
1,752
|
|
|
|
9,915
|
|
|
|
4,333
|
|
|
|
2,739,549
|
|
|
|
2,753,797
|
|
Commercial and industrial
|
|
|
9,552
|
|
|
|
933
|
|
|
|
10,485
|
|
|
|
2,208
|
|
|
|
1,267,084
|
|
|
|
1,279,777
|
|
Consumer and other
|
|
|
1,344
|
|
|
|
30
|
|
|
|
1,374
|
|
|
|
156
|
|
|
|
211,628
|
|
|
|
213,158
|
|
Total
|
|
$
|
39,635
|
|
|
$
|
4,947
|
|
|
$
|
44,582
|
|
|
$
|
10,231
|
|
|
$
|
7,720,408
|
|
|
$
|
7,775,221
|
|
(1)
|
Includes $8.4 million and $2.2 million of residential mortgage loans held for sale at June 30, 2014 and December 31, 2013, respectively.
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
The following table presents information regarding nonperforming assets as of the dates indicated:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
23,082
|
|
|
$
|
10,231
|
|
Accruing loans 90 or more days past due
|
|
|
335
|
|
|
|
4,947
|
|
Total nonperforming loans
|
|
|
23,417
|
|
|
|
15,178
|
|
Repossessed assets
|
|
|
11
|
|
|
|
27
|
|
Other real estate
|
|
|
5,093
|
|
|
|
7,299
|
|
Total nonperforming assets
|
|
$
|
28,521
|
|
|
$
|
22,504
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total
loans and other real estate
|
|
|
0.31
|
%
|
|
|
0.29
|
%
|
The Company’s conservative lending approach has resulted in sound asset quality. The Company had $28.5 million in nonperforming assets at June 30, 2014 compared with $22.5 million at December 31, 2013.
If interest on nonaccrual loans had been accrued under the original loan terms, approximately $483 thousand and $153 thousand would have been recorded as income for the six months ended June 30, 2014 and 2013, respectively.
Purchased Credit-Impaired (PCI) Loans.
In connection with the acquisition of American State Financial Corporation (ASB) on July 1, 2012, Community National Bank on October 1, 2012, East Texas Financial Services, Inc. on January 1, 2013, Coppermark Bancshares, Inc. on April 1, 2013, FVNB Corp. on November 1, 2013 and F&M Bancorporation Inc. on April 1, 2014, the Company acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses.
Loans acquired with evidence of credit quality deterioration at acquisition for which it was probable that the Company would not be able to collect all contractual amounts due were accounted for as PCI.
The carrying amount of acquired PCI loans included in the consolidated balance sheet and the related outstanding balance as of the dates indicated are presented in the table below.
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Dollars in thousands)
|
|
Acquired PCI loans:
|
|
|
|
|
|
|
|
|
Outstanding balance
|
|
$
|
179,891
|
|
|
$
|
87,089
|
|
Discount
|
|
|
100,808
|
|
|
|
45,497
|
|
Recorded investment
|
|
$
|
79,083
|
|
|
$
|
41,592
|
|
The outstanding balance represents the total amount owed as of June 30, 2014 and December 31, 2013, including accrued but unpaid interest and any amounts previously charged off. No allowance for loan losses was required on the acquired PCI loans at both June 30, 2014 and December 31, 2013.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014
(UNAUDITED)
Changes in the accretable yield for acquired PCI loans as of the dates indicated below were as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
8,470
|
|
|
$
|
7,569
|
|
|
$
|
9,855
|
|
|
$
|
7,459
|
|
Additions
|
|
|
7,158
|
|
|
|
5,792
|
|
|
|
7,158
|
|
|
|
7,528
|
|
Reclassifications from nonaccretable
|
|
|
4,532
|
|
|
|
1,112
|
|
|
|
6,035
|
|
|
|
1,255
|
|
Accretion
|
|
|
(5,471
|
)
|
|
|
(1,462
|
)
|
|
|
(8,359
|
)
|
|
|
(3,231
|
)
|
Balance at June 30
|
|
$
|
14,689
|
|
|
$
|
13,011
|
|
|
$
|
14,689
|
|
|
$
|
13,011
|
|
Impaired Loans.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is determined, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014
(UNAUDITED)
Impaired loans are set forth in the following tables. No interest income was recognized on impaired loans subsequent to their classification as impaired. The average recorded investment presented in the tables below is reported on a year-to-date basis.
|
|
June 30, 2014
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Average
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
|
(Dollars in thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
315
|
|
|
$
|
336
|
|
|
$
|
-
|
|
|
$
|
296
|
|
Agriculture and agriculture real estate (includes farmland)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
1-4 family (includes home equity)
|
|
|
507
|
|
|
|
580
|
|
|
|
-
|
|
|
|
546
|
|
Commercial real estate (includes multi-family residential)
|
|
|
735
|
|
|
|
764
|
|
|
|
-
|
|
|
|
1,613
|
|
Commercial and industrial
|
|
|
867
|
|
|
|
1,035
|
|
|
|
-
|
|
|
|
485
|
|
Consumer and other
|
|
|
7
|
|
|
|
7
|
|
|
|
-
|
|
|
|
11
|
|
Total
|
|
|
2,431
|
|
|
|
2,722
|
|
|
|
-
|
|
|
|
2,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agriculture and agriculture real estate (includes farmland)
|
|
|
75
|
|
|
|
147
|
|
|
|
53
|
|
|
|
48
|
|
1-4 family (includes home equity)
|
|
|
673
|
|
|
|
706
|
|
|
|
249
|
|
|
|
1,596
|
|
Commercial real estate (includes multi-family residential)
|
|
|
202
|
|
|
|
203
|
|
|
|
47
|
|
|
|
908
|
|
Commercial and industrial
|
|
|
9,227
|
|
|
|
9,326
|
|
|
|
2,887
|
|
|
|
5,169
|
|
Consumer and other
|
|
|
120
|
|
|
|
133
|
|
|
|
92
|
|
|
|
108
|
|
Total
|
|
|
10,297
|
|
|
|
10,515
|
|
|
|
3,328
|
|
|
|
7,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
315
|
|
|
|
336
|
|
|
|
-
|
|
|
|
296
|
|
Agriculture and agriculture real estate (includes farmland)
|
|
|
75
|
|
|
|
147
|
|
|
|
53
|
|
|
|
55
|
|
1-4 family (includes home equity)
|
|
|
1,180
|
|
|
|
1,286
|
|
|
|
249
|
|
|
|
2,142
|
|
Commercial real estate (includes multi-family residential)
|
|
|
937
|
|
|
|
967
|
|
|
|
47
|
|
|
|
2,521
|
|
Commercial and industrial
|
|
|
10,094
|
|
|
|
10,361
|
|
|
|
2,887
|
|
|
|
5,654
|
|
Consumer and other
|
|
|
127
|
|
|
|
140
|
|
|
|
92
|
|
|
|
119
|
|
|
|
$
|
12,728
|
|
|
$
|
13,237
|
|
|
$
|
3,328
|
|
|
$
|
10,787
|
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Average
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
|
(Dollars in thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
277
|
|
|
$
|
289
|
|
|
$
|
-
|
|
|
$
|
711
|
|
Agriculture and agriculture real estate (includes farmland)
|
|
|
14
|
|
|
|
57
|
|
|
|
-
|
|
|
|
46
|
|
1-4 family (includes home equity)
|
|
|
584
|
|
|
|
664
|
|
|
|
-
|
|
|
|
538
|
|
Commercial real estate (includes multi-family residential)
|
|
|
2,490
|
|
|
|
3,798
|
|
|
|
-
|
|
|
|
1,470
|
|
Commercial and industrial
|
|
|
103
|
|
|
|
122
|
|
|
|
-
|
|
|
|
95
|
|
Consumer and other
|
|
|
15
|
|
|
|
16
|
|
|
|
-
|
|
|
|
13
|
|
Total
|
|
|
3,483
|
|
|
|
4,946
|
|
|
|
-
|
|
|
|
2,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agriculture and agriculture real estate (includes farmland)
|
|
|
21
|
|
|
|
27
|
|
|
|
18
|
|
|
|
28
|
|
1-4 family (includes home equity)
|
|
|
2,519
|
|
|
|
2,548
|
|
|
|
890
|
|
|
|
1,759
|
|
Commercial real estate (includes multi-family residential)
|
|
|
1,613
|
|
|
|
1,615
|
|
|
|
445
|
|
|
|
2,032
|
|
Commercial and industrial
|
|
|
1,111
|
|
|
|
1,192
|
|
|
|
1,029
|
|
|
|
1,077
|
|
Consumer and other
|
|
|
95
|
|
|
|
113
|
|
|
|
77
|
|
|
|
81
|
|
Total
|
|
|
5,359
|
|
|
|
5,495
|
|
|
|
2,459
|
|
|
|
4,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
277
|
|
|
|
289
|
|
|
|
-
|
|
|
|
711
|
|
Agriculture and agriculture real estate (includes farmland)
|
|
|
35
|
|
|
|
84
|
|
|
|
18
|
|
|
|
74
|
|
1-4 family (includes home equity)
|
|
|
3,103
|
|
|
|
3,212
|
|
|
|
890
|
|
|
|
2,297
|
|
Commercial real estate (includes multi-family residential)
|
|
|
4,103
|
|
|
|
5,413
|
|
|
|
445
|
|
|
|
3,502
|
|
Commercial and industrial
|
|
|
1,214
|
|
|
|
1,314
|
|
|
|
1,029
|
|
|
|
1,172
|
|
Consumer and other
|
|
|
110
|
|
|
|
129
|
|
|
|
77
|
|
|
|
94
|
|
|
|
$
|
8,842
|
|
|
$
|
10,441
|
|
|
$
|
2,459
|
|
|
$
|
7,850
|
|
Credit Quality Indicators.
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks loan grades to be used as credit quality indicators. The following is a general description of the loan grades used:
Grade 1
– Credits in this category have risk potential that is virtually nonexistent. These loans may be secured by insured certificates of deposit, insured savings accounts, U.S. Government securities and highly rated municipal bonds.
Grade 2
– Credits in this category are of the highest quality. These borrowers represent top rated companies and individuals with unquestionable financial standing with excellent global cash flow coverage, net worth, liquidity and collateral coverage.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014
(UNAUDITED)
Grade 3
– Credits in this category are not immune from risk but are well protected by the collateral and paying capacity of the borrower. These loans may exhibit a minor unfavorable credit factor, but the overall credit is sufficiently strong to minimize the possibility of loss.
Grade 4
– Credits in this category are considered “pass/watch”. Loans in this category have sources of repayment that remain sufficient to preclude a larger than normal probability of default and secondary sources are likewise currently of sufficient quantity, quality, and liquidity to protect the Bank against loss of principal and interest. These borrowers have specific risk factors, but the overall strength of the credit is acceptable based on other mitigating credit and/or collateral factors and can repay the debt in the normal course of business.
Grade 5
– Credits in this category constitute an undue and unwarranted credit risk; however the factors do not rise to a level of substandard. These credits have potential weaknesses and/or declining trends that, if not corrected, could expose the Bank to risk at a future date. These loans are monitored on the Bank’s internally generated watch list and evaluated on a quarterly basis.
Grade 6
– Credits in this category are considered “substandard” but “non-impaired” loans in accordance with regulatory guidelines. Loans in this category have well-defined weaknesses that, if not corrected, could make default of principal and interest possible. Loans in this category are still accruing interest and may be dependent upon secondary sources of repayment and/or collateral liquidation.
Grade 7
– Credits in this category are deemed “substandard” and “impaired” pursuant to regulatory guidelines. As such, the Bank has determined that it is probable that less than 100% of the contractual principal and interest will be collected. These loans are individually evaluated for a specific reserve valuation and will typically have the accrual of interest stopped.
Grade 8
– Credits in this category include “doubtful” loans in accordance with regulatory guidance. Such loans are no longer accruing interest and factors indicate a loss is imminent. These loans are also deemed “impaired.” While a specific reserve may be in place while the loan and collateral is being evaluated, these loans are typically charged down to an amount the Bank estimates is collectible.
Grade 9
– Credits in this category are deemed a “loss” in accordance with regulatory guidelines and have been charged off or charged down. The Bank may continue collection efforts and may have partial recovery in the future.
The following table presents risk grades and classified loans by class of loan at June 30, 2014. Impaired loans include loans in risk grades 7, 8 and 9.
|
|
Construction,
Land
Development and
other land loans
|
|
|
Agriculture and
Agriculture Real
Estate (includes
Farmland)
|
|
|
1-4 Family
(includes
Home Equity) (1)
|
|
|
Commercial
Real Estate
(includes Multi-
Family Residential)
|
|
|
Commercial
and Industrial
|
|
|
Consumer and
Other
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Grade 1
|
|
$
|
-
|
|
|
$
|
10,613
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
61,053
|
|
|
$
|
35,633
|
|
|
$
|
107,299
|
|
Grade 2
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Grade 3
|
|
|
998,970
|
|
|
|
525,343
|
|
|
|
2,402,634
|
|
|
|
2,958,043
|
|
|
|
2,020,937
|
|
|
|
122,334
|
|
|
|
9,028,261
|
|
Grade 4
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Grade 5
|
|
|
962
|
|
|
|
5,616
|
|
|
|
1,943
|
|
|
|
9,733
|
|
|
|
5,822
|
|
|
|
24
|
|
|
|
24,100
|
|
Grade 6
|
|
|
1,446
|
|
|
|
131
|
|
|
|
6,996
|
|
|
|
28,585
|
|
|
|
10,480
|
|
|
|
9,053
|
|
|
|
56,691
|
|
Grade 7
|
|
|
315
|
|
|
|
75
|
|
|
|
1,171
|
|
|
|
937
|
|
|
|
10,079
|
|
|
|
127
|
|
|
|
12,704
|
|
Grade 8
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
24
|
|
Grade 9
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PCI Loans (2)
|
|
|
3,406
|
|
|
|
582
|
|
|
|
8,807
|
|
|
|
30,647
|
|
|
|
35,641
|
|
|
|
-
|
|
|
|
79,083
|
|
Total
|
|
$
|
1,005,099
|
|
|
$
|
542,360
|
|
|
$
|
2,421,560
|
|
|
$
|
3,027,945
|
|
|
$
|
2,144,027
|
|
|
$
|
167,171
|
|
|
$
|
9,308,162
|
|
|
(1)
|
Includes $8.4 million of residential mortgage loans held for sale at June 30, 2014.
|
|
(2)
|
Of the total PCI loans, $32.3 million were classifed as substandard at June 30, 2014.
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
The following table presents risk grades and classified loans by class of loan at December 31, 2013. Impaired loans include loans in risk grades 7, 8 and 9.
|
|
Construction,
Land
Development and
other land loans
|
|
|
Agriculture and
Agriculture Real
Estate (includes
Farmland)
|
|
|
1-4 Family
(includes
Home Equity) (1)
|
|
|
Commercial
Real Estate
(includes Multi-
Family Residential)
|
|
|
Commercial
and Industrial
|
|
|
Consumer and
Other
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Grade 1
|
|
$
|
-
|
|
|
$
|
5,225
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50,131
|
|
|
$
|
31,362
|
|
|
$
|
86,718
|
|
Grade 2
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Grade 3
|
|
|
858,712
|
|
|
|
520,921
|
|
|
|
2,113,698
|
|
|
|
2,697,664
|
|
|
|
1,202,604
|
|
|
|
181,406
|
|
|
|
7,575,005
|
|
Grade 4
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Grade 5
|
|
|
1,141
|
|
|
|
3,427
|
|
|
|
6,337
|
|
|
|
10,798
|
|
|
|
17,179
|
|
|
|
146
|
|
|
|
39,028
|
|
Grade 6
|
|
|
1,616
|
|
|
|
1,043
|
|
|
|
4,504
|
|
|
|
14,316
|
|
|
|
2,423
|
|
|
|
134
|
|
|
|
24,036
|
|
Grade 7
|
|
|
277
|
|
|
|
35
|
|
|
|
3,093
|
|
|
|
4,103
|
|
|
|
1,214
|
|
|
|
110
|
|
|
|
8,832
|
|
Grade 8
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
Grade 9
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PCI Loans (2)
|
|
|
3,765
|
|
|
|
607
|
|
|
|
4,078
|
|
|
|
26,916
|
|
|
|
6,226
|
|
|
|
-
|
|
|
|
41,592
|
|
Total
|
|
$
|
865,511
|
|
|
$
|
531,258
|
|
|
$
|
2,131,720
|
|
|
$
|
2,753,797
|
|
|
$
|
1,279,777
|
|
|
$
|
213,158
|
|
|
$
|
7,775,221
|
|
|
(1)
|
Includes $2.2 million of residential mortgage loans held for sale at December 31, 2013.
|
|
(2)
|
Of the total PCI loans, $17.6 million were classifed as substandard at December 31, 2013.
|
Allowance for Credit Losses.
The allowance for credit losses is a valuation established through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses which it believes is adequate for estimated probable losses in the Company’s loan portfolio. The amount of the allowance for credit losses is affected by the following: (i) charge-offs of loans that occur when loans are deemed uncollectible and decrease the allowance, (ii) recoveries on loans previously charged off that increase the allowance and (iii) provisions for credit losses charged to earnings that increase the allowance. Based on an evaluation of the loan portfolio and consideration of the factors listed below, management presents a quarterly review of the allowance for credit losses to the Bank’s Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance.
The Company’s allowance for credit losses consists of two components: a specific valuation allowance based on probable losses on specifically identified loans and a general valuation allowance based on historical loan loss experience, general economic conditions and other qualitative risk factors both internal and external to the Company.
In setting the specific valuation allowance, the Company follows a loan review program to evaluate the credit risk in the loan portfolio. Through this loan review process, the Company maintains an internal list of impaired loans which, along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. For each impaired loan, the Company allocates a specific loan loss reserve primarily based on the value of the collateral securing the impaired loan requiring a reserve. The specific reserves are determined on an individual loan basis. Impaired loans are excluded from the general valuation allowance described below.
In determining the amount of the general valuation allowance, management considers factors such as historical loan loss experience, industry diversification of the Company’s commercial loan portfolio, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, general economic conditions and other qualitative risk factors both internal and external to the Company and other relevant factors in accordance with ASC Topic 450, “
Contingencies
.
”
Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type, excluding any impaired loan. The Company uses this information to establish the amount of the general valuation allowance.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014
(UNAUDITED)
In connection with its review of the loan portfolio, the Company considers risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements include:
|
•
|
for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of collateral;
|
|
•
|
for commercial real estate loans and multifamily residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;
|
|
•
|
for construction and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio;
|
|
•
|
for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral;
|
|
•
|
for agriculture real estate loans, the experience and financial capability of the borrower, projected debt service coverage of the operations of the borrower and loan to value ratio; and
|
|
•
|
for non-real estate agriculture loans, the operating results, experience and financial capability of the borrower, historical and expected market conditions and the value, nature and marketability of collateral.
|
In addition, for each category, the Company considers secondary sources of income and the financial strength and credit history of the borrower and any guarantors.
At June 30, 2014, the allowance for credit losses totaled $73.3 million or 0.79% of total loans. At December 31, 2013, the allowance totaled $67.3 million or 0.87% of total loans.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014
(UNAUDITED)
The following table details activity in the allowance for loan losses by portfolio segment for the three
and six months ended June 30, 2014
and 2013
.
Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
|
Construction,
Land
Development
and other
land loans
|
|
|
Agriculture
and
Agriculture
Real Estate
(includes
Farmland)
|
|
|
1-4 Family
(includes
Home
Equity)
|
|
|
Commercial
Real Estate
(includes
Multi-Family
Residential)
|
|
|
Commercial
and
Industrial
|
|
|
Consumer
and Other
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2014
|
|
$
|
13,600
|
|
|
$
|
1,356
|
|
|
$
|
18,718
|
|
|
$
|
23,371
|
|
|
$
|
8,653
|
|
|
$
|
1,398
|
|
|
$
|
67,096
|
|
Provision for credit losses
|
|
|
1,508
|
|
|
|
(751
|
)
|
|
|
593
|
|
|
|
313
|
|
|
|
2,240
|
|
|
|
2,422
|
|
|
|
6,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(153
|
)
|
|
|
(1
|
)
|
|
|
(523
|
)
|
|
|
(26
|
)
|
|
|
(59
|
)
|
|
|
(879
|
)
|
|
|
(1,641
|
)
|
Recoveries
|
|
|
38
|
|
|
|
844
|
|
|
|
117
|
|
|
|
21
|
|
|
|
123
|
|
|
|
343
|
|
|
|
1,486
|
|
Net charge-offs
|
|
|
(115
|
)
|
|
|
843
|
|
|
|
(406
|
)
|
|
|
(5
|
)
|
|
|
64
|
|
|
|
(536
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2014
|
|
$
|
14,993
|
|
|
$
|
1,448
|
|
|
$
|
18,905
|
|
|
$
|
23,679
|
|
|
$
|
10,957
|
|
|
$
|
3,284
|
|
|
$
|
73,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2014
|
|
$
|
14,353
|
|
|
$
|
1,229
|
|
|
$
|
17,046
|
|
|
$
|
24,835
|
|
|
$
|
8,167
|
|
|
$
|
1,652
|
|
|
$
|
67,282
|
|
Provision for credit losses
|
|
|
738
|
|
|
|
(705
|
)
|
|
|
2,396
|
|
|
|
(1,091
|
)
|
|
|
2,807
|
|
|
|
2,780
|
|
|
|
6,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(155
|
)
|
|
|
(15
|
)
|
|
|
(662
|
)
|
|
|
(128
|
)
|
|
|
(202
|
)
|
|
|
(1,924
|
)
|
|
|
(3,086
|
)
|
Recoveries
|
|
|
57
|
|
|
|
939
|
|
|
|
125
|
|
|
|
63
|
|
|
|
185
|
|
|
|
776
|
|
|
|
2,145
|
|
Net charge-offs
|
|
|
(98
|
)
|
|
|
924
|
|
|
|
(537
|
)
|
|
|
(65
|
)
|
|
|
(17
|
)
|
|
|
(1,148
|
)
|
|
|
(941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2014
|
|
$
|
14,993
|
|
|
$
|
1,448
|
|
|
$
|
18,905
|
|
|
$
|
23,679
|
|
|
$
|
10,957
|
|
|
$
|
3,284
|
|
|
$
|
73,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2013
|
|
$
|
12,235
|
|
|
$
|
887
|
|
|
$
|
14,112
|
|
|
$
|
21,869
|
|
|
$
|
5,400
|
|
|
$
|
546
|
|
|
$
|
55,049
|
|
Provision for credit losses
|
|
|
(120
|
)
|
|
|
108
|
|
|
|
(642
|
)
|
|
|
1,763
|
|
|
|
1,041
|
|
|
|
400
|
|
|
|
2,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(257
|
)
|
|
|
(13
|
)
|
|
|
(51
|
)
|
|
|
(826
|
)
|
|
|
(258
|
)
|
|
|
(587
|
)
|
|
|
(1,992
|
)
|
Recoveries
|
|
|
133
|
|
|
|
-
|
|
|
|
16
|
|
|
|
25
|
|
|
|
110
|
|
|
|
285
|
|
|
|
569
|
|
Net charge-offs
|
|
|
(124
|
)
|
|
|
(13
|
)
|
|
|
(35
|
)
|
|
|
(801
|
)
|
|
|
(148
|
)
|
|
|
(302
|
)
|
|
|
(1,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2013
|
|
$
|
11,991
|
|
|
$
|
982
|
|
|
$
|
13,435
|
|
|
$
|
22,831
|
|
|
$
|
6,293
|
|
|
$
|
644
|
|
|
$
|
56,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2013
|
|
$
|
11,909
|
|
|
$
|
764
|
|
|
$
|
13,942
|
|
|
$
|
19,607
|
|
|
$
|
5,777
|
|
|
$
|
565
|
|
|
$
|
52,564
|
|
Provision for credit losses
|
|
|
150
|
|
|
|
223
|
|
|
|
(370
|
)
|
|
|
3,969
|
|
|
|
723
|
|
|
|
655
|
|
|
|
5,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(257
|
)
|
|
|
(13
|
)
|
|
|
(162
|
)
|
|
|
(895
|
)
|
|
|
(413
|
)
|
|
|
(1,192
|
)
|
|
|
(2,932
|
)
|
Recoveries
|
|
|
189
|
|
|
|
8
|
|
|
|
25
|
|
|
|
150
|
|
|
|
206
|
|
|
|
616
|
|
|
|
1,194
|
|
Net charge-offs
|
|
|
(68
|
)
|
|
|
(5
|
)
|
|
|
(137
|
)
|
|
|
(745
|
)
|
|
|
(207
|
)
|
|
|
(576
|
)
|
|
|
(1,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2013
|
|
$
|
11,991
|
|
|
$
|
982
|
|
|
$
|
13,435
|
|
|
$
|
22,831
|
|
|
$
|
6,293
|
|
|
$
|
644
|
|
|
$
|
56,176
|
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014
(UNAUDITED)
The following table details the amount of the allowance for loan losses allocated to each portfolio segment as of June 30, 2014
, December 31, 2013
and June 30, 2013
, detailed on the basis of the impairment methodology used by the Company.
|
|
Construction,
Land
Development
and other
land loans
|
|
|
Agriculture
and
Agriculture
Real Estate
(includes
Farmland)
|
|
|
1-4 Family
(includes
Home
Equity)
|
|
|
Commercial
Real Estate
(includes
Multi-Family
Residential)
|
|
|
Commercial
and
Industrial
|
|
|
Consumer
and Other
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Allowance for credit losses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
53
|
|
|
$
|
249
|
|
|
$
|
47
|
|
|
$
|
2,887
|
|
|
$
|
92
|
|
|
$
|
3,328
|
|
Collectively evaluated for impairment
|
|
|
14,993
|
|
|
|
1,395
|
|
|
|
18,656
|
|
|
|
23,632
|
|
|
|
8,070
|
|
|
|
3,192
|
|
|
|
69,938
|
|
PCI loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total allowance for credit losses
|
|
$
|
14,993
|
|
|
$
|
1,448
|
|
|
$
|
18,905
|
|
|
$
|
23,679
|
|
|
$
|
10,957
|
|
|
$
|
3,284
|
|
|
$
|
73,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
18
|
|
|
$
|
890
|
|
|
$
|
445
|
|
|
$
|
1,029
|
|
|
$
|
77
|
|
|
$
|
2,459
|
|
Collectively evaluated for impairment
|
|
|
14,353
|
|
|
|
1,211
|
|
|
|
16,156
|
|
|
|
24,390
|
|
|
|
7,138
|
|
|
|
1,575
|
|
|
|
64,823
|
|
PCI loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total allowance for credit losses
|
|
$
|
14,353
|
|
|
$
|
1,229
|
|
|
$
|
17,046
|
|
|
$
|
24,835
|
|
|
$
|
8,167
|
|
|
$
|
1,652
|
|
|
$
|
67,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
23
|
|
|
$
|
44
|
|
|
$
|
-
|
|
|
$
|
819
|
|
|
$
|
66
|
|
|
$
|
952
|
|
Collectively evaluated for impairment
|
|
|
11,991
|
|
|
|
959
|
|
|
|
13,391
|
|
|
|
22,831
|
|
|
|
5,474
|
|
|
|
578
|
|
|
|
55,224
|
|
PCI loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total allowance for credit losses
|
|
$
|
11,991
|
|
|
$
|
982
|
|
|
$
|
13,435
|
|
|
$
|
22,831
|
|
|
$
|
6,293
|
|
|
$
|
644
|
|
|
$
|
56,176
|
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
3
0
, 2014
(UNAUDITED)
The following table details the recorded investment in loans as of June 30, 2014
, December 31, 2013
and June 30, 2013,
excluding $8.4 million, $2.2 million and $6.2 million, respectively, of residential mortgage loans held for sale, related to each balance in the allowance for loan losses by portfolio segment.
|
|
Construction,
Land
Development
and other
land loans
|
|
|
Agriculture
and
Agriculture
Real Estate
(includes
Farmland)
|
|
|
1-4 Family
(includes
Home
Equity)
|
|
|
Commercial
Real Estate
(includes
Multi-Family
Residential)
|
|
|
Commercial
and
Industrial
|
|
|
Consumer
and Other
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
315
|
|
|
$
|
75
|
|
|
$
|
1,180
|
|
|
$
|
937
|
|
|
$
|
10,094
|
|
|
$
|
127
|
|
|
$
|
12,728
|
|
Collectively evaluated for impairment
|
|
|
1,001,378
|
|
|
|
541,703
|
|
|
|
2,403,165
|
|
|
|
2,996,361
|
|
|
|
2,098,292
|
|
|
|
167,044
|
|
|
|
9,207,943
|
|
PCI loans
|
|
|
3,406
|
|
|
|
582
|
|
|
|
8,807
|
|
|
|
30,647
|
|
|
|
35,641
|
|
|
|
-
|
|
|
|
79,083
|
|
Total loans evaluated for impairment
|
|
$
|
1,005,099
|
|
|
$
|
542,360
|
|
|
$
|
2,413,152
|
|
|
$
|
3,027,945
|
|
|
$
|
2,144,027
|
|
|
$
|
167,171
|
|
|
$
|
9,299,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
277
|
|
|
$
|
35
|
|
|
$
|
3,103
|
|
|
$
|
4,103
|
|
|
$
|
1,214
|
|
|
$
|
110
|
|
|
$
|
8,842
|
|
Collectively evaluated for impairment
|
|
|
861,469
|
|
|
|
530,616
|
|
|
|
2,122,329
|
|
|
|
2,722,778
|
|
|
|
1,272,337
|
|
|
|
213,048
|
|
|
|
7,722,577
|
|
PCI loans
|
|
|
3,765
|
|
|
|
607
|
|
|
|
4,078
|
|
|
|
26,916
|
|
|
|
6,226
|
|
|
|
-
|
|
|
|
41,592
|
|
Total loans evaluated for impairment
|
|
$
|
865,511
|
|
|
$
|
531,258
|
|
|
$
|
2,129,510
|
|
|
$
|
2,753,797
|
|
|
$
|
1,279,777
|
|
|
$
|
213,158
|
|
|
$
|
7,773,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
267
|
|
|
$
|
103
|
|
|
$
|
340
|
|
|
$
|
1,430
|
|
|
$
|
880
|
|
|
$
|
67
|
|
|
$
|
3,087
|
|
Collectively evaluated for impairment
|
|
|
677,696
|
|
|
|
314,416
|
|
|
|
1,656,702
|
|
|
|
2,362,001
|
|
|
|
995,500
|
|
|
|
111,382
|
|
|
|
6,117,697
|
|
PCI loans
|
|
|
16,622
|
|
|
|
426
|
|
|
|
3,965
|
|
|
|
27,389
|
|
|
|
3,297
|
|
|
|
-
|
|
|
|
51,699
|
|
Total loans evaluated for impairment
|
|
$
|
694,585
|
|
|
$
|
314,945
|
|
|
$
|
1,661,007
|
|
|
$
|
2,390,820
|
|
|
$
|
999,677
|
|
|
$
|
111,449
|
|
|
$
|
6,172,483
|
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUN E
3
0
, 2014
(UNAUDITED)
Troubled Debt Restructurings.
The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Effective July 1, 2011, the Company adopted the provisions of ASU No. 2011-02, “
Receivables (Topic 310)-A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.
”
As such, the Company reassessed all loan modifications occurring since January 1, 2011 for identification as troubled debt restructurings. The following table presents information regarding the recorded balance of loans modified in a troubled debt restructuring during the six months ended June 30, 2014:
|
|
Six Months Ended
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
|
Number of
Contracts
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
Number of
Contracts
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
|
(Dollars in thousands)
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and
other land loans
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
249
|
|
|
$
|
236
|
|
Agriculture and agriculture real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
1-4 Family (includes home equity)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate (commercial
mortgage and multi-family)
|
|
|
1
|
|
|
|
35
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
16
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
2
|
|
|
$
|
51
|
|
|
$
|
50
|
|
|
|
1
|
|
|
$
|
249
|
|
|
$
|
236
|
|
As of June 30, 2014, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding six months. Default is determined at 90 or more days past due. The modifications primarily related to extending the amortization periods of the loans, which includes loans modified during bankruptcy. The Company did not grant principal reductions on any restructured loans. For the six months ended June 30, 2014, the Company added $51 thousand in new troubled debt restructurings of which $50 thousand was still outstanding on June 30, 2014. The remaining restructured loans from prior periods are performing and accruing loans. These modifications did not have a material impact on the Company’s determination of the allowance for credit losses.
6. FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair values represent the estimated price that would be received from selling an asset or paid to transfer a liability, otherwise known as an “exit price.” Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis such as certain loans including residential mortgage loans held for sale, goodwill and other intangible assets and other real estate owned. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write downs of individual assets. ASC Topic 820 “
Fair Value Measurements and Disclosures
” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
3
0
, 2014
(UNAUDITED)
Fair Value Hierarchy
The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2—Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities) or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
•
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.
The fair value disclosures below represent the Company’s estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.
The following tables present fair values for assets and liabilities measured at fair value on a recurring basis:
|
|
As of June 30, 2014
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
-
|
|
|
$
|
22,420
|
|
|
$
|
-
|
|
|
$
|
22,420
|
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
37,842
|
|
|
|
-
|
|
|
|
37,842
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
98,825
|
|
|
|
-
|
|
|
|
98,825
|
|
Other securities
|
|
|
12,669
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,669
|
|
Total
|
|
$
|
12,669
|
|
|
$
|
159,087
|
|
|
$
|
-
|
|
|
$
|
171,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedging interest rate swap
|
|
$
|
-
|
|
|
$
|
303
|
|
|
$
|
-
|
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedging interest rate swap
|
|
$
|
-
|
|
|
$
|
(303
|
)
|
|
$
|
-
|
|
|
$
|
(303
|
)
|
|
|
As of December 31, 2013
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
-
|
|
|
$
|
29,375
|
|
|
$
|
-
|
|
|
$
|
29,375
|
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
489
|
|
|
|
-
|
|
|
|
489
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
115,137
|
|
|
|
-
|
|
|
|
115,137
|
|
Other securities
|
|
|
12,477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,477
|
|
Total
|
|
$
|
12,477
|
|
|
$
|
145,001
|
|
|
$
|
-
|
|
|
$
|
157,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedging interest rate swap
|
|
$
|
-
|
|
|
$
|
38
|
|
|
$
|
-
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedging interest rate swap
|
|
$
|
-
|
|
|
$
|
(38
|
)
|
|
$
|
-
|
|
|
$
|
(38
|
)
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014
(UNAUDITED)
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These instruments include other real estate owned, repossessed assets, held to maturity debt securities, loans held for sale, and impaired loans. For the three and six months ended June 30, 2014, the Company had additions to other real estate owned of $1.7 million and $4.4 million, respectively, of which $1.6 million and $3.1 million were outstanding as of June 30, 2014. For the six months ended June 30, 2014, the Company had additions to impaired loans of $1.5 million, of which $1.2 million were outstanding as of June 30, 2014. The remaining assets and liabilities measured at fair value on a nonrecurring basis that were recorded in 2014 and remained outstanding at June 30, 2014 were not significant.
ASC Topic 825, “
Financial Instruments
”
requires that the Company disclose estimated fair values for its financial instruments. The following table presents carrying and fair value information of financial instruments as of the dates indicated:
|
|
As of June 30, 2014
|
|
|
|
Carrying
|
|
|
Estimated Fair Value
|
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
509,853
|
|
|
$
|
509,853
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
509,853
|
|
Federal funds sold
|
|
|
3,630
|
|
|
|
3,630
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,630
|
|
Held to maturity securities
|
|
|
8,679,479
|
|
|
|
-
|
|
|
|
8,692,302
|
|
|
|
-
|
|
|
|
8,692,302
|
|
Loans held for sale
|
|
|
8,408
|
|
|
|
-
|
|
|
|
8,408
|
|
|
|
-
|
|
|
|
8,408
|
|
Loans held for investment, net of allowance
|
|
|
9,226,488
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,264,081
|
|
|
|
9,264,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
4,921,398
|
|
|
$
|
-
|
|
|
$
|
4,921,398
|
|
|
$
|
-
|
|
|
$
|
4,921,398
|
|
Interest-bearing
|
|
|
12,359,657
|
|
|
|
-
|
|
|
|
12,374,774
|
|
|
|
-
|
|
|
|
12,374,774
|
|
Other borrowings
|
|
|
200,210
|
|
|
|
-
|
|
|
|
201,528
|
|
|
|
-
|
|
|
|
201,528
|
|
Securities sold under repurchase agreements
|
|
|
388,342
|
|
|
|
-
|
|
|
|
388,402
|
|
|
|
-
|
|
|
|
388,402
|
|
Junior subordinated debentures
|
|
|
167,531
|
|
|
|
-
|
|
|
|
160,990
|
|
|
|
-
|
|
|
|
160,990
|
|
|
|
As of December 31, 2013
|
|
|
|
Carrying
|
|
|
Estimated Fair Value
|
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
380,990
|
|
|
$
|
380,990
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
380,990
|
|
Federal funds sold
|
|
|
400
|
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400
|
|
Held to maturity securities
|
|
|
8,066,970
|
|
|
|
-
|
|
|
|
7,987,342
|
|
|
|
-
|
|
|
|
7,987,342
|
|
Loans held for sale
|
|
|
2,210
|
|
|
|
2,210
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,210
|
|
Loans held for investment, net of allowance
|
|
|
7,705,729
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,749,786
|
|
|
|
7,749,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
4,108,835
|
|
|
$
|
-
|
|
|
$
|
4,108,835
|
|
|
$
|
-
|
|
|
$
|
4,108,835
|
|
Interest-bearing
|
|
|
11,182,436
|
|
|
|
-
|
|
|
|
11,196,241
|
|
|
|
-
|
|
|
|
11,196,241
|
|
Other borrowings
|
|
|
10,689
|
|
|
|
-
|
|
|
|
12,014
|
|
|
|
-
|
|
|
|
12,014
|
|
Securities sold under repurchase agreements
|
|
|
364,357
|
|
|
|
-
|
|
|
|
364,477
|
|
|
|
-
|
|
|
|
364,477
|
|
Junior subordinated debentures
|
|
|
124,231
|
|
|
|
-
|
|
|
|
119,325
|
|
|
|
-
|
|
|
|
119,325
|
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
The following is a description of the fair value estimates, methods and assumptions that are used by the Company in estimating the fair values of financial instruments.
Cash and due from banks
—For these short-term instruments, the carrying amount is a reasonable estimate of fair value. The Company classifies the estimated fair value of these instruments as Level 1.
Federal funds sold
—For these short-term instruments, the carrying amount is a reasonable estimate of fair value. The Company classifies the estimated fair value of these instruments as Level 1.
Securities
—
Fair value measurements based upon quoted prices are considered Level 1 inputs. Level 1 securities consist of U.S. Treasury securities and certain equity securities which are included in the available for sale portfolio. For all other available for sale and held to maturity securities, if quoted prices are not available, fair values are measured using Level 2 inputs. For these securities, the Company generally obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness.
Securities available for sale are recorded at fair value on a recurring basis.
Loans held for sale
—
Loans held for sale are carried at the lower of cost or estimated fair value. Fair value for consumer mortgages held for sale is based on commitments on hand from investors or prevailing market prices. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2.
Loans held for investment
—
The Company does not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value disclosures. However, from time to time, the Company records nonrecurring fair value adjustments to impaired loans to reflect (1) partial write downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value. Where appraisals are not available, estimated cash flows are discounted using a rate commensurate with the credit risk associated with those cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.
The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk. The Company classifies the estimated fair value of loans held for investment as Level 3.
Deposits
—The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Deposits fair value measurements utilize Level 2 inputs.
Junior subordinated debentures
—The fair value of the junior subordinated debentures was calculated using the quoted market prices, if available. If quoted market prices are not available, fair value is estimated using quoted market prices for similar subordinated debentures. Junior subordinated debentures fair value measurements utilize Level 2 inputs.
Other borrowings
—Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of other borrowings using a discounted cash flows methodology and are measured utilizing Level 2 inputs.
Securities sold under repurchase agreements
—The fair value of securities sold under repurchase agreements is the amount payable on demand at the reporting date and are measured utilizing Level 2 inputs.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
Derivative financial instruments
—The fair value of the underlying non-hedging derivative contracts offset each other and are measured utilizing Level 2 inputs.
Off-balance sheet financial instruments
—The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. The Company has reviewed the unfunded portion of commitments to extend credit as well as standby and other letters of credit, and has determined that the fair value of such financial instruments is not material. The Company classifies the estimated fair value of credit-related financial instruments as Level 3.
The Company’s off-balance sheet commitments including letters of credit, which totaled $2.22 billion at June 30, 2014, are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.
The fair value estimates presented herein are based on pertinent information available to management at June 30, 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
7. GOODWILL AND CORE DEPOSIT INTANGIBLES
Changes in the carrying amount of the Company’s goodwill and core deposit intangibles (“CDI”) for the six months ended June 30, 2014 and the year ended December 31, 2013 were as follows:
|
|
|
|
|
|
Core Deposit
|
|
|
|
Goodwill
|
|
|
Intangibles
|
|
|
|
(Dollars in thousands)
|
|
Balance as of December 31, 2012
|
|
$
|
1,217,162
|
|
|
$
|
26,159
|
|
Less:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
-
|
|
|
|
(6,145
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Measurement period adjustments
|
|
|
(1,225
|
)
|
|
|
2,110
|
|
Acquisition of East Texas Financial Services, Inc.
|
|
|
15,007
|
|
|
|
-
|
|
Acquisition of Coppermark Bancshares, Inc.
|
|
|
117,544
|
|
|
|
1,514
|
|
Acquisition of FVNB Corp.
|
|
|
323,032
|
|
|
|
18,411
|
|
Balance as of December 31, 2013
|
|
|
1,671,520
|
|
|
|
42,049
|
|
Less:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
-
|
|
|
|
(4,675
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Measurement period adjustments
|
|
|
8,167
|
|
|
|
(302
|
)
|
Acquisition of F&M Bancorporation Inc.
|
|
|
214,583
|
|
|
|
-
|
|
Balance as of June 30, 2014
|
|
$
|
1,894,270
|
|
|
$
|
37,072
|
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE
3
0
, 201
4
(UNAUDITED)
Goodwill is recorded on the acquisition date of each entity. The Company may record subsequent adjustments to goodwill for amounts undeterminable at acquisition date, such as deferred taxes and real estate valuations, and therefore the goodwill amounts reflected in the table above may change accordingly. The Company initially records the total premium paid on acquisitions as goodwill. After finalizing the valuation, core deposit intangibles are identified and reclassified from goodwill to core deposit intangibles on the balance sheet. This reclassification has no effect on total assets, liabilities, shareholders’ equity, net income or cash flows. Management performs an evaluation annually and more frequently if a triggering event occurs, of whether any impairment of the goodwill and other intangibles has occurred. If any such impairment is determined, a write-down is recorded. As of June 30, 2014, there were no impairments recorded on goodwill.
The measurement period for the Company to determine the fair value of acquired identifiable assets and assumed liabilities will be at the end of the earlier of (i) twelve months from the date of acquisition or (ii) as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the date of acquisition. As such, certain acquisitions completed during 2014 and 2013 may be subject to adjustment.
Core deposit intangibles are amortized on an accelerated basis over their estimated lives, which the Company believes is between 8 and 15 years. Amortization expense related to intangible assets totaled $2.6 million and $1.3 million for the three months ended June 30, 2014 and 2013, respectively, and $4.7 million and $3.1 million for the six months ended June 30, 2014 and 2013, respectively. The estimated aggregate future amortization expense for CDI remaining as of June 30, 2014 is as follows (dollars in thousands):
Remaining 2014
|
|
$
|
2,920
|
|
2015
|
|
|
6,549
|
|
2016
|
|
|
5,798
|
|
2017
|
|
|
3,843
|
|
2018
|
|
|
3,134
|
|
Thereafter
|
|
|
14,828
|
|
Total
|
|
$
|
37,072
|
|
8. STOCK BASED COMPENSATION
At June 30, 2014, the Company had four stock-based employee compensation plans and one stock option plan assumed in connection with an acquisition under which no additional options will be granted. Two of the four plans adopted by the Company have expired and therefore no additional awards may be issued under those plans.
During 2004, the Company’s Board of Directors adopted the Prosperity Bancshares, Inc. 2004 Stock Incentive Plan (the “2004 Plan”) which authorizes the issuance of up to 1,250,000 shares of common stock pursuant to the exercise or grant, as the case may be, of awards under such plan and the shareholders approved the 2004 Plan in 2005. The Company has granted shares with forfeiture restrictions (“restricted stock”) to certain directors, officers and associates under the 2004 Plan. The awardee is not entitled to the shares until they vest, which is generally over a one to five year period, but the awardee is entitled to receive dividends on and vote the shares prior to vesting. The shares granted do not have a cost to the awardee and the only requirement of vesting is continued service to the Company. Compensation cost related to restricted stock is calculated based on the fair value of the shares at the date of grant. If the awardee leaves the Company before the shares vest, the unvested shares are forfeited.
During 2012, the Company’s Board of Directors adopted the Prosperity Bancshares, Inc. 2012 Stock Incentive Plan (the “2012 Plan”), which authorizes the issuance of up to 1,250,000 shares of common stock upon the exercise of options granted under the 2012 Plan or pursuant to the grant or exercise, as the case may be, of other awards granted under the 2012 Plan, including restricted stock, stock appreciation rights, phantom stock awards and performance awards. As of June 30, 2014, no options or other awards have been granted under the 2012 Plan.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
The Company received $576 thousand and $1.1 million in cash from the exercise of stock options during the three month periods ended June 30, 2014 and 2013, respectively, and $2.4 million and $1.8 million during the six month periods ended June 30, 2014 and 2013, respectively. There was no tax benefit realized from option exercises of the share-based payment arrangements during the three and six month periods ended June 30, 2014 and 2013.
As of June 30, 2014, there was $23.3 million of total unrecognized compensation expense related to stock-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.53 years.
9
. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ITEMS
Contractual Obligations
The following table summarizes the Company’s contractual obligations and other commitments to make future payments as of June 30, 2014 (other than deposit obligations and securities sold under repurchase agreements). The Company’s future cash payments associated with its contractual obligations pursuant to its junior subordinated debentures, FHLB borrowings and operating leases as of June 30, 2014 are summarized below. Payments for junior subordinated debentures include interest of $83.2 million that will be paid over the future periods. The future interest payments were calculated using the current rate in effect at June 30, 2014. The current principal balance of the junior subordinated debentures at June 30, 2014 was $167.5 million. Payments for FHLB borrowings include interest of $2.1 million that will be paid over the future periods. Payments related to leases are based on actual payments specified in underlying contracts.
|
|
1 year or less
|
|
|
More than 1
year but less
than 3 years
|
|
|
3 years or
more but less
than 5 years
|
|
|
5 years
or more
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Junior subordinated debentures
|
|
$
|
2,084
|
|
|
$
|
8,335
|
|
|
$
|
8,334
|
|
|
$
|
231,952
|
|
|
$
|
250,705
|
|
Federal Home Loan Bank notes payable
|
|
|
190,822
|
|
|
|
3,456
|
|
|
|
5,665
|
|
|
|
2,337
|
|
|
|
202,280
|
|
Operating leases
|
|
|
3,698
|
|
|
|
10,661
|
|
|
|
4,676
|
|
|
|
7,779
|
|
|
|
26,814
|
|
Total
|
|
$
|
196,604
|
|
|
$
|
22,452
|
|
|
$
|
18,675
|
|
|
$
|
242,068
|
|
|
$
|
479,799
|
|
Off-Balance Sheet Items
In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
The Company’s commitments associated with outstanding standby letters of credit and commitments to extend credit expiring by periods as of June 30, 2014 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
|
|
1 year or less
|
|
|
More than 1
year but less
than 3 years
|
|
|
3 years or
more but less
than 5 years
|
|
|
5 years
or more
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Standby letters of credit
|
|
$
|
53,468
|
|
|
$
|
55,713
|
|
|
$
|
155
|
|
|
$
|
1,324
|
|
|
$
|
110,660
|
|
Commitments to extend credit
|
|
|
595,548
|
|
|
|
903,606
|
|
|
|
152,906
|
|
|
|
456,593
|
|
|
|
2,108,653
|
|
Total
|
|
$
|
649,016
|
|
|
$
|
959,319
|
|
|
$
|
153,061
|
|
|
$
|
457,917
|
|
|
$
|
2,219,313
|
|
10. OTHER COMPREHENSIVE (LOSS) INCOME
The tax effects allocated to each component of other comprehensive (loss) income were as follows:
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Before Tax Amount
|
|
|
Tax Benefit
|
|
|
Net of Tax Amount
|
|
|
Before Tax Amount
|
|
|
Tax Benefit
|
|
|
Net of Tax Amount
|
|
|
|
(Dollars in thousands)
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain during period
|
|
$
|
(317
|
)
|
|
$
|
111
|
|
|
$
|
(206
|
)
|
|
$
|
(2,330
|
)
|
|
$
|
816
|
|
|
$
|
(1,514
|
)
|
Total securities available for sale
|
|
|
(317
|
)
|
|
|
111
|
|
|
|
(206
|
)
|
|
|
(2,330
|
)
|
|
|
816
|
|
|
|
(1,514
|
)
|
Total other comprehensive loss
|
|
$
|
(317
|
)
|
|
$
|
111
|
|
|
$
|
(206
|
)
|
|
$
|
(2,330
|
)
|
|
$
|
816
|
|
|
$
|
(1,514
|
)
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Before Tax Amount
|
|
|
Tax Benefit
|
|
|
Net of Tax Amount
|
|
|
Before Tax Amount
|
|
|
Tax Benefit
|
|
|
Net of Tax Amount
|
|
|
|
(Dollars in thousands)
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain during period
|
|
$
|
(806
|
)
|
|
$
|
282
|
|
|
$
|
(524
|
)
|
|
$
|
(4,101
|
)
|
|
$
|
1,435
|
|
|
$
|
(2,666
|
)
|
Total securities available for sale
|
|
|
(806
|
)
|
|
|
282
|
|
|
|
(524
|
)
|
|
|
(4,101
|
)
|
|
|
1,435
|
|
|
|
(2,666
|
)
|
Total other comprehensive loss
|
|
$
|
(806
|
)
|
|
$
|
282
|
|
|
$
|
(524
|
)
|
|
$
|
(4,101
|
)
|
|
$
|
1,435
|
|
|
$
|
(2,666
|
)
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
Activity in accumulated other comprehensive income associated with securities available for sale, net of tax, was as follows:
|
|
Accumulated Other Comprehensive Income
|
|
|
|
(Dollars in thousands)
|
|
Balance at January 1, 2014
|
|
$
|
4,883
|
|
Other comprehensive loss
|
|
|
(524
|
)
|
Balance at June 30, 2014
|
|
$
|
4,359
|
|
|
|
|
|
|
Balance at January 1, 2013
|
|
$
|
8,986
|
|
Other comprehensive loss
|
|
|
(2,666
|
)
|
Balance at June 30, 2013
|
|
$
|
6,320
|
|
11. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
On November 1, 2013, the Company acquired FVNB Corp. and assumed the following derivative contracts relating to loans made to certain commercial customers. The interest rate derivative contracts outstanding at June 30, 2014 are presented in the following table:
|
|
Current Notional Amount
|
|
|
Estimated Fair Value
|
|
|
Maturity Date
|
|
|
Fixed Pay Rate
|
|
Variable Rate Received
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Interest Rate Swap
|
|
$
|
4,387
|
|
|
$
|
183
|
|
|
August 1, 2020
|
|
|
4.30%
|
|
1-Month USD - LIBOR BBA+2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Interest Rate Swap
|
|
|
1,607
|
|
|
|
61
|
|
|
August 15, 2020
|
|
|
5.49%
|
|
1-Month USD - LIBOR BBA+3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Interest Rate Swap
|
|
|
1,463
|
|
|
|
51
|
|
|
August 15, 2020
|
|
|
4.30%
|
|
1-Month USD - LIBOR BBA+2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Interest Rate Swap
|
|
|
1,865
|
|
|
|
8
|
|
|
May 1, 2022
|
|
|
5.60%
|
|
1-Month USD - LIBOR BBA+3.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,322
|
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
In these transactions, the Company has made a loan to a borrower at a variable rate of interest which the borrower pays directly to the Company. The Company also enters into an interest rate swap with a customer to accommodate the customer’s desired terms while at the same time entering into an identical offsetting interest rate swap with another financial institution, thus fully eliminating any interest rate risk to the Company. In connection with each swap transaction, the Company agrees to pay interest to the borrowing customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to
effectively convert a variable-rate loan to a fixed-rate. Because the Company acts solely as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not materially impact the Company’s results of operations. Derivative assets of $303 thousand and derivative liabilities of $303 thousand are recorded in other assets and other liabilities, respectively. The notional amounts and estimated fair values of interest rate derivative contracts outstanding at June 30, 2014 are presented in the following table:
|
|
Current Notional Amount
|
|
|
Estimated Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Financial Institution Counterparties:
|
|
|
|
|
|
|
|
|
Swaps - liabilities
|
|
$
|
9,322
|
|
|
$
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
Bank Customer Counterparties:
|
|
|
|
|
|
|
|
|
Swaps - assets
|
|
$
|
9,322
|
|
|
$
|
303
|
|
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. Credit risk is minimized through credit approvals, limits, counterparty collateral and monitoring procedures.
The Company’s derivative assets and liabilities include certain contractual features in which the Company requires the counterparties to provide collateral in the form of cash and securities to offset changes in the fair value of the derivatives. When necessary, the Company posts collateral primarily in the form of cash to offset changes in fair value of the derivatives, including changes in fair value due to the Company’s credit risk. As of June 30, 2014 and December 31, 2013, the balance of collateral posted by the Company for derivatives was $260 thousand
.
12.
ACQUISITIONS
Acquisition of F&M Bancorporation Inc.
–
On April 1, 2014, the Company completed the acquisition of F&M Bancorporation Inc. (“FMBC”) and its wholly-owned subsidiary The F&M Bank & Trust Company (“F&M”) headquartered in Tulsa, Oklahoma. F&M operated 13 banking offices: 9 in Tulsa, Oklahoma and surrounding areas; 3 in Dallas, Texas; and 1 loan production office in Oklahoma City, Oklahoma. The Company acquired FMBC to further expand its Oklahoma and Dallas, Texas area markets. The acquisition was not considered significant to the Company’s financial statements and therefore pro forma financial data and related disclosures are not included.
The Company acquired loans and deposits with fair values of $1.60 billion and $2.27 billion, respectively, at acquisition date. Under the terms of the agreement, the Company issued 3,298,022 shares of Company common stock plus $34.2 million in cash for all outstanding shares of FMBC capital stock for total merger consideration of $252.4 million based on the Company’s closing stock price of $66.15. As of June 30, 2014, the Company recognized $214.6 million in goodwill. Goodwill recognized does not include subsequent fair value adjustments that are still being finalized. Goodwill is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of identifiable assets acquired, none of which is expected to be deductible for tax purposes. As of June 30, 2014, management had not assessed the value of the F&M core deposit intangibles. For the six months ended June 30, 2014, the Company incurred approximately $2.0 million of pre-tax merger related expenses related to the F&M acquisition.
PROSPERITY BANCSHARES, INC.
®
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
Acquisition of
FVNB Corp.
–
On November 1, 2013, the Company completed the acquisition of FVNB Corp. and its wholly owned subsidiary, First Victoria National Bank (collectively, “FVNB”) headquartered in Victoria, Texas. FVNB operated 33 banking locations; 4 in Victoria, Texas; 7 in the South Texas area including Corpus Christi; 6 in the Bryan/College Station area; 5 in the Central Texas area including New Braunfels; and 11 in the Houston area including The Woodlands. The Company acquired FVNB to expand its Central and South Texas markets. The acquisition was not considered significant to the Company’s financial statements and therefore pro forma financial data and related disclosures are not included.
The Company acquired loans and deposits with fair values of $1.58 billion and $2.25 billion, respectively, at acquisition date. Under the terms of the acquisition agreement, the Company issued 5,570,667 shares of Company common stock plus $91.3 million in cash for all outstanding shares of FVNB Corp. capital stock for total merger consideration of $439.1 million based on the Company’s closing stock price of $62.45. As of June 30, 2014, the Company recognized $331.1 million in goodwill. Goodwill recognized does not include subsequent fair value adjustments that are still being finalized. Goodwill is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of identifiable assets acquired, none of which is expected to be deductible for tax purposes. Additionally, the Company recognized $18.4 million of core deposit intangibles. For the six months ended June 30, 2014, the Company incurred approximately $12 thousand of pre-tax merger related expenses in connection with the FVNB acquisition.
Acquisition of Coppermark Bancshares, Inc.
—
On April 1, 2013, the Company completed the acquisition of Coppermark Bancshares, Inc. and its wholly-owned subsidiary, Coppermark Bank (collectively, “Coppermark”). Coppermark operated 9 full-service banking offices: 6 in Oklahoma City, Oklahoma and surrounding areas and 3 in the Dallas, Texas area. The Company acquired Coppermark to expand its market into Oklahoma. The acquisition was not considered significant to the Company’s financial statements and therefore pro forma financial data and related disclosures are not included.
The Company acquired loans and deposits with fair values of $800.2 million and $1.12 billion, respectively, at acquisition date. Under the terms of the acquisition agreement, the Company issued 3,258,718 shares of Company common stock plus $60.0 million in cash for all outstanding shares of Coppermark Bancshares, Inc. capital stock, for total merger consideration of $214.4 million based on the Company’s closing stock price of $47.39. As of June 30, 2014, the Company recognized goodwill of $117.7 million, after a $109 thousand measurement period adjustment recording during the first quarter of 2014. Additionally, the Company recognized $1.5 million of core deposit intangibles.
Acquisition of East Texas Financial Services, Inc.
—
On January 1, 2013, the Company completed the acquisition of East Texas Financial Services, Inc. (OTC BB: FFBT) and its wholly-owned subsidiary, First Federal Bank Texas (collectively, “East Texas Financial Services”). East Texas Financial Services operated 4 banking offices in the Tyler MSA, including 3 locations in Tyler, Texas and 1 location in Gilmer, Texas. The Company acquired East Texas Financial Services to increase its market share in the East Texas area. The acquisition was not considered significant to the Company’s financial statements and therefore pro forma financial data and related disclosures are not included.
The Company acquired loans and deposits with fair values of $122.1 million and $112.4 million, respectively, at acquisition date. Under the terms of the acquisition agreement, the Company issued 530,940 shares of Company common stock for all outstanding shares of East Texas Financial Services capital stock, for total merger consideration of $22.3 million based on the Company’s closing stock price of $42.00. The Company recognized goodwill of $15.0 million.