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PB > SEC Filings for PB > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for PROSPERITY BANCSHARES INC | Request a Trial to NEW EDGAR Online Pro



Quarterly Report


Special Cautionary Notice Regarding Forward-Looking Statements

Statements and financial discussion and analysis contained in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond the Company's control. Many possible events or factors could affect the future financial results and performance of the Company and could cause such results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, without limitation:

• changes in the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations resulting in, among other things, a deterioration in credit quality or reduced demand for credit, including the result and effect on the Company's loan portfolio and allowance for credit losses;

• changes in interest rates and market prices, which could reduce the Company's net interest margins, asset valuations and expense expectations;

• changes in the levels of loan prepayments and the resulting effects on the value of the Company's loan portfolio;

• changes in local economic and business conditions which adversely affect the Company's customers and their ability to transact profitable business with the company, including the ability of the Company's borrowers to repay their loans according to their terms or a change in the value of the related collateral;

• increased competition for deposits and loans adversely affecting rates and terms;

• the timing, impact and other uncertainties of any future acquisitions, including the Company's ability to identify suitable future acquisition candidates, the success or failure in the integration of their operations, and the ability to enter new markets successfully and capitalize on growth opportunities;

• the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations;

• increased credit risk in the Company's assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio;

• the concentration of the Company's loan portfolio in loans collateralized by real estate;

• the failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses;

• changes in the availability of funds resulting in increased costs or reduced liquidity;

• a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company's securities portfolio;

• increased asset levels and changes in the composition of assets and the resulting impact on the Company's capital levels and regulatory capital ratios;

• the Company's ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes;

• the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;

• government intervention in the U.S. financial system;

• changes in statutes and government regulations or their interpretations applicable to financial holding companies and the Company's present and future banking and other subsidiaries, including changes in tax requirements and tax rates;

• poor performance by external vendors;

• the failure of analytical and forecasting models used by the Company to estimate probable credit losses and to measure the fair value of financial instruments;

• additional risks from new lines of businesses or new products and services;

• claims or litigation related to intellectual property or fiduciary responsibilities;

• potential risk of environmental liability associated with lending activities;

• the potential payment of interest on demand deposit accounts in order to effectively compete for clients;

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• acts of terrorism, an outbreak of hostilities or other international or domestic calamities, weather or other acts of God and other matters beyond the Company's control; and

• other risks and uncertainties listed from time to time in the Company's reports and documents filed with the Securities and Exchange Commission.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. However, the Company cautions you that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's interim consolidated financial statements and accompanying notes. This section should be read in conjunction with the Company's interim consolidated financial statements and accompanying notes included elsewhere in this report and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.


The Company, a Texas corporation, was formed in 1983 as a vehicle to acquire the former Allied First Bank in Edna, Texas, which was chartered in 1949 as The First National Bank of Edna and is now known as Prosperity Bank. The Company is a registered financial holding company that derives substantially all of its revenues and income from the operation of its bank subsidiary, Prosperity Bankฎ ("Prosperity Bankฎ" or the "Bank"). The Bank provides a wide array of financial products and services to small and medium-sized businesses and consumers. As of March 31, 2013, the Bank operated two hundred fifteen (215) full-service banking locations throughout Texas. The Company's headquarters are located at Prosperity Bank Plaza, 4295 San Felipe in Houston, Texas and its telephone number is
(713) 693-9300. The Company's website address is Information contained on the Company's website is not incorporated by reference into this quarterly report on Form 10-Q and is not part of this or any other report.

The Company generates the majority of its revenues from interest income on loans, service charges on customer accounts and income from investment in securities. The revenues are partially offset by interest expense paid on deposits and other borrowings and noninterest expenses such as administrative, occupancy and general operating expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings which are used to fund those earning assets. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and margin.

Three principal components of the Company's growth strategy are internal growth, stringent cost control practices and acquisitions, including strategic merger transactions and FDIC assisted transactions. The Company focuses on continuous internal growth. Each banking center is operated as a separate profit center, maintaining separate data with respect to its net interest income, efficiency ratio, deposit growth, loan growth and overall profitability. Banking center presidents and managers are accountable for performance in these areas and compensated accordingly. The Company also focuses on maintaining stringent cost control practices and policies. The Company has centralized many of its critical operations, such as data processing and loan processing. Management believes that this centralized infrastructure can accommodate substantial additional growth while enabling the Company to minimize operational costs through certain economies of scale. During 2012, the Company completed four acquisitions including Texas Bankers, Inc., The Bank Arlington, ASB and Community National Bank. Combined these acquisitions added forty-one (41) banking centers. On January 1, 2013, the Company completed its acquisition of East Texas Financial Services, Inc. and on April 1, 2013 completed the acquisition of Coppermark Bancshares, Inc., which expanded the Company's geographic footprint into the Oklahoma City, Oklahoma area.

Total assets were $15.08 billion at March 31, 2013 compared with $14.58 billion at December 31, 2012, an increase of $497.7 million or 3.4%. Total loans were $5.26 billion at March 31, 2013 compared with $5.18 billion at December 31, 2012, an increase of $83.1 million or 1.6%. Total deposits were $11.71 billion at March 31, 2013 compared with $11.64 billion at December 31, 2012, an increase of $71.6 million or 0.6%. Shareholders' equity increased $60.1 million or 2.9%, to $2.15 billion at March 31, 2013 compared with $2.09 billion at December 31, 2012.

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The Company's accounting policies are integral to understanding the financial results reported. Accounting policies are described in detail in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity:

Allowance for Credit Losses-The allowance for credit losses is 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 losses in the Company's loan portfolio. Based on an evaluation of the loan portfolio, management presents a monthly 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. In making its evaluation, management considers factors such as historical loan loss experience, industry diversification of the Company's commercial loan portfolio, the amount of nonperforming assets and related collateral, 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 and other relevant factors. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. Charge-offs occur when loans are deemed to be uncollectible.

Goodwill and Intangible Assets-Goodwill and intangible assets that have indefinite useful lives are subject to an impairment test at least annually, or more often, if events or circumstances indicate that it is more likely than not that the fair value of Prosperity Bank, the Company's only reporting unit with assigned goodwill, is below the carrying value of its equity. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining the need to perform step one of the annual test for goodwill impairment. An entity has an unconditional option to bypass the qualitative assessment described in the preceding paragraph for any reporting unit in any period and proceed directly to performing the first step of the goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period.

If the Company bypasses the qualitative assessment, a two-step goodwill impairment test is performed. The two-step process begins with an estimation of the fair value of the Company's reporting unit compared with its carrying value. If the carrying amount exceeds the fair value of the reporting unit, a second test is completed comparing the implied fair value of the reporting unit's goodwill to its carrying value to measure the amount of impairment.

Estimating the fair value of the Company's reporting unit is a subjective process involving the use of estimates and judgments, particularly related to future cash flows of the reporting unit, discount rates (including market risk premiums) and market multiples. Material assumptions used in the valuation models include the comparable public company price multiples used in the terminal value, future cash flows and the market risk premium component of the discount rate. The estimated fair values of the reporting unit is determined using a blend of two commonly used valuation techniques: the market approach and the income approach. The Company gives consideration to both valuation techniques, as either technique can be an indicator of value. For the market approach, valuations of the reporting unit were based on an analysis of relevant price multiples in market trades in companies with similar characteristics. For the income approach, estimated future cash flows (derived from internal forecasts and economic expectations) and terminal value (value at the end of the cash flow period, based on price multiples) were discounted. The discount rate was based on the imputed cost of equity capital.

The Company had no intangible assets with indefinite useful lives at March 31, 2013. Other identifiable intangible assets that are subject to amortization are amortized on an accelerated basis over the years expected to be benefited, which the Company believes is between eight and ten years. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value to carrying value. Based on the Company's annual goodwill impairment test as of September 30, 2012, management does not believe any of its goodwill is impaired as of March 31, 2013, because the fair value of the Company's equity substantially exceeded its carrying value. While the Company believes no impairment existed at March 31, 2013, under accounting standards applicable at that date, different conditions or assumptions, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company's impairment evaluation and financial condition or future results of operations.

Stock-Based Compensation-The Company accounts for stock-based employee compensation plans using the fair value-based method of accounting. The Company's results of operations reflect compensation expense for all employee stock-based compensation, including the unvested portion of stock options granted prior to 2003. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions including stock price volatility and employee turnover that are utilized to measure compensation expense.

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Other-Than-Temporarily Impaired Securities-When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is below amortized cost, additional analysis is performed to determine whether an impairment exists. Available for sale and held to maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) whether the market decline was affected by macroeconomic conditions, and (iv) 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. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company's results of operations and financial condition.

Fair Values of Financial Instruments. The Company determines the fair market values of financial instruments based on the fair value hierarchy established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value. Level 1 inputs include quoted market prices, where available. If such quoted market prices are not available, Level 2 inputs are used. These inputs are based upon internally developed models that primarily use observable market-based parameters. Level 3 inputs are unobservable inputs which are typically based on an entity's own assumptions, as there is little, if any, related market activity. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.


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 ("Firstbank"). As of December 31, 2012, East Texas Financial Services reported, on a consolidated basis, total assets of $165.0 million, total loans of $129.3 million and total deposits of $112.3 million. The Company issued 530,940 shares of Company common stock for all outstanding shares of East Texas Financial Services capital stock, which resulted in a premium of $7.0 million.


Acquisition of Coppermark Bancshares, Inc. - On April 1, 2013, the Company completed the merger with Coppermark Bancshares, Inc. and its wholly-owned subsidiary, Coppermark Bank (collectively referred to as "Coppermark") headquartered in Oklahoma City, Oklahoma. Coppermark operated nine
(9) full-service banking offices: six (6) in Oklahoma City, Oklahoma and surrounding areas and three (3) in the Dallas, Texas area. As of March 31, 2013, Coppermark reported, on a consolidated basis, total assets of $1.25 billion, total loans of $847.6 million and total deposits of $1.11 billion.

Pursuant to the terms of the acquisition agreement, the Company issued 3,258,718 shares of Company common stock plus approximately $60.0 million in cash for all outstanding shares of Coppermark Bancshares capital stock, which resulted in a premium of $91.7 million.


Net income available to common shareholders was $49.3 million ($0.86 per common share on a diluted basis) for the quarter ended March 31, 2013 compared with $36.5 million ($0.77 per common share on a diluted basis) for the quarter ended March 31, 2012, an increase of $12.8 million or 35.1%. The Company posted returns on average common equity of 9.23% and 9.15%, returns on average assets of 1.33% and 1.39% and efficiency ratios of 42.40% and 42.23% for the quarters

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ended March 31, 2013 and 2012, respectively. The efficiency ratio is calculated by dividing total noninterest expense (excluding credit loss provisions) by net interest income plus noninterest income (excluding net gains and losses on the sale of securities and assets). Additionally, taxes are not part of this calculation.

Net Interest Income

The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change." It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change."

Net interest income before the provision for credit losses was $108.1 million for the quarter ended March 31, 2013 compared with $81.8 million for the quarter ended March 31, 2012, an increase of $26.2 million or 32.1%. This increase includes $14.3 million related to purchase accounting accretion during the three months ended March 31, 2013. There was no purchase accounting accretion recorded during the three months ended March 31, 2012. The average rate paid on interest-bearing liabilities decreased 15 basis points from 0.57% for the quarter ended March 31, 2012 to 0.42% for the quarter ended March 31, 2013, while the average yield on interest-earning assets decreased 36 basis points from 4.03% for the quarter ended March 31, 2012 compared with 3.67% for the quarter ended March 31, 2013. The average volume of interest-bearing liabilities increased $2.84 billion and the average volume of interest-earning assets increased $3.92 billion for the same period. The net interest margin on a tax equivalent basis decreased 22 basis points from 3.64% for the quarter ended March 31, 2012 to 3.42% for the quarter ended March 31, 2013.

The following table sets forth, for each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the quarters ended March 31, 2013 and 2012. The table also sets forth the average rate paid on total interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Except as indicated in the footnotes, no tax-equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the table as loans carrying a zero yield.

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                                                                                 Three Months Ended
                                                        Mar 31, 2013                                             Mar 31, 2012
                                                        Interest                                                 Interest
                                                         Earned/                                                  Earned/
                                       Average          Interest           Average              Average          Interest           Average
                                       Balance            Paid          Yield/Rate (4)          Balance            Paid          Yield/Rate (4)
                                                                               (Dollars in thousands)
Interest-Earning Assets:
Loans                                $  5,263,784       $  81,464                  6.28 %     $  3,818,991       $  53,217                  5.60 %
Investment securities                   7,755,567          36,548                  1.91 %        5,192,257          38,321                  2.95 %
Federal funds sold and other
earning assets                             34,793              19                  0.22 %          126,154              78                  0.25 %

Total interest-earning assets          13,054,144       $ 118,031                  3.67 %        9,137,402       $  91,616                  4.03 %

Allowance for credit losses               (53,242 )                                                (51,601 )
Noninterest-earning assets              1,849,461                                                1,414,340

Total assets                         $ 14,850,363                                             $ 10,500,141

Interest-Bearing Liabilities:
Interest-bearing demand deposits     $  2,659,489       $   2,210                  0.34 %     $  1,694,240       $   2,063                  0.49 %
Savings and money market deposits       3,790,416           2,829                  0.30 %        2,792,348           2,589                  0.37 %
Certificates and other time
deposits                                2,370,499           3,651                  0.62 %        1,971,071           4,139                  0.84 %
Securities sold under repurchase
agreements                                448,542             292                  0.26 %           53,304              37                  0.28 %
Federal funds purchased and other
borrowings                                358,120             362                  0.41 %          272,760             279                  0.41 %
Junior subordinated debentures             85,055             605                  2.88 %           85,055             663                  3.14 %

Total interest-bearing
liabilities                          $  9,712,121       $   9,949                  0.42 %     $  6,868,778       $   9,770                  0.57 %

Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits                                2,939,621                                                1,970,942
Other liabilities                          62,716                                                   65,137

Total liabilities                      12,714,458                                                8,904,857
Shareholders' equity                    2,135,905                                                1,595,284

Total liabilities and
shareholders' equity                 $ 14,850,363                                             $ 10,500,141

Net interest rate spread                                                           3.25 %                                                   3.46 %

Net interest income and margin
(1) (2)                                                 $ 108,082                  3.36 %                        $  81,846                  3.60 %

Net interest income and margin
(tax equivalent) (3)                                    $ 110,207                  3.42 %                        $  82,742                  3.64 %

(1) Yield is based on amortized cost and does not include any component of unrealized gains or losses.

(2) The net interest margin is equal to net interest income divided by average interest-earning assets.

(3) In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 35%.

(4) Annualized and based on an actual/365 day basis for the three months ended March 31, 2013 and on an actual/366 day basis for the three months ended March 31, 2012.

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The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

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