UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-35388
PROSPERITY BANCSHARES, INC.®
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction of
incorporation or organization)
Prosperity Bank Plaza
4295 San Felipe
Houston, Texas
(Address of principal executive offices)
74-2331986
(I.R.S. Employer
Identification No.)
77027
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (713) 693-9300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value
$1.00 per share
(Title of each class)
New York Stock Exchange, Inc.
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-accelerated Filer
☒
☐
Accelerated Filer
☐
Smaller Reporting Company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the shares of common stock held by non-affiliates as of June 30, 2016, based on the closing price of the
common stock on the New York Stock Exchange on June 30, 2016 was approximately $3.37 billion.
As of February 23, 2017, the number of outstanding shares of common stock was 69,478,062.
Documents Incorporated by Reference:
Portions of the Company’s Proxy Statement relating to the 2017 Annual Meeting of Shareholders, which will be filed within 120 days after
December 31, 2016, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
PROSPERITY BANCSHARES, INC.®
2016 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Business ............................................................................................................................................................
General .........................................................................................................................................................
Recent Acquisitions .....................................................................................................................................
Available Information ..................................................................................................................................
Officers and Associates ................................................................................................................................
Banking Activities........................................................................................................................................
Business Strategies .......................................................................................................................................
Competition ..................................................................................................................................................
Supervision and Regulation .........................................................................................................................
Risk Factors ......................................................................................................................................................
Unresolved Staff Comments .............................................................................................................................
Properties ..........................................................................................................................................................
Legal Proceedings .............................................................................................................................................
Mine Safety Disclosures ...................................................................................................................................
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Securities ......................................................................................................................................................
Selected Consolidated Financial Data ...............................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................
Overview ......................................................................................................................................................
Recent Acquisition .......................................................................................................................................
Critical Accounting Policies ........................................................................................................................
Results of Operations ...................................................................................................................................
Financial Condition ......................................................................................................................................
Quantitative and Qualitative Disclosures about Market Risk ...........................................................................
Financial Statements and Supplementary Data .................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........................
Controls and Procedures ...................................................................................................................................
Other Information .............................................................................................................................................
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance ................................................................................
Executive Compensation ..................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .........
Certain Relationships and Related Transactions and Director Independence ...................................................
Principal Accountant Fees and Services ...........................................................................................................
PART IV
Item 15.
Exhibits and Financial Statement Schedules .....................................................................................................
Signatures ..............................................................................................................................................................................
1
1
2
2
2
2
3
4
4
13
20
20
21
21
22
25
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29
29
31
36
55
55
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56
59
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ITEM 1.
BUSINESS
General
PART I
Prosperity Bancshares, Inc.®, a Texas corporation (the “Company”), was formed in 1983 as a vehicle to acquire the former
Allied 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 Bank® (“Prosperity Bank®” or the “Bank”). The Bank provides a wide array of financial products and
services to small and medium-sized businesses and consumers. As of December 31, 2016, the Bank operated 245 full service banking
locations; 65 in the Houston area, including The Woodlands; 29 in the South Texas area, including Corpus Christi and Victoria; 36 in
the Dallas/Fort Worth area; 22 in the East Texas area; 29 in the Central Texas area, including Austin and San Antonio; 34 in the West
Texas area, including Lubbock, Midland-Odessa and Abilene; 16 in the Bryan/College Station area, 6 in the Central Oklahoma area
and 8 in the Tulsa, Oklahoma area. The Company’s principal executive office is 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 www.prosperitybankusa.com.
The Company’s market consists of the communities served by its banking centers. The diverse nature of the economies in each
local market served by the Company provides the Company with a varied customer base and allows the Company to spread its lending
risk throughout a number of different industries including professional service firms and their principals, manufacturing, tourism,
recreation, petrochemicals, farming and ranching. The Company’s market areas outside of Houston, Dallas, Corpus Christi, San
Antonio, Lubbock, Austin, Tulsa and Oklahoma City are dominated by either small community banks or branches of larger regional
banks. Management believes that the Company, through its responsive customer service and community banking philosophy,
combined with the sophistication of a larger regional bank holding company, has a competitive advantage in its market areas and
excellent growth opportunities through acquisitions, new banking center locations and additional business development.
Operating under a community banking philosophy, the Company seeks to develop broad customer relationships based on
service and convenience while maintaining its conservative approach to lending and sound asset quality. The Company has grown
through a combination of internal growth, the acquisition of community banks and branches of banks and the opening of new banking
centers. Utilizing a low cost of funds and employing stringent cost controls, the Company has been profitable in every year of its
existence, including the periods of adverse economic conditions in Texas and Oklahoma.
In addition to internal growth, the Company completed the following acquisitions within the last ten years (through
December 31, 2016):
Acquired Entity
SNB Bancshares, Inc.
Texas United Bancshares, Inc.
Acquired Bank
Southern National Bank of Texas
State Bank, GNB Financial, n.a., Gateway
National Bank and Northwest Bank
Completion
Date
2006
2007
The Bank of Navasota
Banco Popular, NA (6 branches)
1st Choice Bancorp
Franklin Bank (from FDIC, as receiver) (3)
U.S. Bank (3 branches)
First Bank (19 branches)
Texas Bankers, Inc.
The Bank Arlington
American State Financial Corporation
Community National Bank
East Texas Financial Services, Inc.
Coppermark Bancshares, Inc.
FVNB Corp.
F&M Bancorporation Inc.
Tradition Bancshares, Inc.
The Bank of Navasota
N/A
1st Choice Bank
N/A
N/A
N/A
Bank of Texas
The Bank Arlington
American State Bank
Community National Bank
Firstbank
Coppermark Bank
First Victoria National Bank
The F&M Bank & Trust Company
Tradition Bank
2007
2008
2008
2008
2010
2010
2012
2012
2012
2012
2013
2013
2013
2014
2016
Number of
Banking Centers
Acquired (1)
6 (2)
34
1
5
1
33
3
15
2
1
37
1
4
6
20
11
7
(1) The number of banking centers added does not include any locations of the acquired entity that were closed and consolidated with
existing banking centers of the Company upon consummation of the transaction or closed after consummation of the transaction.
Included one banking center under construction at the time of consummation.
(2)
(3) Assumed approximately $3.6 billion of deposits and acquired certain assets, including 33 banking centers, from the Federal Deposit
Insurance Corporation (“FDIC”), acting in its capacity as receiver for Franklin Bank.
1
Recent Acquisitions
Acquisition of Tradition Bancshares, Inc.—On January 1, 2016, the Company completed the acquisition of Tradition
Bancshares, Inc. (“Tradition”) and its wholly-owned subsidiary Tradition Bank headquartered in Houston, Texas. Tradition Bank
operated 7 banking offices in the Houston, Texas area, including its main office in Bellaire, 3 banking centers in Katy and 1 banking
center in The Woodlands.
As of December 31, 2015, Tradition, on a consolidated basis, reported total assets of $548.0 million, total loans of $253.3
million, total deposits of $488.9 million and shareholders’ equity of $43.1 million. Under the terms of the definitive agreement, the
Company issued 679,528 shares of Company common stock plus $39.0 million in cash for all outstanding shares of Tradition capital
stock, for a total merger consideration of $71.5 million, based on the Company’s closing stock price of $47.86 on December 31, 2015.
As of December 31, 2016, the Company recognized goodwill of $32.0 million, which is calculated as the excess of both the
consideration exchanged and liabilities assumed compared with the fair value of the assets acquired. Additionally, the Company
recognized $5.6 million of core deposit intangibles.
Available Information
The Company’s website address is www.prosperitybankusa.com. The Company makes available free of charge on or through its
website its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as
soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
Information contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K and is not
part of this or any other report.
Officers and Associates
The Company’s directors and officers are important to the Company’s success and play a key role in the Company’s business
development efforts by actively participating in civic and public service activities in the communities served by the Company.
The Company has invested heavily in its officers and associates by recruiting talented officers in its market areas and providing
them with economic incentives. The senior management team has substantial experience in the Houston, Dallas, Austin,
Bryan/College Station, East Texas, South Texas, West Texas, Oklahoma City and Tulsa markets and the surrounding communities in
which the Company has a presence. Each banking center location is overseen by a local president or manager with knowledge of the
community and lending expertise in the specific industries found in the community. The Company entrusts its banking center
presidents and managers with authority and flexibility within general parameters with respect to product pricing and decision making
in order to minimize the bureaucratic structure of larger banks. The Company operates each banking center as a separate profit center,
maintaining separate data with respect to each banking center’s 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. Each banking center has its own listed local business telephone number. Customers are served by a local banker with
decision making authority.
As of December 31, 2016, the Company and the Bank had 3,035 full-time equivalent associates, 821 of whom were officers of
the Bank. The Company provides medical and hospitalization insurance to its full-time associates. The Company considers its
relations with associates to be good. Neither the Company nor the Bank is a party to any collective bargaining agreement.
Banking Activities
The Company, through the Bank, offers a variety of traditional loan and deposit products to its customers, which consist
primarily of consumers and small and medium-sized businesses. The Bank tailors its products to the specific needs of customers in a
given market. At December 31, 2016, the Bank maintained approximately 598,400 separate deposit accounts including certificates of
deposit and 53,600 separate loan accounts. At December 31, 2016, noninterest-bearing demand deposits were 30% of the Bank’s total
deposits. For the year ended December 31, 2016, the Company’s average cost of funds was 0.24% and the Company’s average cost of
deposits (excluding all borrowings) was 0.23%.
The Company has been an active real estate lender, with commercial real estate (including multifamily residential) and 1-4
family residential loans comprising 32.9% and 25.3%, respectively, of the Company’s total loans as of December 31, 2016. The
Company also offers commercial loans, loans for automobiles and other consumer durables, home equity loans, debit and credit cards,
internet banking and other cash management services, mobile banking, trust and wealth management, retail brokerage services,
mortgage banking services and automated telephone banking. The Company offers businesses a broad array of loan products including
2
term loans, lines of credit and loans for working capital, business expansion and the purchase of equipment and machinery; land
development and interim construction loans for builders; and owner-occupied and non-owner occupied commercial real estate loans.
By offering certificates of deposit, interest checking accounts, savings accounts and overdraft protection at competitive rates, the
Company gives its depositors a full range of traditional deposit products.
The Company maintains a trust department with $1.68 billion in assets under management as of December 31, 2016. The trust
department provides trust services in the Company’s various market areas.
Business Strategies
The Company’s main objective is to increase deposits and loans through internal growth, as well as through acquisition
opportunities, while maintaining efficiency, individualized customer service and maximizing profitability. To achieve this objective,
the Company has employed the following strategic goals:
Continue Community Banking Emphasis. Although the Company has significantly grown in the last several years, it intends to
continue operating as a community banking organization focused on meeting the specific needs of consumers and small and medium-
sized businesses in its market areas. The Company provides a high degree of responsiveness combined with a wide variety of banking
products and services. The Company staffs its banking centers with experienced bankers who possess lending expertise in the specific
industries found in the given community, and gives them authority to make certain pricing and credit decisions, avoiding the
bureaucratic structure of larger banks.
Expand Market Share Through Internal Growth and a Disciplined Acquisition Strategy. The Company intends to continue
seeking opportunities, both inside and outside its existing markets, to expand either by acquiring existing banks or branches of banks
or by establishing new banking centers. All of the Company’s acquisitions have been accretive to earnings within 12 months after
acquisition date and generally have supplied the Company with relatively low-cost deposits which have been used to fund the
Company’s lending and investing activities. However, future acquisitions, if any, may not be accretive to earnings within any
particular time period. Factors used by the Company to evaluate expansion opportunities include (1) the similarity in management and
operating philosophies, (2) whether the acquisition will be accretive to earnings and enhance shareholder value, (3) the ability to
improve the efficiency ratio through economies of scale, (4) whether the acquisition will strategically expand the Company’s
geographic footprint and (5) the opportunity to enhance the Company’s market presence in existing market areas.
Increase Loan Volume and Diversify Loan Portfolio. While maintaining its conservative approach to lending, the Company has
emphasized both new and existing loan products, focusing on managing its commercial real estate and commercial loan portfolios.
From December 31, 2015 to December 31, 2016, the Company’s total loans increased from $9.44 billion to $9.62 billion or 1.9%.
Construction, land development and other land loans increased from $1.07 billion to $1.26 billion, or 17.8%, and represented 11.4%
and 13.1% of the total loan portfolio, as of December 31, 2015 and 2016, respectively. Commercial real estate (including multifamily
residential) increased from $3.13 billion to $3.16 billion, or 1.0%, and represented 33.2% and 32.9% of the total portfolio, as of
December 31, 2015 and 2016, respectively. From December 31, 2015 to December 31, 2016, 1-4 family residential mortgage loans
(including home equity loans) increased from $2.64 billion to $2.72 billion, or 2.9%, and represented 27.9% and 28.2% of the total
portfolio, as of December 31, 2015 and 2016, respectively. Commercial and industrial loans decreased from $1.69 billion to $1.54
billion, or 9.0%, and represented 17.9% and 16.0% of the total portfolio, as of December 31, 2015 and 2016, respectively. In addition,
the Company targets business owners, professional service firms, including legal and medical practices, for loans secured by owner-
occupied premises, working capital or equipment and personal loans to their principals.
Maintain Sound Asset Quality. The Company continues to maintain the sound asset quality that has been representative of its
historical loan portfolio. As the Company continues to diversify and increase its lending activities and acquire loans in acquisitions, it
may face higher risks of nonpayment and increased risks in the event of prolonged economic downturns. The Company intends to
continue to employ the strict underwriting guidelines and comprehensive loan review process that have contributed to its low
incidence of nonperforming assets and its minimal charge-offs in relation to its size.
Continue Focus on Efficiency. The Company plans to maintain its stringent cost control practices and policies. The Company
has invested significantly in the infrastructure required to centralize many of its critical operations, such as data processing and loan
processing. For its banking centers, which the Company operates as independent profit centers, the Company supplies complete
support in the areas of loan review, loan processing, internal audit, compliance and training. Management believes that this centralized
infrastructure can accommodate additional growth while enabling the Company to minimize operational costs through economies of
scale.
Enhance Cross-Selling. The Company uses incentives and friendly competition to encourage cross-selling efforts and increase
cross-selling results among its associates. Officers and associates have access to each customer’s existing and related account
3
relationships and are better able to inform customers of additional products when customers visit or call the various banking centers or
use their drive-in facilities. In addition, the Company includes product information in monthly statements and other mailings.
Competition
The banking business is highly competitive, and the profitability of the Company depends principally on its ability to compete in
its market areas. The Company competes with other commercial banks, savings banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based nonbank lenders and
certain other nonfinancial entities, including retail stores which may maintain their own credit programs and certain governmental
organizations which may offer more favorable financing than the Company. The Company believes it has been able to compete
effectively with other financial institutions by emphasizing customer service, technology and responsive decision-making with respect
to loans, by establishing long-term customer relationships and building customer loyalty and by providing products and services
designed to address the specific needs of its customers.
Supervision and Regulation
The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of
depositors, the Deposit Insurance Fund (“DIF”) of the FDIC and the banking system as a whole, and not for the protection of the bank
holding company’s shareholders or creditors. The banking agencies have broad enforcement power over bank holding companies and
banks including the power to impose substantial fines and other penalties for violations of laws and regulations.
The following description summarizes some of the laws to which the Company and the Bank are subject. References in this
Annual Report on Form 10-K to applicable statutes and regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
The Company
The Company is a financial holding company pursuant to the Gramm-Leach-Bliley Act and a bank holding company registered
under the Bank Holding Company Act of 1956, as amended (“BHCA”). Accordingly, the Company is subject to supervision,
regulation and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). The Gramm-Leach-
Bliley Act, the BHCA and other federal laws subject financial and bank holding companies to particular restrictions on the types of
activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and regulations. Further, since the Company has securities registered with the Securities and Exchange
Commission and traded on the New York Stock Exchange, it is also subject to the supervision and regulation of these organizations.
Regulatory Restrictions on Dividends. The Company is regarded as a legal entity separate and distinct from the Bank. The
principal source of the Company’s revenues is dividends received from the Bank. As described in more detail below, federal law
places limitations on the amount that banks may pay in dividends, which the Bank must adhere to when paying dividends to the
Company. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock
only out of income available over the past year and only if the prospective rate of earnings retention is consistent with the
organization’s expected capital needs and financial condition. The Federal Reserve Board’s policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of
strength to its banking subsidiaries. The Federal Reserve Board is authorized to limit or prohibit the payment of dividends if, in the
Federal Reserve Board’s opinion, the payment of dividends would constitute an unsafe or unsound practice in light of a bank holding
company’s financial condition. In addition, the Federal Reserve Board has indicated that each bank holding company should carefully
review its dividend policy, and has discouraged payment ratios that are at maximum allowable levels, which is the maximum dividend
amount that may be issued and allow the company to still maintain its target Tier 1 capital ratio, unless both asset quality and capital
are very strong.
Stress Testing. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), in
October 2012, the Federal Reserve Board published its final rules regarding company-run stress testing. The rules require institutions
with average total consolidated assets greater than $10 billion, such as the Company and the Bank, to conduct an annual company-run
stress test of capital and consolidated earnings and losses under one base and at least two stress scenarios provided by bank regulatory
agencies. Institutions with total consolidated assets between $10 billion and $50 billion use data as of December 31 and scenarios
released by the agencies. The results of these stress tests must be reported to the agencies by July 31 of the following year. Public
disclosure of summary stress test results under the severely adverse scenario will occur between October 15 and October 31. The
Company’s capital ratios reflected in the stress test calculations are an important factor considered by the Federal Reserve Board in
evaluating the capital adequacy of the Company and the Bank and determining whether proposed payments of dividends or stock
repurchases may be an unsafe or unsound practice.
4
Source of Strength. Under Federal Reserve Board policy, a bank holding company has historically been required to act as a
source of financial strength to each of its banking subsidiaries. The Dodd-Frank Act codified this policy as a statutory requirement.
Under this requirement, the Company is expected to commit resources to support the Bank, including support at times when the
Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its
subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As
discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed
to have assumed and is required to cure immediately any deficit under any commitment by the debtor holding company to any of the
federal banking agencies to maintain the capital of an insured depository institution. Any claim for breach of such obligation will
generally have priority over most other unsecured claims.
Scope of Permissible Activities. Under the BHCA, bank holding companies generally may not acquire a direct or indirect
interest in or control of more than 5% of the voting shares of any company that is not a bank or bank holding company or from
engaging in activities other than those of banking, managing or controlling banks or furnishing services to or performing services for
its subsidiaries, except that it may engage in, directly or indirectly, certain activities that the Federal Reserve Board has determined to
be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In approving acquisitions or the
addition of activities, the Federal Reserve Board considers, among other things, whether the acquisition or the additional activities can
reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency,
that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest
or unsound banking practices.
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act eliminated the barriers to affiliations among banks, securities
firms, insurance companies and other financial service providers and permits bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in
nature. The Gramm-Leach- Bliley Act defines “financial in nature” to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities
that the Federal Reserve Board has determined to be closely related to banking. No regulatory approval will be required for a financial
holding company, such as the Company, to acquire a company, other than a bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are financial in nature as determined by the Federal Reserve Board.
The Company’s financial holding company status depends upon it maintaining its status as “well capitalized” and “well
managed” under applicable Federal Reserve Board regulations. If a financial holding company ceases to meet these requirements, the
Federal Reserve Board may impose corrective capital and/or managerial requirements on the financial holding company and place
limitations on its ability to conduct the broader financial activities permissible for financial holding companies. Until the financial
holding company returns to compliance, it may not acquire a company engaged in such financial activities without prior approval of
the Federal Reserve Board. In addition, the Federal Reserve Board may require divestiture of the holding company’s depository
institutions and/or its non-bank subsidiaries if the deficiencies persist.
While the Federal Reserve Board is the “umbrella” regulator for financial holding companies and has the power to examine
banking organizations engaged in new activities, regulation and supervision of activities which are financial in nature or determined to
be incidental to such financial activities will be handled along functional lines. Accordingly, activities of subsidiaries of a financial
holding company will be regulated by the agency or authorities with the most experience regulating that activity as it is conducted in a
financial holding company.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking
practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve
Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated
net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or
unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the
position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking
subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can
assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial
loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.
Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services,
such as extensions of credit, to other services offered by a holding company or its affiliates.
5
Basel III Capital Adequacy Requirements. In July 2013, the Federal Reserve Board and the FDIC published the Basel III Capital
Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implemented the Basel
Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain
provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to
bank holding companies and depository institutions, including the Company and the Bank, under the previous U.S. risk-based capital
rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking
institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator
in banking institutions’ regulatory capital ratios and replace the prior risk-weighting approach, which was derived from the Basel I
capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel
Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the
Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules became
effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions.
The Basel III Capital Rules, among other things, (1) include a new capital measure called “Common Equity Tier 1” (“CET1”),
(2) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (3)
defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the
other components of capital and (4) expanded the scope of the deductions/adjustments as compared to existing regulations.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1
to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a four-year
period (beginning at 40% on January 1, 2015 and increasing by an additional 20% per year thereafter). Under the previous capital
standards, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of
determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items
are not excluded; however, banking organizations that do not have $250 billion or more in total consolidated assets or $10 billion or
more in total on-balance sheet foreign exposure, including the Company and the Bank, were able to make a one-time permanent
election to continue to exclude these items. The Company and the Bank made this election in order to avoid significant variations in
the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s available-for-sale
securities portfolio. Under the Basel III Capital Rules, trust preferred securities no longer included in Tier 1 capital of bank holding
companies may be included as Tier 2 capital on a permanent basis.
The Basel III Capital Rules also require a capital conservation buffer, composed entirely of CET1, that is designed to absorb
losses during periods of economic stress and has the effect of increasing the minimum required risk-weighted capital ratios. The
implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and is being phased in over a four-
year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III Capital
Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any
current applicability to the Company or the Bank. Banking institutions with a ratio of CET1 to risk-weighted assets below the
effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face
constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The minimum capital ratios under the Basel III Capital Rules that were effective as of January 1, 2016 are (1) 4.5% CET1 to
risk-weighted assets, (2) 6.0% Tier 1 capital to risk-weighted assets, (3) 8.0% total capital (that is, Tier 1 plus Tier 2) to risk-weighted
assets and (4) 4.0% Tier 1 capital to average quarterly assets as reported on consolidated financial statements (known as the “leverage
ratio”). As of December 31, 2016, the Company’s ratio of CET1 to risk-weighted assets was 14.48%, Tier 1 capital to risk-weighted
assets was 14.48%, Total capital to risk-weighted assets was 15.20% and Tier 1 capital to average quarterly assets was 8.68%.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company to maintain an additional capital
conservation buffer of 2.5% CET1, effectively resulting in minimum ratios of (1) CET1 to risk-weighted assets of 7.0%, (2) Tier 1
capital to risk-weighted assets of 8.5%, (3) total capital to risk-weighted assets of 10.5% and (4) a leverage ratio of 4.0%, calculated as
the ratio of Tier 1 capital to average quarterly assets.
With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations as discussed below
under “The Bank—Corrective Measures for Capital Deficiencies.”
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories
from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of
categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for
certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In addition, the Basel III Capital Rules
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provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central
counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
The federal banking agencies’ risk-based and leverage capital ratios are minimum supervisory ratios generally applicable to
banking organizations that meet certain specified criteria. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a
particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board
guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
Liquidity Requirements. Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed
as a supervisory matter, without required formulaic measures. The Basel III liquidity framework requires banks and bank holding
companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures
historically applied by banks and regulators for management and supervisory purposes, are now required by regulation.
One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that a banking entity maintains an adequate
level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if
greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable
funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities
over a one-year time horizon. In September 2014, the federal banking agencies approved final rules implementing (1) the LCR for
advanced approaches banking organizations (i.e., banking organizations with $250 billion or more in total consolidated assets or $10
billion or more in total on-balance sheet foreign exposure) and (2) a modified version of the LCR for bank holding companies with at
least $50 billion in total consolidated assets that are not advanced approach banking organizations. Neither rule applies to the
Company or the Bank. In May 2016, bank regulators issued a proposed rule that would implement the NSFR by requiring certain U.S.
banking organizations to ensure they have access to stable funding over a one-year time horizon. The proposed rule has an effective
date of January 1, 2018 and would not apply to U.S. banking organizations with less than $50 billion in total consolidated assets such
as the Company and the Bank.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take “prompt corrective action” to
resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution
becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the
regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is
entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s
assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank
regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to
submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior
Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled
institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting
shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such
bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider, among other
things, the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served and various competitive factors.
Control Acquisitions. The Change in Bank Control Act (“CBCA”) prohibits a person or group of persons from acquiring
“control” of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of
a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would,
under the circumstances set forth in the presumption, constitute acquisition of control of the Company.
In addition, a person may not acquire 25% (5% in the case of an acquiror that is a bank holding company) or more of a bank
holding company’s or bank’s voting securities, or otherwise obtain control or a controlling influence over a bank holding company or
bank without the approval of the Federal Reserve Board. In 2008, the Federal Reserve Board issued a policy statement on equity
investments in bank holding companies and banks, which allows the Federal Reserve Board to generally be able to conclude that an
entity’s investment is not “controlling” if the entity does not own in excess of 15% of the voting power and 33% of the total equity of
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the bank holding company or bank. Depending on the nature of the overall investment and the capital structure of the banking
organization, the Federal Reserve Board will permit, based on the policy statement, noncontrolling investments in the form of voting
and nonvoting shares that represent in the aggregate (1) less than one-third of the total equity of the banking organization (and less
than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and
(2) less than 15% of any class of voting securities of the banking organization.
The Volcker Rule. The Volcker Rule under the Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary
trading and investing in and sponsoring certain hedge funds and private equity funds. Since neither the Company nor the Bank
engages in the types of trading or investing covered by the Volcker Rule, the Volcker Rule does not currently have any effect on the
operations of the Company or the Bank.
The Bank
The Bank is a Texas-chartered banking association, the deposits of which are insured by the DIF of the FDIC. The Bank is not a
member of the Federal Reserve System; therefore, the Bank is subject to supervision and regulation by the FDIC and the Texas
Department of Banking. Such supervision and regulation subject the Bank to special restrictions, requirements, potential enforcement
actions and periodic examination by the FDIC and the Texas Department of Banking. Because the Federal Reserve Board regulates
the Company, the Federal Reserve Board also has supervisory authority which affects the Bank. Further, because the Bank had total
assets of over $10 billion as of December 31, 2016, the Bank is subject to supervision and regulation by the Consumer Financial
Protection Bureau (“CFPB”). The CFPB is responsible for implementing, examining and enforcing compliance with federal consumer
protection laws.
Equivalence to National Bank Powers. The Texas Constitution, as amended in 1986, provides that a Texas-chartered bank has
the same rights and privileges that are or may be granted to national banks domiciled in Texas. To the extent that the Texas laws and
regulations may have allowed state-chartered banks to engage in a broader range of activities than national banks, the Federal Deposit
Insurance Corporation Improvement Act (“FDICIA”) has operated to limit this authority. FDICIA provides that no state bank or
subsidiary thereof may engage as principal in any activity not permitted for national banks, unless the institution complies with
applicable capital requirements and the FDIC determines that the activity poses no significant risk to the DIF. In general, statutory
restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions.
Financial Modernization. Under the Gramm-Leach-Bliley Act, a national bank may establish a financial subsidiary and engage,
subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting as principal, insurance
company portfolio investment, real estate development, real estate investment, annuity issuance and merchant banking activities. To
do so, a bank must be well capitalized, well managed and have a CRA rating of satisfactory or better. Subsidiary banks of a financial
holding company or national banks with financial subsidiaries must remain well capitalized and well managed in order to continue to
engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the
financial-in-nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is
engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a
CRA rating of satisfactory or better.
Although the powers of state chartered banks are not specifically addressed in the Gramm-Leach-Bliley Act, Texas-chartered
banks such as the Bank, will have the same if not greater powers as national banks through the parity provision contained in the Texas
Constitution.
Branching. Pursuant to the Dodd-Frank Act, banks are permitted to engage in de novo interstate branching if the laws of the
state where the new branch is to be established would permit the establishment of the branch if it were chartered by such state, subject
to applicable regulatory review and approval requirements. The Dodd-Frank Act also created certain regulatory requirements for
interstate mergers and acquisitions, including that the acquiring bank must be well capitalized and well managed. Texas law provides
that a Texas-chartered bank can establish a branch anywhere in Texas provided that the branch is approved in advance by the Texas
Department of Banking. The branch must also be approved by the FDIC, which considers a number of factors, including financial
history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate
powers.
Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its nonbanking affiliates, including
the Company, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such
transactions to 10% of the Bank’s capital stock and surplus and requires that such transactions be secured by designated amounts of
specified collateral. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the
Company or its subsidiaries. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate
transactions within a banking organization.
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Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain
transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those
prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The Federal Reserve Board has also
issued Regulation W which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive
guidance with respect to affiliate transactions.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred
to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries
and holding companies. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by the Bank have provided a substantial
part of the Company’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to the Company
will continue to be the Company’s principal source of operating funds. Capital adequacy requirements serve to limit the amount of
dividends that may be paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will
be “undercapitalized.” The FDIC may declare a dividend payment to be unsafe and unsound even though the Bank would continue to
meet its capital requirements after the dividend. Because the Company is a legal entity separate and distinct from its subsidiaries, its
right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to
the prior claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of an insured depository institution, the
claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any
obligation of the institution to its shareholders, including any depository institution holding company (such as the Company) or any
shareholder or creditor thereof.
Consumer Financial Protection. The Bank is subject to a number of federal and state consumer protection laws that extensively
govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the
Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home
Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the
Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding
unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and
terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit
report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Bank’s ability to
raise interest rates and subject the Bank to substantial regulatory oversight. Violations of applicable consumer protection laws can
result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees.
Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer
protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the
state and local attorneys general in each jurisdiction in which the Bank operates and civil money penalties. Failure to comply with
consumer protection requirements may also result in the Bank’s failure to obtain any required bank regulatory approval for merger or
acquisition transactions the Bank may wish to pursue or its prohibition from engaging in such transactions even if approval is not
required.
The Dodd-Frank Act established the CFPB, which has supervisory authority over depository institutions with total assets of $10
billion or greater. The CFPB focuses its supervision and regulatory efforts on (1) risks to consumers and compliance with the federal
consumer financial laws when it evaluates the policies and practices of a financial institution; (2) the markets in which firms operate
and risks to consumers posed by activities in those markets; (3) depository institutions that offer a wide variety of consumer financial
products and services; (4) certain depository institutions with a more specialized focus; and (5) non-depository companies that offer
one or more consumer financial products or services.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among
other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those
that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take
unreasonable advantage of a consumer’s (1) lack of financial savvy, (2) inability to protect himself in the selection or use of consumer
financial products or services or (3) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB can issue
cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil
action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. The CFPB has
examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates.
Examinations. The FDIC periodically examines and evaluates state non-member banks. The Texas Department of Banking also
conducts examinations of state banks, but may accept the results of a federal examination in lieu of conducting an independent
examination. In addition, the FDIC and Texas Department of Banking may elect to conduct a joint examination. Further, because the
Bank has total assets of over $10 billion as of December 31, 2016, the CFPB has examination authority with respect to the Bank’s
compliance with federal consumer protection laws. Compliance with consumer protection laws will be considered when banking
regulators are asked to approve a proposed transaction.
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Capital Adequacy Requirements. The FDIC has adopted regulations establishing minimum requirements for the capital
adequacy of insured institutions. The FDIC may establish higher minimum requirements if, for example, a bank has previously
received special attention or has a high susceptibility to interest rate risk.
The FDIC’s risk-based capital guidelines generally require state banks to have a minimum ratio of CET1 to risk-weighted assets
of 4.5%, Tier 1 capital to total risk-weighted assets of 6.0% and a ratio of total capital to total risk-weighted assets of 8.0%. The
capital categories have the same definitions for the Bank as for the Company. As of December 31, 2016, the Bank’s ratio of CET1 to
risk-weighted assets was 14.35%, Tier 1 capital to total risk-weighted assets was 14.35% and its ratio of total capital to total risk-
weighted assets was 15.07%.
The FDIC’s leverage guidelines require state banks to maintain Tier 1 capital of no less than 4.0% of average total assets. The
Texas Department of Banking has issued a policy which generally requires state chartered banks to maintain a leverage ratio (defined
in accordance with federal capital guidelines) of 5.0%. As of December 31, 2016, the Bank’s ratio of Tier 1 capital to average total
assets (leverage ratio) was 8.60%.
Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take “prompt corrective action”
with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are
“well-capitalized,” “adequately capitalized,” “under capitalized,” “significantly under capitalized” and “critically under capitalized.”
A bank is “well capitalized” if it has a total risk-based capital ratio of 10.0% or higher; a CET1 capital ratio of 6.5% or
higher; a Tier 1 risk-based capital ratio of 8.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any
written agreement, order or directive requiring it to maintain a specific capital level for any capital measure.
A bank is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or higher; a CET1 capital ratio of 4.5%
or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 4.0% or higher; and does not meet the
criteria for a well capitalized bank.
A bank is “under capitalized” if it has a total risk-based capital ratio of less than 8.0%; a CET1 capital ratio less than
4.5%; a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%.
A bank is “significantly under capitalized” if it has a total risk-based capital ratio of less than 6.0%; a CET1 capital ratio
less than 3.0%; a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%.
A bank is “critically under capitalized” if it has tangible equity equal to or less than 2.0% of average quarterly tangible
assets.
At December 31, 2016, the Bank was classified as “well-capitalized” for purposes of the FDIC’s prompt corrective action
regulations in effect as of such date.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad
restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and
expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital
distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
As an institution’s capital decreases, the FDIC’s enforcement powers become more severe. A significantly undercapitalized
institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of
management and other restrictions. The FDIC has only very limited discretion in dealing with a critically undercapitalized institution
and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative
actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a
hearing in the event the institution has no tangible capital.
Deposit Insurance Assessments. Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF, and
the Bank must pay deposit insurance assessments to the FDIC for such deposit insurance protection. A depository institution’s DIF
assessment is calculated by multiplying its assessment rate by the assessment base, which is defined as the average consolidated total
assets less the average tangible equity of the depository institution. The initial base assessment rate is based on its capital level and
CAMELS ratings, certain financial measures to assess an institution’s ability to withstand asset related stress and funding related
stress and, in some cases, additional discretionary adjustments by the FDIC to reflect additional risk factors.
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The FDIC’s current DIF restoration plan is designed to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020,
as required by the Dodd-Frank Act. At least semi-annually, the FDIC updates its loss and income projections for the fund and, if
needed, increases or decreases assessment rates, following notice-and-comment rulemaking, if required.
In August 2016, the FDIC announced that the DIF reserve ratio had surpassed 1.15% as of June 30, 2016. As a result, beginning
in the third quarter of 2016, the initial assessment ranges for all institutions were adjusted downward such that the initial base deposit
insurance assessment rate ranges from three to 30 basis points on an annualized basis (basis points representing cents per $100 of
assessable assets). After the effect of potential base-rate adjustments, the total base assessment rate could range from 1.5 to 40 basis
points on an annualized basis.
Interchange Fees. Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve Board adopted rules establishing
standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are
“reasonable and proportional” to the costs incurred by issuers for processing such transactions. Interchange fees, or “swipe” fees, are
charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment transactions. Federal Reserve
Board rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible
interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of
the transaction. An upward adjustment of no more than 1 cent to an issuer’s debit card interchange fee is allowed if the card issuer
develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards. The Federal
Reserve Board also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing
transactions on each debit or prepaid product.
Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the FDIC, have
promulgated guidance governing financial institutions with concentrations in commercial real estate lending, which was re-
emphasized in December 2015. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total
reported loans for construction, land development and other land represent 100% or more of total capital or (2) total reported loans
secured by multifamily and non-farm residential properties and loans for construction, land development and other land represent
300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior
36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ
heightened risk management practices that address the following key elements: including board and management oversight and
strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market
analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate
lending.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (“CRA”) and the regulations issued thereunder are
intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods,
consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record
in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to
acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform, Recovery, and Enforcement Act
(“FIRREA”) requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank
holding company, the CRA performance records of the banks involved in the transaction are reviewed in connection with the filing of
an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction.
Anti-Money Laundering and Anti-Terrorism Legislation. A major focus of governmental policy on financial institutions in
recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA
Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant
new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the
United States. The United States Treasury Department has issued and, in some cases, proposed a number of regulations that apply
various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to
maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to
verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions
that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial
institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of
the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with
designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by
the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take
many different forms. Generally, however, they contain one or more of the following elements: (1) restrictions on trade with or
investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country
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and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-
related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the government or specially designated
nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including
property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out,
withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have
serious legal and reputational consequences.
Privacy. In addition to expanding the activities in which banks and bank holding companies may engage, the Gramm-Leach-
Bliley Act also imposed requirements on financial institutions with respect to customer privacy. The Gramm-Leach-Bliley Act
generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the
opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy
policies to customers annually. Financial institutions, however, are required to comply with state law if it is more protective of
customer privacy than the Gramm-Leach-Bliley Act.
Incentive Compensation. In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive final guidance on
incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not
undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all
employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based
upon the key principles that a banking organization’s incentive compensation arrangements should (1) provide incentives that do not
encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (2) be compatible with effective
internal controls and risk management and (3) be supported by strong corporate governance, including active and effective oversight
by the organization’s Board of Directors.
These three principles are incorporated into the proposed revised rules on incentive-based payment arrangements at specified
covered institutions released in May 2016 by a number of federal agencies, including the Federal Reserve Board, FDIC and SEC. The
proposed revised rules would establish general qualitative requirements applicable to all covered institutions, including the Company
and the Bank, that have at least $1 billion in total assets, which would include (1) prohibiting incentive arrangements that encourage
inappropriate risks by providing excessive compensation; (2) prohibiting incentive arrangements that encourage inappropriate risks
that could lead to a material financial loss; (3) establishing requirements for performance measures to appropriately balance risk and
reward; (4) requiring Board of Director oversight of incentive arrangements; and (5) mandating appropriate record-keeping. Under the
proposed rule, larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional
requirements.
The Federal Reserve Board reviews, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews are
tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive
compensation arrangements. The findings of this supervisory initiative will be included in reports of examination. Deficiencies will be
incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other
actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-
management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking
prompt and effective measures to correct the deficiencies.
Legislative and Regulatory Initiatives
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by
regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and
depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change
banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among
banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation
will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of
operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have
a material effect on the Company’s business, financial condition and results of operations. In addition, the recent change in federal
administration in the United States, has added additional uncertainty to the implementation, scope and timing of regulatory reforms.
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on
the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to
affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank
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borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to
influence overall growth and distribution of bank loans, investments and deposits; and their use may affect interest rates charged on
loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are
expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and
earnings of the Company and its subsidiaries cannot be predicted.
ITEM 1A. RISK FACTORS
An investment in the Company’s common stock involves risks. The following is a description of the material risks and
uncertainties that the Company believes affect its business and an investment in the common stock. Additional risks and uncertainties
that the Company is unaware of, or that it currently deems immaterial, also may become important factors that affect the Company
and its business. If any of the risks described in this Annual Report on Form 10-K were to occur, the Company’s financial condition,
results of operations and cash flows could be materially and adversely affected. If this were to happen, the value of the common stock
could decline significantly and all or part of an investment could be lost.
Risks Associated with the Company’s Business
If the Company is not able to continue its historical levels of growth, it may not be able to maintain its historical earnings trends.
To achieve its past levels of growth, the Company has focused on both internal growth and acquisitions. The Company may not
be able to sustain its historical rate of growth or may not be able to grow at all. More specifically, the Company may not be able to
obtain the financing necessary to fund additional growth and may not be able to find suitable acquisition candidates. Various factors,
such as economic conditions, competition and heightened regulatory scrutiny, may impede or prohibit the opening of new banking
centers and the completion of acquisitions. Further, the Company may be unable to attract and retain experienced bankers, which
could adversely affect its internal growth. If the Company is not able to continue its historical levels of growth, it may not be able to
maintain its historical earnings trends.
If the Company is unable to manage its growth effectively, its operations could be negatively affected.
Companies that experience rapid growth face various risks and difficulties, including:
finding suitable markets for expansion;
finding suitable candidates for acquisition;
attracting funding to support additional growth;
maintaining asset quality;
attracting and retaining qualified management; and
maintaining adequate regulatory capital.
In addition, in order to manage its growth and maintain adequate information and reporting systems within its organization, the
Company must identify, hire and retain additional qualified associates, particularly in the accounting and operational areas of its
business.
If the Company does not manage its growth effectively, its business, financial condition, results of operations and future
prospects could be negatively affected, and the Company may not be able to continue to implement its business strategy and
successfully conduct its operations.
The Company’s profitability depends significantly on local economic conditions.
The Company’s success depends primarily on the general economic conditions of the primary markets in Texas and Oklahoma
in which it operates and where its loans are concentrated. The local economic conditions in Texas and Oklahoma have a significant
impact on the Company’s commercial, real estate and construction, land development and other land loans; the ability of its borrowers
to repay their loans; and the value of the collateral securing these loans. Accordingly, if the population or income growth in the
Company’s market areas is slower than projected, income levels, deposits and housing starts could be adversely affected and could
result in a reduction of the Company’s expansion, growth and profitability. In addition, due to the large number of oil and gas
companies in the Company’s market areas, the volatility in oil prices may negatively impact economic conditions in these areas. If the
Company’s market areas experience a downturn or a recession for a prolonged period of time, the Company could experience
13
significant increases in nonperforming loans, which could lead to operating losses, impaired liquidity and eroding capital. A
significant decline in general economic conditions, caused by inflation, a decline in commodity prices, recession, acts of terrorism,
outbreaks of hostilities or other international or domestic calamities, unemployment or other factors could impact these local economic
conditions and could negatively affect the Company’s financial condition, results of operations and cash flows.
The Company’s business is subject to interest rate risk, and fluctuations in interest rates may adversely affect its financial
condition and results of operations.
The majority of the Company’s assets are monetary in nature, and, as a result, the Company is subject to significant risk from
changes in interest rates. Changes in interest rates can impact the Company’s net interest income as well as the valuation of its assets
and liabilities. The Company’s earnings are significantly dependent on its net interest income. Net interest income is the difference
between the interest income earned on loans, investments and other interest-earning assets and the interest expense paid on deposits,
borrowings and other interest-bearing liabilities.
Changes in monetary policy, including changes in interest rates, could influence the interest the Company receives on loans and
securities and the amount of interest it pays on deposits and borrowings, and could also affect (1) the Company’s ability to originate
loans and obtain deposits, (2) the fair value of the Company’s financial assets and liabilities and (3) the average duration of the
Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate
than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be
adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments decrease
more quickly than the interest rates paid on deposits and other borrowings. Further, the Company’s assets and liabilities may react
differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity
characteristics of the assets and liabilities. Any substantial, unexpected, prolonged change in market interest rates could have a
material adverse effect on the Company’s business, financial condition and results of operations.
If the Company is unable to identify and acquire other financial institutions and successfully integrate its acquired businesses, its
business and earnings may be negatively affected.
The market for acquisitions remains highly competitive, and the Company may be unable to find acquisition candidates in the
future that fit its acquisition and growth strategy. To the extent that the Company is unable to find suitable acquisition candidates, an
important component of its growth strategy may be lost.
Acquisitions of financial institutions involve operational risks and uncertainties and acquired companies may have unforeseen
liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could
negatively affect the Company’s organization. The Company may not be able to complete future acquisitions; and, if completed, the
Company may not be able to successfully integrate the operations, management, products and services of the entities that it acquires
and eliminate redundancies. The integration process could result in the loss of key employees or disruption of the combined entity’s
ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s ability to
maintain relationships with customers and employees or achieve the anticipated benefits of the transaction. The integration process
may also require significant time and attention from the Company’s management that they would otherwise direct at servicing existing
business and developing new business. The Company’s inability to find suitable acquisition candidates or failure to successfully
integrate the entities it acquires into its existing operations may increase its operating costs significantly and adversely affect its
business and earnings.
The Company’s dependence on loans secured by real estate subjects it to risks relating to fluctuations in the real estate market that
could adversely affect its financial condition, results of operations and cash flows.
Approximately 79.2% of the Company’s total loans as of December 31, 2016 consisted of loans included in the real estate loan
portfolio, with 37.9% in commercial real estate (including farmland and multifamily residential), 28.2% in residential real estate
(including home equity) and 13.1% in construction, land development and other land loans. The real estate collateral in each case
provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the
credit is extended. A weakening of the real estate market in the Company’s primary market areas could have an adverse effect on the
demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the
loans and the value of real estate owned by the Company. If real estate values decline, it is also more likely that the Company would
be required to increase its allowance for credit losses, which could adversely affect its financial condition, results of operations and
cash flows.
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The Company’s commercial real estate and commercial loans expose it to increased credit risks, and these risks will increase if the
Company succeeds in increasing these types of loans.
The Company, while maintaining its conservative approach to lending, has emphasized both new and existing loan products,
focusing on managing its commercial real estate (including farmland and multifamily residential) and commercial loan portfolios, and
intends to continue to increase its lending activities and acquire loans in possible future acquisitions. As a result, commercial real
estate and commercial loans as a proportion of its portfolio could increase. As of December 31, 2016, commercial real estate
(including farmland and multifamily residential) and commercial loans totaled $5.19 billion. In general, commercial real estate loans
and commercial loans yield higher returns and often generate a deposit relationship, but also pose greater credit risks than do owner-
occupied residential real estate loans. These types of loans are also typically larger than residential real estate loans. Accordingly, the
deterioration of one or several of these loans could cause a significant increase in nonperforming loans, which could result in a loss of
earnings from these loans and an increase in the provision for credit losses and net charge-offs.
The Company makes both secured and some unsecured commercial loans. Unsecured loans generally involve a higher degree of
risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’
businesses. Secured commercial loans are generally collateralized by accounts receivable, inventory, equipment or other assets owned
by the borrower and include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult
to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed. Further,
commercial loans generally will be serviced primarily from the operation of the business, which may not be successful, while
commercial real estate loans generally will be serviced from income on the properties securing the loans. As the Company’s various
commercial loan portfolios increase, the corresponding risks and potential for losses from these loans will also increase.
The Company’s allowance for credit losses may not be sufficient to cover actual credit losses, which could adversely affect its
earnings.
As a lender, the Company is exposed to the risk that its loan customers may not repay their loans according to the terms of these
loans and the collateral securing the payment of these loans may be insufficient to fully compensate the Company for the outstanding
balance of the loan plus the costs to dispose of the collateral. The Company maintains an allowance for credit losses in an attempt to
cover estimated losses inherent in its loan portfolio. Additional credit losses will likely occur in the future and may occur at a rate
greater than the Company has experienced to date. The determination of the appropriate level of the allowance inherently involves a
high degree of subjectivity and requires the Company to make significant estimates of current credit risks, future trends and general
economic conditions, all of which may undergo material changes. If the Company’s assumptions prove to be incorrect or if it
experiences significant credit losses in future periods, its current allowance may not be sufficient to cover actual credit losses and
adjustments may be necessary to allow for different economic conditions or adverse developments in its loan portfolio. A material
addition to the allowance could cause net income, and possibly capital, to decrease.
In addition, federal and state regulators periodically review the Company’s allowance for credit losses and may require the
Company to increase its provision for credit losses or recognize further charge-offs, based on judgments different than those of the
Company’s management. An increase in the Company’s allowance for credit losses or charge-offs as required by these regulatory
agencies could have a material adverse effect on the Company’s operating results and financial condition.
The small to medium-sized businesses that the Company lends to may have fewer resources to weather a downturn in the economy,
which could materially harm the Company’s operating results.
The Company makes loans to privately-owned businesses, many of which are considered to be small to medium-sized
businesses. Small to medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to
economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in
operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a
small to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of
persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business
and its ability to repay a loan. Economic downturns, a sustained decline in commodity prices and other events that negatively impact
the Company’s market areas could cause the Company to incur substantial credit losses that could negatively affect the Company’s
results of operations and financial condition.
Failure to compete effectively for customers could adversely affect the Company’s growth and profitability, which could have a
material adverse effect on the Company’s business, financial condition and results of operations.
The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which
are larger and may have more financial resources. These competitors primarily include national, regional, and community banks
within the various markets where the Company operates. The Company also faces competition from many other types of financial
institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies and other financial
15
intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and
technological changes and continued consolidation. Also, technology and other changes have lowered barriers to entry and made it
possible for non-banks to offer products and services functionally equivalent to those provided by banks. The process of eliminating
banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits
and the related income generated from those deposits. Further, many of the Company’s competitors have fewer regulatory constraints
and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and,
as a result, may offer a broader range of products and services as well as better pricing for those products and services than the
Company can. Failure to compete effectively for deposit, loan and other banking customers in the Company’s market areas could
adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s
business, financial condition and results of operations.
Liquidity risk could impair the Company’s ability to fund operations and jeopardize its financial condition.
Liquidity is essential to the Company’s business. An inability to raise funds through deposits, borrowings, the sale of loans and
other sources could have a substantial negative effect on its liquidity. The Company’s access to funding sources in amounts adequate
to finance its activities or on terms which are acceptable to it could be impaired by factors that affect the Company specifically or the
financial services industry or economy in general. Factors that could detrimentally impact the Company’s access to liquidity sources
include a decrease in the level of its business activity as a result of a downturn in the markets in which its loans are concentrated or
adverse regulatory action against it. The Company’s ability to borrow could also be impaired by factors that are not specific to it, such
as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in
light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.
If the goodwill that the Company recorded in connection with a business acquisition becomes impaired, it could require charges to
earnings.
Goodwill represents the amount by which the acquisition cost exceeds the fair value of net assets the Company acquired in the
purchase of another financial institution. The Company reviews goodwill for impairment at least annually, or more frequently if events
or changes in circumstances indicate the carrying value of the asset might be impaired.
The Company determines impairment by comparing the implied fair value of the reporting unit goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in the Company’s results of
operations in the periods in which they become known. At December 31, 2016, the Company’s goodwill totaled $1.90 billion.
Although the Company has not recorded any such impairment charges since it initially recorded the goodwill, the Company’s future
evaluations of goodwill could result in findings of impairment and related write-downs, which may have a material adverse effect on
its financial condition and results of operations.
The Company’s accounting estimates and risk management processes rely on analytical and forecasting models and tools.
The processes the Company uses to estimate its probable credit losses and to measure the fair value of financial instruments, as
well as the processes used to estimate the effects of changing interest rates and other market measures on the Company’s financial
condition and results of operations, depend upon the use of analytical and forecasting models and tools. These models and tools reflect
assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these
assumptions are accurate, the models and tools may prove to be inadequate or inaccurate because of other flaws in their design or their
implementation. Any such failure in the Company’s analytical or forecasting models and tools could have a material adverse effect on
the Company’s business, financial condition and results of operations.
The Company may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company
has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial
services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these
transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit
risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to
recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect
on the Company’s financial condition, results of operations and cash flows.
16
The Company may need to raise additional capital in the future and such capital may not be available when needed or at all.
The Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to
meet regulatory capital requirements or its commitments and business needs. In addition, the Company may elect to raise additional
capital to support its business or to finance acquisitions, if any. If needed, the Company’s ability to raise additional capital will depend
on many things, including conditions in the capital markets at that time, which are outside its control, and its financial performance.
Such capital may not be available to the Company on acceptable terms or at all. Any occurrence that may limit the Company’s
access to the capital markets, such as a decline in the confidence of investors, depositors of Prosperity Bank or counterparties
participating in the capital markets, may adversely affect the Company’s capital costs and its ability to raise capital and, in turn, its
liquidity. Moreover, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are
also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on
acceptable terms when needed could have a material adverse effect on the Company’s business, financial condition and results of
operations.
New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement or acquire new lines of business or offer new products and services within
existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the
markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company
may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new
products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as
compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation
of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have
a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in
the development and implementation of new lines of business or new products or services could have a material adverse effect on the
Company’s business, financial condition and results of operations.
An interruption in or breach in security of the Company’s information systems may result in a loss of customer business and have
an adverse effect on the Company’s results of operations, financial condition and cash flows.
The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or
breach in security of these systems, whether caused by physical damage, hackers, viruses or other malware, could jeopardize the
security of information stored in and transmitted through the Company’s computer systems and network infrastructure as well as result
in failures or disruptions in the Company’s customer relationship management, general ledger, deposits, servicing or loan origination
systems. While the Company maintains specific “cyber” insurance coverage, which would apply in the event of various breach
scenarios, the amount of coverage may not be adequate in any particular case. In addition, cyber threat scenarios are inherently
difficult to predict and can take many forms, some of which may not be covered under the Company’s cyber insurance coverage.
Although the Company, with the help of third-party service providers, has and intends to continue to implement security technology
and operational procedures to prevent such damage, these security measures may not entirely mitigate these risks. In addition,
advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or
breach of the algorithms the Company and its third-party service providers use to protect client transaction data. The occurrence of
any such failures, interruptions or security breaches could damage the Company’s reputation, result in a loss of customer business,
subject the Company to additional regulatory scrutiny or expose the Company to civil litigation and possible financial liability, any of
which could have a material adverse effect on the Company’s results of operations, financial condition and cash flows.
The Company is subject to certain risks in connection with its use of technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven
products and services. The Company’s future success depends in part upon its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands for convenience as well as create additional
efficiencies in its operations. Many of the Company’s competitors have substantially greater resources to invest in technological
improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful
in marketing these products and services to its customers, which may negatively affect the Company’s results of operations, financial
condition and cash flows. Further, as technology advances, the ability to initiate transactions and access data has become more widely
distributed among mobile devices, personal computers, automated teller machines, remote deposit capture sites and similar access
points. These technological advances increase cybersecurity risk. While the Company maintains programs intended to prevent or limit
the effects of cybersecurity risk, there is no assurance that unauthorized transactions or unauthorized access to customer information
will not occur. The financial, reputational and regulatory impact of unauthorized transactions or unauthorized access to customer
information could be significant.
17
The Company’s operations rely on external vendors.
The Company relies on certain external vendors to provide products and services necessary to maintain its day-to-day
operations. These third parties provide key components of the Company’s business operations such as data processing, recording and
monitoring transactions, online banking interfaces and services, Internet connections and network access. While the Company has
selected these third-party vendors carefully, it does not control their actions. Any complications caused by these third parties,
including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or
higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor
performance of services, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise
conduct its business. Financial or operational difficulties of a third-party vendor could also hurt the Company’s operations if those
difficulties interfere with the vendor’s ability to provide services. Furthermore, the Company’s vendors could also be sources of
operational and information security risk, including from breakdowns or failures of their own systems or capacity constraints.
Replacing these third-party vendors could also create significant delay and expense. Problems caused by external vendors could be
disruptive to the Company’s operations, which could have a material adverse impact on the Company’s business and, in turn, the
Company’s financial condition and results of operations.
The Company’s business may be adversely affected by security breaches at third parties.
The Company’s customers interact with their own and other third-party systems, which pose operational risks to the Company.
The Company may be adversely affected by data breaches at retailers and other third parties who maintain data relating to the
Company’s customers that involve the theft of customer data, including the theft of customers’ debit card, credit card, wire transfer
and other identifying and/or access information used to make purchases or payments at such retailers and to other third parties.
Despite third-party security risks that are beyond the Company’s control, the Company offers its customers protection against fraud
and attendant losses for unauthorized use of debit and credit cards in order to stay competitive in the marketplace. Offering such
protection to customers exposes the Company to significant expenses and potential losses related to reimbursing the Company’s
customers for fraud losses, reissuing the compromised cards and increased monitoring for suspicious activity. In the event of a data
breach at one or more retailers of considerable magnitude, the Company’s business, financial condition and results of operations may
be adversely affected.
The Company is subject to claims and litigation pertaining to intellectual property.
Banking and other financial services companies, such as the Company, rely on technology companies to provide information
technology products and services necessary to support their day-to-day operations. Technology companies frequently enter into
litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding
companies seek to monetize patents they have purchased or otherwise obtained. Competitors of the Company’s vendors, or other
individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors. Such
claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The
plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential
or actual litigants, the Company may have to engage in protracted litigation. Such litigation is often expensive, time-consuming,
disruptive to the Company’s operations and distracting to management. If the Company is found to infringe one or more patents or
other intellectual property rights, it may be required to pay substantial damages or royalties to a third-party. In certain cases, the
Company may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that
such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the
Company’s operating expenses. If legal matters related to intellectual property claims were resolved against the Company or settled,
the Company could be required to make payments in amounts that could have a material adverse effect on its business, financial
condition and results of operations.
The Company is subject to claims and litigation pertaining to fiduciary responsibility.
From time to time, customers make claims and take legal action pertaining to the Company’s performance of its fiduciary
responsibilities. Whether customer claims and legal action related to the Company’s performance of its fiduciary responsibilities are
founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in
significant financial liability, adversely affect the market perception of the Company and its products and services and/or impact
customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on
the Company’s business, financial condition and results of operations.
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The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision.
The Company and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are
primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the Company’s
shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and
growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for
possible changes. Any change in applicable regulations or federal or state legislation could have a substantial impact on the Company,
the Bank and their respective operations.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes
in light of the performance of and government intervention in the financial services sector during the several years prior to the
implementation of such Act. Additional legislation and regulations or regulatory policies, including changes in interpretation or
implementation of statutes, regulations or policies, could significantly affect the Company’s powers, authority and operations, or the
powers, authority and operations of the Bank in substantial and unpredictable ways. Further, regulators have significant discretion and
power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the
performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power could have a negative
impact on the Company. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil
money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition
and results of operations.
The Company’s risk management framework may not be effective in identifying, managing or mitigating risks and/or losses to it.
The Company has implemented a risk management framework to identify and manage its risk exposure, which is reviewed and
overseen by the Company’s Risk Committee. This framework consists of various processes, systems and strategies, and is designed to
manage the types of risk to which the Company is subject, including, among others, credit, market, liquidity, operational, financial,
interest rate, legal and regulatory, compliance, strategic, reputation, fiduciary and general economic risks. The Company’s framework
also includes financial or other modeling methodologies, which involves management assumptions and judgment. In addition, under
this framework, the Company has developed a risk appetite statement to detail its risk tolerance levels at an enterprise-wide level. This
risk management framework may not be effective under all circumstances, and it may not adequately identify, manage or mitigate all
or any risk or loss to the Company. If this framework is not effective, the Company may be subject to potentially adverse regulatory
consequences and could suffer unexpected losses and its financial condition or results of operations could be materially adversely
affected.
The Company is subject to losses resulting from fraudulent and negligent acts on the part of loan applicants, correspondents or
other third parties.
The Company relies heavily upon information supplied by third parties, including the information contained in credit
applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in
deciding which loans the Company will originate, as well as the terms of those loans. If any of the information upon which the
Company relies is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding,
the value of the asset may be significantly lower than expected, or the Company may fund a loan that it would not have funded or on
terms it would not have extended. Whether a misrepresentation is made by the applicant or another third party, the Company generally
bears the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or
subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentations are often difficult to
locate, and it is often difficult to recover any of the monetary losses the Company may suffer.
The Company is subject to environmental liability risk associated with lending activities.
A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the
Company may foreclose on and take title to properties securing certain loans, and there is a risk that hazardous or toxic substances
could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as
well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may
materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future
laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to
environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any
foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation
costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the
Company’s financial condition and results of operations.
19
Risks Associated with the Company’s Common Stock
The Company’s corporate organizational documents and the provisions of Texas law to which it is subject may delay or prevent a
change in control of the Company that a shareholder may favor.
The Company’s amended and restated articles of incorporation and amended and restated bylaws contain various provisions
which may delay, discourage or prevent an attempted acquisition or change of control of the Company. These provisions include:
a Board of Directors classified into three classes of directors with the directors of each class having staggered three-year
terms;
a provision that any special meeting of the Company’s shareholders may be called only by the chairman of the board and
chief executive officer, the president, a majority of the Board of Directors or the holders of at least 50% of the Company’s
shares entitled to vote at the meeting;
a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for
shareholder proposals to be considered at an annual or special meeting of shareholders; and
a provision that denies shareholders the right to amend the Company’s bylaws.
The Company’s articles of incorporation provide for noncumulative voting for directors and authorize the Board of Directors to
issue shares of its preferred stock without shareholder approval and upon such terms as the Board of Directors may determine. The
issuance of the Company’s preferred stock could have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a controlling interest in the Company. In addition, certain provisions of Texas law,
including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders,
may delay, discourage or prevent an attempted acquisition or change in control of the Company.
There are restrictions on the Company’s ability to pay dividends.
Holders of the Company’s common stock are only entitled to receive such dividends as the Company’s Board of Directors may
declare out of funds legally available for such payments. Although the Company has historically declared cash dividends on its
common stock, it is not required to do so and there can be no assurance that the Company will pay dividends in the future. Any
declaration and payment of dividends on common stock will depend upon the Company’s earnings and financial condition, liquidity
and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt obligations
senior to the common stock and other factors deemed relevant by the Board of Directors.
The Company’s principal source of funds to pay dividends on the shares of common stock is cash dividends that the Company
receives from the Bank. Various banking laws applicable to the Bank limit the payment of dividends and other distributions by the
Bank to the Company, and may therefore limit the Company’s ability to pay dividends on its common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
As of December 31, 2016, the Company conducted business at 245 full-service banking centers. The Company’s principal
executive office is located at Prosperity Bank Plaza, 4295 San Felipe, in the Galleria area in Houston, Texas. The Company also owns
or leases other facilities in which its banking centers are located as listed below by geographical market area. The expiration dates of
the leases range from 2017 to 2040 and do not include renewal periods which may be available at the Company’s option.
20
The following table sets forth specific information regarding the banking centers located in each of the Company’s geographical
market areas at December 31, 2016:
Geographical Area
Bryan/College Station area
Houston area
Central Texas area
Dallas/Fort Worth area
East Texas area
West Texas area
South Texas area
Central Oklahoma area
Tulsa Oklahoma area
Number of
Banking Centers
Number of
Leased Banking
Centers
Deposits at
December 31, 2016
(dollars in thousands)
1,135,604
5,717,743
1,482,680
1,547,609
789,384
2,339,716
2,494,683
691,513
1,108,370
17,307,302
— $
13
3
9
—
6
3
1
2
37 $
16
65
29
36
22
34
29
6
8
245
ITEM 3.
LEGAL PROCEEDINGS
The Company and the Bank are defendants, from time to time, in legal actions arising from transactions conducted in the
ordinary course of business. The Company and the Bank believe, after consultations with legal counsel, that the ultimate liability, if
any, arising from such actions will not have a material adverse effect on their financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
None.
21
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Market Prices
The Company’s common stock is listed on the New York Stock Exchange under the symbol “PB.” As of February 23, 2017,
there were 69,478,062 shares outstanding and 3,287 shareholders of record. The number of beneficial owners is unknown to the
Company at this time.
The following table presents the high and low intra-day sales prices for the common stock as reported by the New York Stock
Exchange:
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
$
High
Low
73.68 $
56.27
54.57
47.50
52.81
45.94
43.28
33.57
High
Low
57.04 $
59.97
59.30
55.88
46.23
43.76
50.91
45.01
Dividends
Holders of common stock are entitled to receive dividends when, as and if declared by the Company’s Board of Directors out of
funds legally available therefor. Although the Company has declared dividends on its common stock since 1994, and paid quarterly
dividends aggregating $1.2400 per share for 2016 and $1.1175 per share for 2015, the Company could discontinue payment of
dividends in the future. Future dividends on the common stock will depend upon the Company’s earnings and financial condition,
liquidity and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt
obligations senior to the common stock and other factors deemed relevant by the Board of Directors of the Company.
As a holding company, the Company is ultimately dependent upon its subsidiaries to provide funding for its operating expenses,
debt service and dividends. Various banking laws applicable to the Bank limit the payment of dividends and other distributions by the
Bank to the Company, and may therefore limit the Company’s ability to pay dividends on its common stock. Regulatory authorities
could impose administratively stricter limitations on the ability of the Bank to pay dividends to the Company if such limits were
deemed appropriate to preserve certain capital adequacy requirements.
In addition, the Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy
in relation to the organization’s overall asset quality, level of current and prospective earnings and level, composition and quality of
capital. The guidance provides that the Company should inform and consult with the Federal Reserve Board prior to declaring and
paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to
the Company’s capital structure.
The cash dividends declared per share by quarter (and paid on the first business day of the subsequent quarter) for the
Company’s last two fiscal years were as follows:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
2016
2015
0.3400 $
0.3000
0.3000
0.3000
0.3000
0.2725
0.2725
0.2725
22
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2016, the Company had outstanding stock options granted under its 2004 stock award plan and restricted
stock issued under its 2004 and 2012 stock award plans, all of which were approved by the Company’s shareholders. The following
table provides information as of December 31, 2016 regarding the Company’s equity compensation plans under which the Company’s
equity securities are authorized for issuance:
Plan Category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
5,000 $
29.69
908,315 (1)
—
5,000 $
—
29.69
—
908,315
(1) All of these awards are available under the Company’s 2012 Stock Incentive Plan. The Company’s other stock award plans have
expired, and no new awards may be issued thereunder.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table details the Company's repurchases of shares of its common stock during the three months ended
December 31, 2016:
Period
October 1 - October 31, 2016
November 1 - November 30, 2016
December 1 - December 31, 2016
Total Number of
Shares Purchased
Weighted
Average Price
Paid per Share
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Program
Maximum
Number of
Shares That May
Yet Be Purchased
Under the Plan at
the End of the
Period (1)
— $
—
—
— $
—
—
—
—
—
—
—
—
2,290,745
2,290,745
2,290,745
Total
(1) On January 27, 2016, the Company announced a stock repurchase program that authorized the repurchase of up to 5%, or
approximately 3.54 million shares, of the Company's outstanding common stock over the next twelve months at the discretion of
management. Under the stock repurchase program, the Company could repurchase shares from time to time at prevailing
market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions. The
program expired in January 2017.
23
Performance Graph
The following Performance Graph compares the cumulative total shareholder return on the Company’s common stock for the
period beginning at the close of trading on December 31, 2011 to December 31, 2016, with the cumulative total return of the S&P 500
Total Return Index and the Nasdaq Bank Index for the same period. Dividend reinvestment has been assumed. The Performance
Graph assumes $100 invested on December 31, 2011 in the Company’s common stock, the S&P 500 Total Return Index and the
Nasdaq Bank Index. The historical stock price performance for the Company’s common stock shown on the graph below is not
necessarily indicative of future stock performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Prosperity Bancshares, Inc., the S&P 500 Index, and the NASDAQ Bank Index
*
$100 invested on 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
12/11
12/12
12/13
12/14
12/15
12/16
Prosperity Bancshares, Inc.
S&P 500
NASDAQ Bank
$ 100.00 $ 106.03 $ 162.67 $ 144.44 $ 127.54 $ 195.79
198.18
100.00 116.00
251.93
100.00 115.47
177.01
183.74
153.58
163.03
174.60
170.37
Copyright© 2017 Standard & Poor's, a division of S&P Global. All rights reserved.
24
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for, and as of the end of, each of the years in the five-year
period ended December 31, 2016, is derived from and should be read in conjunction with the Company’s consolidated financial
statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income before taxes
Provision for income taxes
Net income
Per Share Data:
Basic earnings per share
Diluted earnings per share
Book value per share
Cash dividends declared per share
Dividend payout ratio
Weighted average shares outstanding (basic)
Weighted average shares outstanding (diluted)
Shares outstanding at end of period
Balance Sheet Data (at period end):
Total assets
Securities
Loans
Allowance for credit losses
Total goodwill and intangibles
Other real estate owned
Total deposits
Federal funds purchased and other borrowings
Junior subordinated debentures
Total shareholders’ equity
2016(1)
As of and for the Years Ended December 31,
2013(1)
2014(1)
2015
(In thousands, except per share data)
2012(1)
$
$
$
675,779 $
43,159
632,620
24,000
608,620
118,425
318,387
408,658
134,192
274,466 $
3.94 $
3.94
52.41
1.2400
31.42 %
69,674
69,680
69,491
669,701 $
39,191
630,510
7,560
622,950
120,781
313,536
430,195
143,549
286,646 $
4.09 $
4.09
49.45
1.1175
27.30 %
70,033
70,049
70,022
714,795 $
43,641
671,154
18,275
652,879
120,832
327,962
445,749
148,308
297,441 $
539,297 $
40,471
498,826
17,240
481,586
95,427
247,196
329,817
108,419
221,398 $
419,842
39,136
380,706
6,100
374,606
75,535
198,457
251,684
83,783
167,901
4.32 $
4.32
46.50
0.9925
22.99 %
68,855
68,911
69,780
3.66 $
3.65
42.19
0.8850
24.41 %
60,421
60,578
66,048
3.24
3.23
37.02
0.8000
24.74 %
51,794
51,941
56,447
81,384
85,326
$ 22,331,072 $ 22,037,216 $ 21,507,733 $ 18,642,028 $ 14,583,573
9,726,086 9,502,427 9,045,776 8,224,448 7,442,065
9,622,060 9,438,589 9,244,183 7,775,221 5,179,940
52,564
1,946,629 1,918,244 1,933,138 1,713,569 1,243,321
7,234
17,307,302 17,681,119 17,693,158 15,291,271 11,641,844
256,753
85,055
3,642,311 3,462,910 3,244,826 2,786,818 2,089,389
990,781
—
491,399
—
10,689
124,231
8,724
167,531
15,463
67,282
80,762
2,963
3,237
7,299
(Table continued on the next page)
25
Average Balance Sheet Data:
Total assets
Securities
Loans
Allowance for credit losses
Total goodwill and intangibles
Total deposits
Junior subordinated debentures
Total shareholders’ equity
Performance Ratios:
Return on average assets
Return on average common equity
Net interest margin (tax equivalent)
Efficiency ratio(2)
Asset Quality Ratios(3):
Nonperforming assets to total loans and other real
estate
Net charge-offs to average loans
Allowance for credit losses to total loans
Allowance for credit losses to nonperforming loans(4)
Capital Ratios(3):
Leverage ratio
Average shareholders’ equity to average total assets
CET1 capital ratio(5)
Tier 1 risk-based capital ratio
Total risk-based capital ratio
2016(1)
As of and for the Years Ended December 31,
2013(1)
2014(1)
2015
2012(1)
(In thousands, except per share data)
84,189
$ 21,880,762 $ 21,618,604 $ 20,596,929 $ 16,255,914 $ 12,432,666
9,401,669 9,541,443 8,723,011 7,932,782 6,364,917
9,629,714 9,200,765 8,988,069 6,202,897 4,514,171
51,770
1,947,979 1,934,099 1,853,350 1,395,323 1,078,804
17,348,387 17,157,864 16,690,344 12,764,302 9,748,843
85,055
3,566,931 3,368,788 3,080,324 2,378,234 1,844,334
29,443
80,894
154,902
2,081
91,584
57,001
72,714
1.25 %
7.69 %
3.35 %
42.50 %
1.33 %
8.51 %
3.38 %
41.87 %
0.50 %
0.21 %
0.89 %
261.8 %
8.68 % (6)
16.30 %
14.48 % (6)
14.48 % (6)
15.20 % (6)
0.46 %
0.08 %
0.86 %
201.8 %
7.97 % (6)
15.58 %
13.55 % (6)
13.55 % (6)
14.25 % (6)
1.44 %
9.66 %
3.80 %
41.81 %
0.40 %
0.05 %
0.87 %
240.3 %
7.69 %
14.96 %
N/A
13.80 %
14.56 %
1.36 %
9.31 %
3.58 %
41.60 %
0.29 %
0.04 %
0.87 %
443.3 %
7.42 %
14.63 %
N/A
13.27 %
14.02 %
1.35 %
9.10 %
3.53 %
43.48 %
0.25 %
0.11 %
1.01 %
920.1 %
7.10 %
14.83 %
N/A
14.40 %
15.22 %
(1) The Company completed the acquisition of Tradition Bancshares, Inc. on January 1, 2016. The Company completed one
acquisition during the twelve-month period ended December 31, 2014, three acquisitions during the twelve-month period ended
December 31, 2013 and four acquisitions during the twelve-month period ended December 31, 2012.
(2) Represents a non-GAAP financial measure. Calculated by dividing total noninterest expense, excluding credit loss provision, 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. See page 35 for calculation methodology and details.
(3) At period end, except for net charge-offs to average loans and average shareholders’ equity to average total assets, which is for
periods ended at such dates.
(4) Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and any other loan management
deems to be nonperforming.
(5) CET1 capital ratio is required under the Basel III Capital Rules effective January 1, 2015.
(6) Calculated pursuant to the phase-in provisions of the Basel III Capital Rules.
26
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Special Cautionary Notice Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in this Annual Report on Form 10-K that are not statements of
historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These 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, but are not limited to:
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, including commodity prices, 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 and tools 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;
27
the failure of the Company’s enterprise risk management framework to identify or address risks adequately;
a failure in or breach of operational or security systems of the Company’s infrastructure, or those of its third-party vendors
and other service providers, including as a result of cyber attacks;
potential risk of environmental liability associated with lending activities;
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 described in this Annual Report on Form 10-K or in the Company’s other 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 that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and
actual results can be material. Therefore, the Company cautions against placing undue reliance on its forward-looking statements. The
forward-looking statements speak only as of the date the statements are made. 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 balance sheets and statements of income. This section should be read in conjunction with the Company’s consolidated
financial statements and accompanying notes and other detailed information appearing elsewhere in this Annual Report on
Form 10-K.
Overview
The Company generates the majority of its revenues from interest income on loans, service charges on customer accounts and
income from investment in securities. In 2016, the Company continued to benefit from additional products and services including trust
services, brokerage, mortgage lending, credit card and independent sales organization sponsorship operations. The revenues are
partially offset by interest expense paid on deposits and other borrowings and noninterest expenses such as administrative and
occupancy 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 assets. Net interest income is the
Company’s largest source of revenue. 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. The Company focuses on continual 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. The Company also intends to continue to seek expansion opportunities. During 2016, the Company
completed the acquisition of Tradition Bancshares, Inc. This acquisition added 7 banking centers after consolidation. During 2014, the
Company completed the acquisition of F&M Bancorporation Inc. This acquisition added 11 banking centers after consolidation.
Net income was $274.5 million, $286.6 million and $297.4 million for the years ended December 31, 2016, 2015 and 2014,
respectively, and diluted earnings per share were $3.94, $4.09 and $4.32, respectively, for these same periods. The change in net
income during 2016 was principally due to an increase in the provision for credit losses and the Tradition acquisition. The change in
net income during 2015 was principally due to a decrease in net interest income resulting from lower purchase accounting loan
discount accretion. The Company posted returns on average assets of 1.25%, 1.33% and 1.44% and returns on average common equity
of 7.69%, 8.51% and 9.66% for the years ended December 31, 2016, 2015 and 2014, respectively. The Company’s efficiency ratio
was 42.50% in 2016, 41.87% in 2015 and 41.81% in 2014. 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 assets).
Additionally, taxes are not part of this calculation.
28
Total assets at December 31, 2016 and 2015 were $22.33 billion and $22.04 billion, respectively. Total deposits at
December 31, 2016 and 2015 were $17.31 billion and $17.68 billion, respectively. Total loans were $9.62 billion at December 31,
2016, an increase of $183.5 million or 1.9% compared with $9.44 billion at December 31, 2015. At December 31, 2016, the Company
had $32.6 million in nonperforming loans, and its allowance for credit losses was $85.3 million compared with $40.3 million in
nonperforming loans and an allowance for credit losses of $81.4 million at December 31, 2015. Shareholders’ equity was $3.64 billion
and $3.46 billion at December 31, 2016 and 2015, respectively.
Recent Acquisition
Acquisition of Tradition Bancshares, Inc.—On January 1, 2016, the Company completed the acquisition of Tradition
Bancshares, Inc. (“Tradition”) and its wholly-owned subsidiary Tradition Bank headquartered in Houston, Texas. Tradition Bank
operated 7 banking offices in the Houston, Texas area, including its main office in Bellaire, 3 banking centers in Katy and 1 banking
center in The Woodlands.
As of December 31, 2015, Tradition, on a consolidated basis, reported total assets of $548.0 million, total loans of $253.3
million, total deposits of $488.9 million and shareholders’ equity of $43.1 million. Under the terms of the definitive agreement, the
Company issued 679,528 shares of its common stock plus $39.0 million in cash for all outstanding shares of Tradition capital stock,
for total merger consideration of $71.5 million, based on the Company’s closing stock price of $47.86. As of December 31, 2016, the
Company recognized goodwill of $32.0 million, which is calculated as the excess of both the consideration exchanged and liabilities
assumed compared with the fair value of the assets acquired. Additionally, the Company recognized $5.6 million of core deposit
intangibles.
On January 1, 2016, in connection with the acquisition of Tradition, the Company assumed $7.2 million in junior subordinated
debentures. During the second quarter of 2016, the Company redeemed all of the junior subordinated debentures. Accordingly, as of
December 31, 2016, the Company had no junior subordinated debentures outstanding.
Critical Accounting Policies
The Company’s significant accounting policies are integral to understanding the results reported. The Company’s accounting
policies are described in detail in Note 1 to the consolidated financial statements, appearing elsewhere is this Annual Report on
Form 10-K. 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. The Company’s allowance for credit losses consists of two elements: (1) specific valuation allowances
based on probable losses on impaired loans; and (2) 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. The allowance for acquired credit
losses is calculated as described under the heading “Accounting for Acquired Loans and the Allowance for Acquired Credit Losses”
below. 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 portfolio, 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. In making its evaluation, management considers factors such as historical loan loss experience, the
amount of nonperforming assets and related collateral, the volume, growth and composition of the portfolio, current economic
conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the 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. For further discussion of the methodology used in the determination of the allowance for credit losses, see
“Financial Condition—Allowance for Credit Losses” below and Note 1 to the consolidated financial statements.
Accounting for Acquired Loans and the Allowance for Acquired Credit Losses—The Company accounts for its acquisitions
using the acquisition method of accounting. Accordingly, the assets, including loans, and liabilities of the acquired entity were
recorded at their fair values at the acquisition date. No allowance for credit losses related to the acquired loans is recorded on the
acquisition date, as the fair value of the acquired loans incorporates assumptions regarding credit risk. These fair value estimates
associated with acquired loans, and based on a discounted cash flow model, include estimates related to market interest rates and
undiscounted projections of future cash flows that incorporate expectations of prepayments and the amount and timing of principal,
interest and other cash flows, as well as any shortfalls thereof.
29
At period-end after acquisition, the fair-valued acquired loans from each acquisition are reassessed to determine whether an
addition to the allowance for credit losses is appropriate due to further credit quality deterioration. For further discussion of the
methodology used in the determination of the allowance for credit losses for acquired loans, see “Financial Condition—Allowance for
Credit Losses” below. For further discussion of the Company’s acquisition and loan accounting, see Note 1 to the consolidated
financial statements.
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 the
Company’s reporting unit is below the carrying value of its equity. Under Accounting Standards Codification (“ASC”) topic 350-20,
“Intangibles—Goodwill and Other—Goodwill,” companies have 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 tools 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 December 31, 2016. Core deposit intangible assets that are
subject to amortization are being amortized on a non-pro rata basis over the years expected to be benefited, which the Company
believes is between ten and fifteen years. These core deposit 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, 2016, management does not believe any of its goodwill is impaired as of December 31, 2016,
because the fair value of the Company’s equity exceeded its carrying value. While the Company believes no impairment existed at
December 31, 2016, 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.
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.
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 (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. 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.
30
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 analytical tools 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.
Results of Operations
Net Interest Income
The Company’s operating results depend primarily on its net interest income, which is the difference between interest income
on interest-earning assets, including securities and loans, and interest expense incurred on interest-bearing liabilities, including
deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of earning assets and
liabilities, combine to affect 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.”
2016 versus 2015. Net interest income before the provision for credit losses for 2016 was $632.6 million compared with $630.5
million for 2015, an increase of $2.1 million or 0.3%. The increase in net interest income was primarily due to an increase in average
interest-earning assets of $254.7 million or 1.4%, partially offset by a decrease in purchase accounting loan discount accretion of
$13.2 million and a 3-basis-point increase in the average rate paid on interest-bearing liabilities. Interest income was $675.8 million in
2016, an increase of $6.1 million or 0.9% compared with 2015. Interest income on loans was $475.1 million for 2016, a decrease of
$368 thousand or 0.1% compared with 2015. This was primarily due to a decrease in purchase accounting loan discount accretion of
$13.2 million and a 24-basis-point decrease in the average yield earned on loans, partially offset by an increase in average loans
outstanding of $428.9 million. The Company had $59.4 million of total outstanding discounts on purchased loans, of which $45.2
million was accretable at December 31, 2016. Interest income on securities was $200.4 million during 2016, an increase of $6.4
million or 3.3% compared with 2015 due primarily to a 10-basis-point increase in the average yield on investment securities, partially
offset by a decrease in average investment securities outstanding of $139.8 million. Average interest-bearing liabilities decreased
$39.2 million or 0.3% for 2016 compared with 2015. The average rate paid increased from 0.30% to 0.33% for the same time period,
resulting in an overall increase in interest expense of $4.0 million. The increase in the average rate paid on interest-bearing liabilities
contributed to an increase in total cost of funds to 0.24% during 2016 from 0.22% during 2015.
Net interest margin, defined as net interest income divided by average interest-earning assets, on a tax equivalent basis,
was 3.35% for 2016, a decrease of 3 basis points compared with 3.38% for 2015.
2015 versus 2014. Net interest income before the provision for credit losses for 2015 was $630.5 million compared with $671.2
million for 2014, a decrease of $40.6 million or 6.1%. The decrease in net interest income was primarily due to a decrease in purchase
accounting loan discount accretion of $43.8 million for the year ended December 31, 2015, partially offset by a decrease in interest
expense of $4.5 million. The decrease in interest expense was due to the redemption of all junior subordinated debentures during the
first quarter of 2015 and a decrease in the average balance for certificates and other time deposits. Interest income was $669.7 million
in 2015, a decrease of $45.1 million or 6.3% compared with 2014. Interest income on loans was $475.4 million for 2015, a decrease of
$50.3 million or 9.6% compared with 2014. This was primarily due to a decrease in purchase accounting loan discount accretion of
$43.8 million from $95.9 million for the year ended December 31, 2014 to $52.1 million for the year ended December 31, 2015 and a
68-basis-point decrease in the average yield earned on loans, partially offset by an increase in average loans outstanding of $212.7
million. The Company had $94.7 million of total outstanding discounts on purchased loans, of which $60.4 million was accretable at
December 31, 2015. Interest income on securities was $194.0 million during 2015, an increase of $5.3 million or 2.8% compared with
2014 due primarily to an increase in average securities of $818.4 million, partially offset by a 13-basis-point decrease in the average
yield earned on securities. Average interest-bearing liabilities increased $453.0 million or 3.6% for 2015 compared with 2014. The
average rate paid decreased from 0.34% to 0.30% for the same time period, resulting in an overall decrease in interest expense of $4.5
million. During 2015, average noninterest-bearing deposits increased $336.7 million or 7.2% from $4.69 billion during 2014 to $5.02
billion during 2015. This increase in noninterest-bearing funds contributed to a decrease in total cost of funds to 0.22% during 2015
from 0.25% during 2014.
Net interest margin, defined as net interest income divided by average interest-earning assets, on a tax equivalent basis,
was 3.38% for 2015, a decrease of 42 basis points compared with 3.80% for 2014.
31
The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from
average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed
both in dollars and rates. 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.
2016
Interest
Earned/
Interest
Paid
Average
Outstanding
Balance
Years Ended December 31,
2015
Average
Yield/
Rate
Average
Outstanding
Balance
Interest
Earned/
Interest
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
(Dollars in thousands)
2014
Interest
Earned/
Interest
Paid
Average
Yield/
Rate
Assets
Interest-Earning Assets:
Loans
Investment securities
Federal funds sold and other earning assets
Total interest-earning assets
Allowance for credit losses
Noninterest-earning assets
Total assets
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits
Savings and money market deposits
Certificates and other time deposits
Federal funds purchased and other
borrowings
$ 9,629,714 $ 475,059 4.93 % $ 9,200,765 $ 475,427 5.17 % $ 8,988,069 $ 525,716 5.85 %
9,401,669 200,375 2.13 % 9,541,443 194,003 2.03 % 8,723,011 188,744 2.16 %
335 0.23 %
19,113,187 675,779 3.54 % 18,858,491 669,701 3.55 % 17,854,834 714,795 4.00 %
345 0.42 %
271 0.23 %
116,283
143,754
81,804
(84,189 )
2,851,764
$ 21,880,762
(80,894 )
2,841,007
$ 21,618,604
(72,714 )
2,814,809
$ 20,596,929
$ 4,066,799 $ 9,843 0.24 % $ 3,873,495 $ 8,776 0.23 % $ 3,516,987 $ 8,561 0.24 %
5,658,441 15,016 0.27 % 5,505,524 13,488 0.24 % 5,355,967 13,406 0.25 %
2,505,526 14,266 0.57 % 2,754,466 13,810 0.50 % 3,129,710 15,904 0.51 %
Securities sold under repurchase agreements
Junior subordinated debentures
Total interest-bearing liabilities
524,492
319,551
2,081
772 0.53 %
938 0.26 %
4,060 2.62 %
13,076,890 43,159 0.33 % 13,116,114 39,191 0.30 % 12,663,161 43,641 0.34 %
3,065 0.58 %
932 0.29 %
37 1.78 %
1,508 0.24 %
818 0.25 %
791 2.69 %
623,441
329,745
29,443
144,570
361,025
154,902
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits
Other liabilities
5,117,621
119,320
18,313,831
3,566,931
Total liabilities and shareholders' equity $ 21,880,762
Total liabilities
Shareholders' equity
5,024,379
109,323
18,249,816
3,368,788
$ 21,618,604
4,687,680
165,764
17,516,605
3,080,324
$ 20,596,929
Net interest rate spread
Net interest income and margin (1)
Net interest income and margin (tax
equivalent) (2)
3.21 %
$ 632,620 3.31 %
3.25 %
$ 630,510 3.34 %
3.66 %
$ 671,154 3.76 %
$ 640,285 3.35 %
$ 636,612 3.38 %
$ 679,122 3.80 %
(1) The net interest margin is equal to net interest income divided by average interest-earning assets.
(2)
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% for the years
ended December 31, 2016, 2015 and 2014 and other applicable effective tax rates.
32
The following table presents information regarding the dollar amount of changes in interest income and interest expense for the
periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the
changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate
and volume which cannot be segregated have been allocated to rate.
Years Ended December 31,
2016 vs. 2015
2015 vs. 2014
Increase
(Decrease)
Due to Change in
Rate
Volume
Increase
(Decrease)
Due to Change in
Rate
Volume
Total
(Dollars in thousands)
Total
$ 22,165 $ (22,533 ) $
9,214
(2,842 )
(368 ) $ 12,441 $ (62,730 ) $ (50,289 )
5,259
6,372 17,709
(12,450 )
Interest-Earning assets:
Loans
Securities
Federal funds sold and other temporary
investments
Total increase (decrease) in interest income
(80 )
19,243
154
(13,165 )
74
(64 )
6,078 30,086
—
(75,180 )
(64 )
(45,094 )
Interest-Bearing liabilities:
Interest-bearing demand deposits
Savings and money market accounts
Certificates of deposit
Other borrowings
Securities sold under repurchase agreements
Junior subordinated debentures
Total (decrease) increase in interest expense
Increase (decrease) in net interest income
438
375
(1,248 )
(239 )
(25 )
(735 )
(1,434 )
629
1,153
1,704
1,796
139
(19 )
5,402
$ 20,677 $ (18,567 ) $
215
1,067
82
1,528
(2,094 )
456
736
1,557
(120 )
114
(3,269 )
(754 )
3,968
(4,450 )
2,110 $ 31,562 $ (72,206 ) $ (40,644 )
(653 )
(292 )
(187 )
(1,822 )
(39 )
19
(2,974 )
868
374
(1,907 )
2,558
(81 )
(3,288 )
(1,476 )
Provision for Credit Losses
The Company’s provision for credit losses is established through charges to income in the form of the provision in order to
bring the Company’s allowance for credit losses to a level deemed appropriate by management based on the factors discussed under
“Financial Condition—Allowance for Credit Losses.” The allowance for credit losses at December 31, 2016 was $85.3 million,
representing 0.89% of total loans as of such date. Acquired loans were recorded at fair value based on a discounted cash flow
valuation methodology that considers, among other things, interest rates, projected default rates, loss given defaults and recovery rates,
with no carryover of any existing allowance for credit losses. The provision for credit losses for the year ended December 31, 2016
was $24.0 million compared with $7.6 million for the year ended December 31, 2015 and $18.3 million for the year ended
December 31, 2014. Net charge-offs for the years ended December 31, 2016, 2015 and 2014 were $20.1 million, $6.9 million and $4.8
million, respectively.
Noninterest Income
The Company’s primary sources of recurring noninterest income are nonsufficient funds (“NSF”) fees, credit, debit and ATM
card income, and service charges on deposit accounts. Additionally, the Company generates recurring noninterest income from its
brokerage, mortgage and trust lines of business. Noninterest income does not include loan origination fees which are recognized over
the life of the related loan as an adjustment to yield using the interest method. For the year ended December 31, 2016, noninterest
income totaled $118.4 million, a decrease of $2.4 million or 2.0% compared with 2015. The decrease was primarily due to a decrease
in other noninterest income, brokerage income and NSF fees, partially offset by an increase in service charges on deposit accounts and
mortgage income.
For the year ended December 31, 2015, noninterest income totaled $120.8 million, a decrease of $51 thousand compared with
2014. The decrease was primarily due to a decrease in NSF fees and net gain on sale of assets, partially offset by an increase in
mortgage income and other income.
33
The following table presents, for the periods indicated, the major categories of noninterest income:
Nonsufficient funds fees
Credit card, debit card and ATM card income
Service charges on deposit accounts
Trust income
Mortgage income
Brokerage income
Bank owned life insurance income
Net gain on sale of assets
Other
Total noninterest income
$
$
2016
Years Ended December 31,
2015
(Dollars in thousands)
34,284 $
23,534
17,095
8,030
5,720
5,953
5,548
2,403
18,214
120,781 $
33,536 $
23,561
18,832
8,120
7,076
4,571
5,663
1,864
15,202
118,425 $
2014
37,048
22,889
16,452
8,108
4,264
5,868
5,189
4,658
16,356
120,832
Noninterest Expense
For the year ended December 31, 2016, noninterest expense totaled $318.4 million, an increase of $4.9 million or 1.5%
compared with 2015. This increase was primarily due to the Tradition acquisition.
For the year ended December 31, 2015, noninterest expense totaled $313.5 million, a decrease of $14.4 million or 4.4%
compared with 2014. This decrease was mainly due to a decrease in salary and employee benefits, professional and legal fees and net
occupancy and equipment expense.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Salaries and employee benefits(1)
Non-staff expenses:
Net occupancy and equipment
Credit and debit card, data processing and software
amortization
Regulatory assessments and FDIC insurance
Property taxes
Core deposit intangibles amortization
Depreciation
Communications(2)
Other real estate expense
Professional and legal fees
Printing and supplies
Other
Total noninterest expense
$
$
2016
Years Ended December 31,
2015
(Dollars in thousands)
192,872 $
197,897 $
2014
199,270
23,058
23,638
24,756
17,050
12,735
7,770
9,200
13,094
11,561
514
4,346
2,334
18,828
318,387 $
15,782
14,433
7,028
9,530
12,959
11,121
625
3,044
2,158
20,346
313,536 $
15,790
15,017
7,410
9,940
13,730
11,609
1,019
5,636
2,427
21,358
327,962
(1) Total salaries and employee benefits include $9.5 million, $11.1 million and $8.2 million in 2016, 2015 and 2014, respectively,
in stock-based compensation expense.
(2) Communications expense includes telephone, data circuits, postage, and courier expenses.
34
Salaries and Employee Benefits. Salaries and employee benefits were $197.9 million for the year ended December 31, 2016, an
increase of $5.0 million or 2.6% compared with 2015. This change was primarily due to the Tradition acquisition and an increase in
incentive compensation. Salaries and employee benefits were $192.9 million for the year ended December 31, 2015, a decrease of
$6.4 million or 3.2% compared with 2014. This change was primarily due to a decrease in FTEs and a decrease in incentive
compensation. The number of FTEs employed by the Company were 3,035, 3,037 and 3,096 at December 31, 2016, 2015 and 2014,
respectively. Total salaries and benefits for the year ended December 31, 2016 include $9.5 million in stock based compensation
expense compared with $11.1 million and $8.2 million recorded for the years ended December 31, 2015 and 2014, respectively.
Credit and Debit Card, Data Processing and Software Amortization. Credit and Debit card, data processing and software
amortization expenses were $17.1 million for the year ended December 31, 2016 and $15.8 million for the years ended December 31,
2015 and 2014. This change was primarily due to an increase in software amortization, ATM and debit card processing expense and
debit card ordering expense.
Regulatory Assessments and FDIC Insurance. Regulatory assessments and FDIC insurance assessments were $12.7 million for
the year ended December 31, 2016, a decrease of $1.7 million or 11.8%, compared with $14.4 million for the year ended
December 31, 2015. Assessments for the year ended December 31, 2015 decreased $584 thousand or 3.9% to $14.4 million compared
to $15.0 million for the year ended December 31, 2014. The change for both periods was primarily due to a decrease in FDIC
insurance assessment fees.
Property Taxes. Property taxes were $7.8 million for the year ended December 31, 2016, an increase of $742 thousand or 10.6%
compared with 2015. Property taxes were $7.0 million for the year ended December 31, 2015, a decrease of $382 thousand or 5.2%
compared with 2014.
Core Deposit Intangibles Amortization. Core deposit intangibles (“CDI”) amortization was $9.2 million for the year ended
December 31, 2016, a decrease of $330 thousand or 3.5% compared with $9.5 million for the year ended December 31, 2015. CDI
amortization decreased $410 thousand or 4.1% to $9.5 million at December 31, 2015, compared with $9.9 million for the year ended
December 31, 2014. The change for both periods was primarily due to a reduction in the annual amortization rate of certain previously
recognized intangible assets. CDI are being amortized on a non-pro rata basis over an estimated life of 10 to 15 years.
Other Real Estate. Other real estate expense was $514 thousand for the year ended December 31, 2016, a decrease of $111
thousand or 17.8%, compared with $625 thousand for the year ended December 31, 2015. Other real estate expense decreased $394
thousand or 38.7% to $625 thousand for the year ended December 31, 2015, compared with $1.0 million for the year ended
December 31, 2014. The change for both periods was primarily due to a decrease in other real estate carrying cost.
Professional and Legal Fees. Professional and legal fees were $4.3 million for the year ended December 31, 2016, an increase
of $1.3 million or 42.8%, compared with $3.0 million for the year ended December 31, 2015. This change was primarily due to an
increase in outsourced professional services needed to comply with regulatory requirements. Professional and legal fees decreased
$2.6 million or 46.0% for the year ended December 31, 2015, compared with $5.6 million for the year ended December 31, 2014. This
decrease was primarily due to less acquisition-related legal and professional fees and less consulting activity needed to comply with
regulatory requirements.
Efficiency Ratio
The Company’s efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of the
Company and is not calculated based on generally accepted accounting principles (“GAAP”). A GAAP-based efficiency ratio is
calculated by dividing total noninterest expense, excluding credit loss provisions, by net interest income plus total noninterest income,
as shown in the Consolidated Statements of Income. The Company’s efficiency ratio, as calculated and used by the Company,
excludes from noninterest income the net gains and losses on the sale of securities and assets, which can vary widely from period to
period. Taxes are not included in either calculation. An increase in the efficiency ratio indicates that more resources are being utilized
to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. The Company’s
efficiency ratio calculated pursuant to GAAP was 42.39% for the year ended December 31, 2016 compared with 41.73% for the year
ended December 31, 2015 and 41.41% for the year ended December 31, 2014. The efficiency ratio, excluding net gains and losses on
the sale of securities and assets, was 42.50% for the year ended December 31, 2016, compared with 41.87% for the year ended
December 31, 2015 and 41.81% for the year ended December 31, 2014.
35
Income Taxes
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt
income and the amount of other nondeductible expenses. Income tax expense was $134.2 million for the year ended December 31,
2016, a decrease of $9.4 million or 6.5% compared with $143.5 million for the year ended December 31, 2015. The decrease was
primarily attributable to lower pre-tax net earnings for the year ended December 31, 2016. Income tax expense decreased $4.8 million
or 3.2% for the year ended December 31, 2015, compared with $148.3 million for the year ended December 31, 2014. The decrease
was primarily attributable to lower pre-tax net earnings for the year ended December 31, 2015. The effective tax rate for the years
ended December 31, 2016, 2015 and 2014 was 32.8%, 33.4% and 33.3%, respectively. The effective income tax rates differed from
the U.S. statutory rate of 35% during the comparable periods primarily due to the effect of tax-exempt income from loans and
securities.
Impact of Inflation
The Company’s consolidated financial statements and related notes included in this Annual Report on Form 10-K have been
prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative value of money over time due to inflation or recession.
Unlike many industrial companies, substantially all of the Company’s assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest
rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However,
noninterest expenses do reflect general levels of inflation.
Financial Condition
Loan Portfolio
At December 31, 2016, total loans were $9.62 billion, an increase of $183.5 million or 1.9%, compared with $9.44 billion at
December 31, 2015. Loans at December 31, 2016 included $27.0 million of loans held for sale. At December 31, 2016, total loans
were 55.6% of deposits and 43.1% of total assets. At December 31, 2015, total loans were $9.44 billion, an increase of $194.4 million
or 2.1%, compared with $9.24 billion at December 31, 2014. Loans at December 31, 2015 included $23.9 million of loans held for
sale.
The following table summarizes the Company’s total loan portfolio by type of loan as of the dates indicated:
2016
2015
Amount
Percent
Amount
Percent
December 31,
2014
Amount
(Dollars in thousands)
Percent
2013
2012
Amount
Percent
Amount
Percent
Commercial and industrial $ 1,539,439 16.0 % $ 1,692,246 17.9 % $ 1,806,267 19.5 % $ 1,279,777 16.5 % $ 771,114 14.9 %
Real estate:
Construction, land
development and
other land loans
1-4 family
residential (1)
Home equity
Commercial real estate
1,263,923 13.1 % 1,073,198 11.4 % 1,026,475 11.1 % 865,511 11.1 % 550,768 10.6 %
2,439,348 25.3 % 2,360,798 25.0 % 2,250,251 24.3 % 1,870,365 24.1 % 1,255,765 24.2 %
278,483 2.9 % 279,867 2.9 % 271,930 3.0 % 261,355 3.4 % 186,801 3.6 %
(including
multifamily
residential) (2)
Farmland
Agriculture
Consumer
Other
Total loans (3)
3,162,109 32.9 % 3,131,083 33.2 % 3,030,340 32.8 % 2,753,797 35.2 % 1,990,642 38.5 %
484,588 5.0 % 434,349 4.6 % 361,943 3.9 % 332,648 4.3 % 211,156 4.1 %
187,748 2.0 % 214,469 2.3 % 189,703 2.1 % 198,610 2.6 %
74,481 1.4 %
130,703 1.4 % 142,363 1.5 % 160,595 1.7 % 146,942 1.9 % 103,725 2.0 %
35,488 0.7 %
135,719 1.4 % 110,216 1.2 % 146,679 1.6 %
$ 9,622,060 100.0 % $ 9,438,589 100.0 % $ 9,244,183 100.0 % $ 7,775,221 100.0 % $ 5,179,940 100.0 %
66,216 0.9 %
(1)
Includes loans held for sale of $27.0, million, $23.9 million, $8.6 million, $2.2 million and $10.4 million at December 31, 2016, 2015,
2014, 2013 and 2012, respectively.
(2) Commercial real estate loans include approximately $1.46 billion, $1.42 billion, $1.51 billion, $1.49 billion and $1.05 billion of owner-
(3)
occupied loans for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
Includes fair value discounts on acquired loans of $59.4 million, $94.7 million, $161.4 million, $133.3 million and $79.9 million at
December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
36
The Company separates its loan portfolio into two general categories of loans: (1) loans originated by Prosperity Bank and made
pursuant to the Company’s loan policy and procedures in effect at the time the loan was made are referred to as “legacy loans” and
(2) “acquired loans,” which are loans acquired in a business combination. Those acquired loans that are renewed or substantially
modified after the date of the business combination, which therefore causes them to become subject to the Company’s allowance for
credit losses methodology, are referred to as “acquired legacy loans.” If a renewal or substantial modification of an acquired loan is
underwritten by the Company with a new credit analysis, the loan will no longer be categorized as an acquired loan. For example,
acquired loans to one borrower may be combined into a new loan with a new loan number and categorized as a legacy loan. Acquired
loans with a fair value discount or premium at the date of the business combination that remained at the reporting date are referred to
as “fair-valued acquired loans.” All fair-valued acquired loans are further categorized into “Non-PCI loans” and “PCI loans”
(purchased credit impaired loans). Acquired loans with evidence of credit quality deterioration at acquisition for which it is probable
that the Company would not be able to collect all contractual amounts due are PCI loans.
The following tables summarize the Company’s legacy and acquired loan portfolios broken out into legacy loans, acquired
legacy loans, Non-PCI loans and PCI loans as of the dates indicated.
Residential mortgage loans held for sale
Commercial and industrial
Real estate:
Construction, land development and other land loans
1-4 family residential (including home equity)
Commercial real estate (including multi-family
residential)
Farmland
Agriculture
Consumer and other
Total loans held for investment
Total
Residential mortgage loans held for sale
Commercial and industrial
Real estate:
Construction, land development and other land loans
1-4 family residential (including home equity)
Commercial real estate (including multi-family
residential)
Farmland
Agriculture
Consumer and other
Total loans held for investment
Total
Legacy Loans
Legacy Loans
PCI Loans
Total Loans
Acquired
26,975 $
$
1,135,846
— $
284,898
— $
26,975
3,684 1,539,439
December 31, 2016
Acquired Loans
Non-PCI
Loans
(dollars in thousands)
— $
115,011
1,152,873
2,289,107
42,990
83,785
66,629
312,254
1,431 1,263,923
5,710 2,690,856
492,822
2,352,094
68,484
396,353
2,118
135,835
22,342
214,905
7,677,013
810,779 1,079,660
$ 7,703,988 $ 810,779 $ 1,079,660 $
300,773
19,363
49,795
29,175
388
—
—
16,420 3,162,109
484,588
187,748
266,422
27,633 9,595,085
27,633 $ 9,622,060
Legacy Loans
Legacy Loans
PCI Loans
Total Loans
Acquired
$
23,933 $
1,038,118
— $
419,932
— $
23,933
15,613 1,692,246
December 31, 2015
Acquired Loans
Non-PCI
Loans
(dollars in thousands)
— $
218,583
954,587
2,115,857
64,158
88,852
53,533
406,754
920 1,073,198
5,269 2,616,732
2,204,662
335,689
143,265
196,859
581,599
80,082
4,785
30,431
6,989,037 1,010,026 1,375,767
$ 7,012,970 $ 1,010,026 $ 1,375,767 $
327,192
18,188
66,415
25,289
390
4
—
17,630 3,131,083
434,349
214,469
252,579
39,826 9,414,656
39,826 $ 9,438,589
The Company’s construction, land development and other land loans were $1.26 billion at December 31, 2016, an increase of
$190.7 million or 17.8% from $1.07 billion at December 31, 2015. This increase was primarily related to legacy loan growth.
37
The Company offers a broad range of short to medium-term commercial loans, primarily collateralized, to businesses for
working capital (including inventory and receivables), business expansion (including acquisitions of real estate and improvements)
and the purchase of equipment and machinery. Historically, the Company has originated loans for its own account, including all loans
in the 1-4 family residential category, and has not securitized its loans. Additionally, the Company, through its Home Loan Center,
originates longer-term residential mortgage loans for sale into the secondary market. The purpose of a particular loan generally
determines its structure.
Loans to borrowers with aggregate debt relationships over $1.0 million and below $3.5 million are evaluated and acted upon on
a daily basis by two of the company-wide loan concurrence officers. Loans to borrowers with aggregate debt relationships above $3.5
million are evaluated and acted upon by an officers’ loan committee which meets weekly. In addition to the officers’ loan committee
evaluation, loans to borrowers with aggregate debt relationships from $25.0 million to $50.0 million are evaluated and acted upon by
the directors’ loan committee which consists of three directors of the Bank and meets as necessary. Loans to borrowers with aggregate
debt relationships over $50.0 million are evaluated and acted upon by the Bank’s Board of Directors either at a regularly scheduled
monthly board meeting or by teleconference or written consent.
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 as well as 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.
Included in commercial loans are (1) commitments to oil and gas producers secured by proven, developed and producing
reserves and (2) commitments to service, equipment and midstream companies secured mainly by accounts receivable, inventory and
equipment. Mineral reserve values supporting commitments to producers are normally re-determined semi-annually using reserve
studies prepared by a third-party or the Company’s oil and gas engineer. Accounts receivable and inventory borrowing bases for
service companies are typically re-determined monthly. Funding requests by both producers and service companies are monitored
relative to the most recently determined borrowing base. As of December 31, 2016, the Company had $119.9 million in funded
commitments outstanding to oil and gas production companies and $72.1 million in unfunded commitments, for a total of $192.0
million. This compares with funded commitments to production companies of $178.6 million as of December 31, 2015 and $80.3
million in unfunded commitments, for a total of $258.9 million. Total unfunded commitments to producers include letters of credit
issued in lieu of oil well plugging bonds. As of December 31, 2016, the Company had outstanding $164.6 million in funded
commitments to service companies and $73.4 million in unfunded commitments for a total of $238.0 million. This compares with
funded commitments to service companies of $220.5 million as of December 31, 2015 and $116.1 million in unfunded commitments,
for a total of $336.6 million.
Commercial Real Estate. The Company makes commercial real estate loans collateralized by owner-occupied and nonowner-
occupied real estate to finance the purchase of real estate. The Company’s commercial real estate 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 nonowner-occupied 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.
1-4 Family Residential Loans. The Company’s lending activities also include the origination of 1-4 family residential mortgage
loans (including home equity loans) 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 Home Loan Center 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 Home Loan Center into the secondary market.
38
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, the Company may not 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. Although the Company has underwriting procedures designed to identify what it believes to be
acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above.
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.
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 contractual maturity ranges of the Company’s loan portfolio by type of loan and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of December 31, 2016 are summarized in the following table.
Contractual maturities are based on contractual amounts outstanding and do not include loan purchase discounts of $59.4 million or
loans held for sale of $27.0 million at December 31, 2016:
Commercial and industrial
Real estate:
Construction, land development and other land loans
1-4 family residential (includes home equity)
Commercial (includes multi-family residential)
Agriculture (includes farmland)
Consumer and other
Total
Loans with a predetermined interest rate
Loans with a floating interest rate
Total
One Year or
Less
After Five
Years
(Dollars in thousands)
$ 528,465 $ 512,657 $ 514,508 $ 1,555,630
Through
Five Years
Total
422,190
37,777
148,271
154,031
84,662
608,593 1,267,097
236,314
141,180 2,521,358 2,700,315
342,424 2,697,427 3,188,122
675,911
267,418
$ 1,375,396 $ 1,382,782 $ 6,896,315 $ 9,654,493
$ 373,813 $ 776,615 $ 2,821,521 $ 3,971,949
1,001,583
606,167 4,074,794 5,682,544
$ 1,375,396 $ 1,382,782 $ 6,896,315 $ 9,654,493
459,399
95,030
62,481
87,726
39
Nonperforming Assets
Nonperforming assets include loans on nonaccrual status, accruing loans 90 days or more past due, repossessed assets and real
estate which has been acquired through foreclosure and is awaiting disposition. Nonperforming assets do not include PCI loans unless
the timing and amount of projected cash flows can no longer be reasonably estimated. PCI loans become subject to the Company’s
allowance for credit losses methodology when a deterioration in projected cash flows is identified.
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. Nevertheless, the Company’s loan portfolio could become subject to increasing pressures from
deteriorating borrower credit due to general economic conditions.
As part of the on-going monitoring of the Company’s loan portfolio and the methodology for calculating the allowance for
credit losses, management grades each loan from 1 to 9. Depending on the grade, loans in the same grade are aggregated and a loss
factor is applied to the total loans in the group to determine the allowance for credit losses. For certain loans in risk grades 7 to 9, a
specific reserve may be required.
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 write-downs or appropriate additions to
the allowance for credit losses.
The following table presents information regarding past due loans and nonperforming assets at the dates indicated:
Nonaccrual loans (1)
Accruing loans 90 or more days past due
Total nonperforming loans
Repossessed assets
Other real estate
Total nonperforming assets
Nonperforming assets to total loans and other real estate
December 31,
2016
2015
2014
2013
2012
$
$
31,642 $
956
32,598
241
15,463
48,302 $
0.50 %
(Dollars in thousands)
39,711 $
614
40,325
171
2,963
43,459 $
0.46 %
31,422 $
2,193
33,615
67
3,237
36,919 $
0.40 %
10,231 $
4,947
15,178
27
7,299
22,504 $
0.29 %
5,382
331
5,713
68
7,234
13,015
0.25 %
(1)
Includes troubled debt restructurings of $97 thousand, $681 thousand, $911 thousand, $1.4 million and $3.6 million for the
years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
The following tables present information regarding past due loans and nonperforming assets differentiated among legacy loans,
acquired legacy loans, Non-PCI loans and PCI loans at the dates indicated:
Nonaccrual loans
Accruing loans 90 or more days past due
Total nonperforming loans
Repossessed assets
Other real estate
Total nonperforming assets
$
$
9,983 $
903
10,886
—
13,442
24,328 $
Legacy Loans
Acquired
Legacy Loans
PCI Loans
Total Loans
December 31, 2016
Acquired Loans
Non-PCI
Loans
(Dollars in thousands)
6,210 $
53
6,263
16
70
6,349 $
12,703 $
—
12,703
225
1,178
14,106 $
2,746 $
—
2,746
—
773
3,519 $
31,642
956
32,598
241
15,463
48,302
Nonperforming assets to total loans and other real estate by
category
0.32 %
1.74 %
0.59 %
12.39 %
0.50 %
40
Legacy Loans
Acquired
Legacy Loans
PCI Loans
Total Loans
December 31, 2015
Acquired Loans
Non-PCI
Loans
(Dollars in thousands)
Nonaccrual loans
Accruing loans 90 or more days past due
Total nonperforming loans
Repossessed assets
Other real estate
Total nonperforming assets
$
$
20,800 $
-
20,800
5
657
21,462 $
7,361 $
614
7,975
10
110
8,095 $
4,254 $
—
4,254
56
1,743
6,053 $
7,296 $
—
7,296
100
453
7,849 $
39,711
614
40,325
171
2,963
43,459
Nonperforming assets to total loans and other real estate
by category
0.31 %
0.80 %
0.44 %
19.49 %
0.46 %
The Company had $48.3 million in nonperforming assets at December 31, 2016 compared with $43.5 million at December 31,
2015 and $36.9 million at December 31, 2014. The nonperforming assets consisted of 158 separate credits or ORE properties at
December 31, 2016, compared with 147 at December 31, 2015 and 169 at December 31, 2014. If interest on nonaccrual loans had
been accrued under the original loan terms, approximately $3.2 million, $3.9 million and $2.7 million would have been recorded as
income for the years ended December 31, 2016, 2015 and 2014, respectively.
At December 31, 2016, of the total nonperforming assets, $24.3 million resulted from legacy loans, $14.1 million resulted from
acquired legacy loans, $6.3 million resulted from Non-PCI loans and $3.5 million resulted from PCI loans. At December 31, 2015, of
the total nonperforming assets, $21.5 million resulted from legacy loans, $8.1 million resulted from acquired legacy loans,
$6.1 million resulted from Non-PCI loans and $7.8 million resulted from PCI loans. A PCI loan becomes impaired when there is a
deterioration in projected cash flows after acquisition.
Nonperforming assets were 0.50% of total loans and other real estate at December 31, 2016 compared with 0.46% of total loans
and other real estate at December 31, 2015. Nonperforming assets attributable to legacy loans were 0.32% of total legacy loans and
other real estate at December 31, 2016 compared with 0.31% of total legacy loans and other real estate at December 31, 2015.
Nonperforming assets attributable to acquired legacy loans were 1.74% of total acquired legacy loans and other real estate at
December 31, 2016 compared with 0.80% of total acquired legacy loans and other real estate at December 31, 2015. Nonperforming
assets attributable to Non-PCI loans were 0.59% of total Non-PCI loans and other real estate at December 31, 2016 compared with
0.44% of total Non-PCI loans and other real estate at December 31, 2015. Nonperforming assets attributable to PCI loans were
12.39% of total PCI loans and other real estate at December 31, 2016 compared with 19.49% of total PCI loans and other real estate at
December 31, 2015.
During the year ended December 31, 2016, the Company added one loan totaling $154 thousand as a new troubled debt
restructuring (TDR), which was repaid during 2016. Total TDRs outstanding at December 31, 2016 were $97 thousand.
41
Allowance for Credit Losses
The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related
data:
Average loans outstanding
Gross loans outstanding at end of period
Allowance for credit losses at beginning of period
Provision for credit losses
Charge-offs:
Commercial and industrial
Real estate and agriculture
Consumer and other
Recoveries:
Commercial and industrial
Real estate and agriculture
Consumer and other
Net charge-offs
Allowance for credit losses at end of period
Ratio of allowance to end of period loans
Ratio of net charge-offs to average loans
Ratio of allowance to end of period nonperforming loans
$
2016
2015
Years Ended December 31,
2014
(Dollars in thousands)
$ 9,629,714 $ 9,200,765 $ 8,988,069 $ 6,202,897 $ 4,514,171
$ 9,622,060 $ 9,438,589 $ 9,244,183 $ 7,775,221 $ 5,179,940
51,594
$
6,100
52,564 $
17,240
80,762 $
7,560
81,384 $
24,000
67,282 $
18,275
2012
2013
(14,371 )
(7,796 )
(5,346 )
(7,696 )
(1,150 )
(3,304 )
(818 )
(3,458 )
(5,674 )
(672 )
(1,423 )
(3,398 )
(674 )
(4,337 )
(2,885 )
2,812
3,516
1,127
(20,058 )
85,326 $
0.89 %
0.21 %
261.8 %
3,322
600
1,290
(6,938 )
81,384 $
0.86 %
0.08 %
201.8 %
466
1,561
3,128
(4,795 )
80,762 $
0.87 %
0.05 %
240.3 %
348
1,330
1,293
(2,522 )
67,282 $
0.87 %
0.04 %
443.3 %
815
342
1,609
(5,130 )
52,564
1.01 %
0.11 %
920.1 %
The allowance for credit losses as a percentage of total nonperforming loans was 261.8% at December 31, 2016 and 201.8% at
December 31, 2015.
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 losses in the Company’s loan
portfolio. The amount of the allowance for credit losses is affected by the following: (1) charge-offs of loans that occur when loans are
deemed uncollectible and decrease the allowance, (2) recoveries on loans previously charged off that increase the allowance and
(3) 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. Although management believes it uses the best information available to make determinations with respect to the allowance
for credit losses, further adjustments may be necessary if economic conditions differ from the assumptions used in making the initial
determinations.
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 total
loan portfolio and assigns risk grades to each loan. 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 certain impaired loans, the Company allocates a specific loan loss
reserve primarily based on the value of the collateral securing the impaired loan. The specific reserves are determined on an individual
loan basis. Loans for which specific reserves are provided are excluded from the general valuation allowance described below.
42
In connection with this 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 mortgage 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, land development and other land 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.
In determining the amount of the general valuation allowance, management considers factors such as historical loan loss
experience, 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, other qualitative risk factors both internal and external
to the Company and other relevant factors. 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 loan that has a specific reserve allocated to it. The Company
uses this information to establish the amount of the general valuation allowance.
A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific reserves identified for
impaired loans, (2) historical credit loss information, (3) changes in environmental factors and (4) growth in the balance of legacy
loans and the re-categorization of fair-valued acquired loans to acquired legacy loans, which subjects such loans to the allowance
methodology.
Changes in the Company’s asset quality are reflected in the allowance in several ways. Specific reserves that are calculated on a
loan-by-loan basis and the qualitative assessment of all other loans reflect current changes in the credit quality of the loan portfolio.
Historical credit losses, on the other hand, are based on a three-year look back period, which are then applied to estimate current credit
losses inherent in the loan portfolio. A deterioration in the credit quality of the loan portfolio in the current period would increase the
historical credit loss factor to be applied in future periods, just as an improvement in credit quality would decrease the historical credit
loss factor.
The allowance for credit losses is further determined by the size of the loan portfolio subject to the allowance methodology and
environmental factors that include Company-specific risk indicators and general economic conditions, both of which are constantly
changing. The Company evaluates the economic and portfolio-specific factors on a quarterly basis to determine a qualitative
component of the general valuation allowance. The factors include economic metrics, business conditions, delinquency trends, credit
concentrations, nature and volume of the portfolio and other adjustments for items not covered by specific reserves and historical loss
experience. Management’s assessment of qualitative factors is a statistically based approach to determine the inherent probable loss
associated with such factors. Based on the Company’s actual historical loan loss experience relative to economic and loan portfolio-
specific factors at the time the losses occurred, management is able to identify the probabilities of default and loss severity based on
current economic conditions. The correlation of historical loss experience with current economic conditions provides an estimate of
inherent and probable losses that has not been previously factored into the general valuation allowance by the determination of
specific reserves and recent historical losses. Additionally, the Company considers qualitative factors not easily quantified and the
possibility of model imprecision.
43
Utilizing the aggregation of specific reserves, historical loss experience and a qualitative component, management is able to
determine the valuation allowance to reflect the full inherent probable loss.
In determining the allowance for credit losses, management also considers the type of loan (legacy or acquired) and the credit
quality of the loan. The Company distinguishes between legacy loans and acquired legacy loans, which are accounted for under the
contractual yield method, and fair-valued acquired loans consisting of Non-PCI loans and PCI loans, which are accounted for as
purchased loans.
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of inherent credit losses
expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for credit losses is recorded
for these loans at acquisition. When a fair-valued acquired loan is renewed at its maturity date, the loan is re-categorized as an
acquired legacy loan. When a fair-valued acquired loan is modified after acquisition, the loan is independently evaluated subsequent to
the modification decision to determine whether the modification was substantial, and therefore requires that the loan be re-categorized
as an acquired legacy loan. This determination is based on a discounted cash-flow analysis. Generally, when a change in discounted
cash-flow of greater than 10% is identified, the fair-valued acquired loan becomes categorized as an acquired legacy loan. If and when
a fair-valued acquired loan becomes an acquired legacy loan, the acquired legacy loan is evaluated at the time of renewal or
modification in accordance with the Company’s allowance for credit losses methodology described above.
Non-PCI loans which were not deemed impaired subsequent to the acquisition date are considered non-impaired and are
evaluated as part of the general valuation allowance. Non-PCI loans that have not become impaired subsequent to acquisition are
segregated into a pool for each acquisition for allowance calculation purposes. For each pool, the Company estimates a hypothetical
allowance for credit losses also referred to as an “indicated reserve” that is calculated in accordance with GAAP requirements. The
Company uses the acquired bank’s past loss history adjusted for qualitative factors to establish the indicated reserve. The indicated
reserve for each pool of Non-PCI loans is compared with the remaining discount for the respective pool to test for credit quality
deterioration and the possible need for a loan loss provision. To the extent the remaining discount of the pool is greater than the
indicated reserve, no additional allowance is necessary. If the remaining discount of the pool is less than the indicated reserve, the
difference results in an increase to the allowance recorded through a provision for credit losses.
Non-PCI loans that have deteriorated to an impaired status subsequent to acquisition are evaluated for a specific reserve on a
quarterly basis which, when identified, is added to the allowance for credit losses. The Company reviews impaired Non-PCI loans on
a loan-by-loan basis and determines the specific reserve based on the difference between the recorded investment in the loan and one
of three factors: expected future cash flows, observable market price or fair value of the collateral. Because essentially all of the
Company’s impaired Non-PCI loans have been collateral-dependent, the amount of the specific reserve historically has been
determined by comparing the fair value of the collateral securing the Non-PCI loan with the recorded investment in such loan. In the
future, the Company will continue to analyze impaired Non-PCI loans on a loan-by-loan basis and may use an alternative
measurement method to determine the specific reserve, as appropriate and in accordance with applicable accounting standards.
PCI loans are individually monitored on a quarterly basis to assess for deterioration subsequent to acquisition and are only
subject to the Company’s allowance methodology when a deterioration in projected cash flows is identified. In the event that a
deterioration in cash flows is identified, an additional provision for credit losses is made. PCI loans were recorded at their acquisition
date fair values, which were based on expected cash flows and included estimates of expected future credit losses. The Company’s
estimates of loan fair values at the acquisition date may be adjusted for a period of up to one year as the Company continues to
evaluate its estimate of expected future cash flows at the acquisition date. If the Company determines that losses arose after the
acquisition date, the additional losses will be reflected as a provision for credit losses. An allowance for credit losses is not calculated
for PCI loans that have not experienced deterioration subsequent to the acquisition date. See “Critical Accounting Policies” above for
more information.
As described in the section captioned “Critical Accounting Policies” above, the Company’s determination of the allowance for
credit losses involves a high degree of judgment and complexity. The Company’s analysis of qualitative, or environmental, factors on
pools of loans with common risk characteristics, in combination with the quantitative historical loss information and specific reserves,
provides the Company with an estimate of inherent losses. The allowance must reflect changes in the balance of loans subject to the
allowance methodology, as well as the estimated imminent losses associated with those loans. In the Company’s case, the $3.9 million
increase in the allowance for credit losses for the year ended December 31, 2016 was primarily attributable to an increase in loans
subject to the allowance methodology.
44
The following table shows the allocation of the allowance for credit losses among various categories of loans and certain other
information as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories
in which future losses may occur. The total allowance is available to absorb losses from any loan category.
2016
2015
Percent of
Loans to
Total Loans
Amount
Percent of
Loans to
Total Loans
Amount
December 31,
2014
Percent of
Loans to
Total Loans
Amount
(Dollars in thousands)
2013
2012
Percent of
Loans to
Total Loans
Amount
Percent of
Loans to
Total Loans
Amount
$ 35,836
43,811
16.0 % $ 33,409
74.2 % 42,769
17.9 % $ 30,002
72.5 % 44,946
19.5 % $ 8,167
71.2 % 56,234
16.5 % $ 5,777
73.9 % 45,458
14.9 %
76.9 %
Balance of allowance for credit
losses applicable to:
Commercial and industrial
Real estate
Agriculture and agriculture real
estate
Consumer and other
Total allowance for credit losses
4,073
1,606
$ 85,326
7.0 % 3,845
2.8 % 1,361
100.0 % $ 81,384
6.9 % 3,722
2.7 % 2,092
100.0 % $ 80,762
6.0 % 1,229
3.3 % 1,652
100.0 % $ 67,282
6.8 %
2.8 %
764
565
100.0 % $ 52,564
5.5 %
2.7 %
100.0 %
The Company further disaggregates its allowance for credit losses to distinguish between the portion of the allowance attributed
to legacy loans and the portion attributed to acquired loans.
The following tables present, as of and for the periods indicated, information regarding the allowance for credit losses
differentiated between legacy loans and acquired loans. The charge-offs and recoveries with respect to the acquired loans shown
below are primarily from acquired legacy loans. Reported net charge-offs may include those from Non-PCI loans and PCI loans, but
only if the total charge-off required is greater than the remaining discount.
Legacy Loans
As of and for the Year Ended December 31, 2016
Acquired
Loans
(Dollars in thousands)
$ 7,403,995 $ 2,225,719 $ 9,629,714
$ 7,703,988 $ 1,918,072 $ 9,622,060
81,384
$
24,000
16,475 $
4,260
64,909 $
19,740
Total
(4,019 )
(7,675 )
(5,158 )
(10,352 )
(121 )
(188 )
(14,371 )
(7,796 )
(5,346 )
1,497
3,435
1,117
(10,803 )
73,846 $
0.96 %
0.15 %
678.4 %
1,315
81
10
(9,255 )
11,480 $
0.60 %
0.42 %
52.9 %
2,812
3,516
1,127
(20,058 )
85,326
0.89 %
0.21 %
261.8 %
Average loans outstanding
Gross loans outstanding at end of period
Allowance for credit losses at beginning of period
Provision for credit losses
Charge-offs:
Commercial and industrial
Real estate and agriculture
Consumer and other
Recoveries:
Commercial and industrial
Real estate and agriculture
Consumer and other
Net charge-offs
Allowance for credit losses at end of period
Ratio of allowance to end of period loans
Ratio of net charge-offs to average loans
Ratio of allowance to end of period nonperforming loans
$
45
Average loans outstanding
Gross loans outstanding at end of period
Allowance for credit losses at beginning of period
Provision for credit losses
Charge-offs:
Commercial and industrial
Real estate and agriculture
Consumer and other
Recoveries:
Commercial and industrial
Real estate and agriculture
Consumer and other
Net charge-offs
Allowance for credit losses at end of period
Ratio of allowance to end of period loans
Ratio of net charge-offs to average loans
Ratio of allowance to end of period nonperforming loans
$
Legacy Loans
As of and for the Year Ended December 31, 2015
Acquired
Loans
(Dollars in thousands)
$ 6,396,941 $ 2,803,824 $ 9,200,765
$ 7,012,970 $ 2,425,619 $ 9,438,589
80,762
$
7,560
19,017 $
2,387
61,745 $
5,173
Total
(2,628 )
(694 )
(3,222 )
(5,068 )
(456 )
(82 )
2,709
539
1,287
(2,009 )
64,909 $
0.93 %
0.03 %
312.1 %
613
61
3
(4,929 )
16,475 $
0.68 %
0.18 %
84.4 %
(7,696 )
(1,150 )
(3,304 )
3,322
600
1,290
(6,938 )
81,384
0.86 %
0.08 %
201.8 %
The Company had gross charge-offs on legacy loans of $16.9 million during the year ended December 31, 2016 compared with
$6.5 million during the year ended December 31, 2015. Partially offsetting these charge-offs were recoveries on legacy loans of $6.0
million for the year ended December 31, 2016 compared with $4.5 million for the year ended December 31, 2015. Total charge-offs
for the year ended December 31, 2016 were $27.5 million, partially offset by total recoveries of $7.5 million. Total charge-offs for the
year ended December 31, 2015 were $12.2 million, partially offset by total recoveries of $5.2 million.
The following tables show the allocation of the allowance for credit losses among various categories of loans disaggregated
between legacy loans, acquired legacy loans, Non-PCI loans and PCI loans at the dates indicated. The allocation is made for analytical
purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb
losses from any loan category, regardless of whether allocated to a legacy loan or an acquired loan.
December 31, 2016
Acquired Loans
Legacy
Loans
Acquired
Legacy
Loans
Non-PCI
Loans
(Dollars in thousands)
PCI Loans
Total
Allowance
Percent of
Loans to
Total Loans
Balance of allowance for credit losses applicable
to:
Commercial and industrial
Real estate
Agriculture and agriculture real estate
Consumer and other
Total allowance for credit losses
$
$
28,049 $
41,254
2,982
1,561
73,846 $
7,690 $
2,455
1,074
45
11,264 $
66 $
102
17
—
185 $
31 $
—
—
—
31 $
35,836
43,811
4,073
1,606
85,326
16.0 %
74.2 %
7.0 %
2.8 %
100.0 %
46
December 31, 2015
Acquired Loans
Legacy
Loans
Acquired
Legacy
Loans
Non-PCI
Loans
(Dollars in thousands)
PCI Loans
Total
Allowance
Percent of
Loans to
Total Loans
Balance of allowance for credit losses applicable
to:
Commercial and industrial
Real estate
Agriculture and agriculture real estate
Consumer and other
Total allowance for credit losses
$
$
21,660 $
39,321
2,645
1,283
64,909 $
8,969 $
3,133
1,162
59
13,323 $
1,944 $
315
38
19
2,316 $
836 $
—
—
—
836 $
33,409
42,769
3,845
1,361
81,384
17.9 %
72.5 %
6.9 %
2.7 %
100.0 %
At December 31, 2016, the allowance for credit losses totaled $85.3 million or 0.89% of total loans. At December 31, 2015, the
allowance for credit losses totaled $81.4 million or 0.86% of total loans, and at December 31, 2014, the allowance totaled $80.8
million or 0.87% of total loans. The allowance for credit losses at December 31, 2016 increased $3.9 million of 4.8% compared with
December 31, 2015.
At December 31, 2016, $73.8 million of the allowance was attributable to legacy loans compared with $64.9 million of the
allowance at December 31, 2015, an increase of $8.9 million or 13.8%. This was primarily due to an increase in the legacy loan
balance.
At December 31, 2016, $11.3 million of the allowance was attributable to acquired legacy loans compared with $13.3 million of
the allowance at December 31, 2015, a decrease of $2.1 million or 15.5%. This was primarily due to a decrease in the acquired legacy
loan balance.
At December 31, 2016, $185 thousand of the allowance was attributable to Non-PCI loans compared with $2.3 million of the
allowance at December 31, 2015, a decrease of $2.1 million or 92.0%. This decrease was primarily attributable to specific reserves
identified for loans charged off during 2016.
At December 31, 2016, $31 thousand of the allowance was attributable to PCI loans compared with $836 thousand of the
allowance at December 31, 2015, a decrease of $805 thousand or 96.3%. This decrease was primarily attributable to specific reserves
identified for a loan that was charged off during 2016.
At December 31, 2015, the Company had $59.4 million of total outstanding discounts on Non-PCI and PCI loans, of which
$45.2 million was accretable.
The Company believes that the allowance for credit losses at December 31, 2016 is adequate to cover estimated losses in the
loan portfolio as of such date. Nevertheless, the Company could sustain losses in future periods that could be substantial in relation to
the size of the allowance at December 31, 2016.
Securities
The Company uses its securities portfolio to manage interest rate risk and as a source of income and liquidity for cash
requirements. At December 31, 2016, the carrying amount of investment securities totaled $9.73 billion, an increase of $223.7 million
or 2.4% compared with $9.50 billion at December 31, 2015. The increase in the securities portfolio during 2016 was primarily due to
excess liquidity throughout the year. At December 31, 2016, securities represented 43.6% of total assets compared with 43.1% of total
assets at December 31, 2015.
At the date of purchase, the Company is required to classify debt and equity securities into one of three categories: held to
maturity, trading or available for sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in
debt securities are classified as held to maturity and measured at amortized cost in the financial statements only if management has the
positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading and measured at fair value in the financial statements with unrealized gains and losses
included in earnings. Investments not classified as either held to maturity or trading are classified as available for sale and measured at
fair value in the financial statements with unrealized gains and losses reported, net of tax, in a separate component of shareholders’
equity until realized.
47
The following table summarizes the carrying value by classification of securities as of the dates shown:
2016
Amortized
Cost
Fair Value
December 31,
2015
2014
Amortized
Cost
(Dollars in thousands)
Fair Value
Amortized
Cost
Fair Value
Available for Sale
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
Total
Held to Maturity
U.S. Treasury securities and obligations of U.S.
Government agencies
States and political subdivisions
Corporate debt securities
Collateralized mortgage obligations
Mortgage-backed securities
Total
1,915 $
$
1,920 $
120,478 120,599
85,863
12,794
$ 219,005 $ 221,176 $
84,024
12,588
14,585
5,463 $
33,573
25,991
84,483
55,884
12,758
12,588
99,926 $ 103,064 $ 139,662 $ 145,399
5,485 $
25,916
58,971
12,692
14,402 $
33,519
79,153
12,588
34,020 $
33,523 $
47,598 $
52,639
$
384,015 386,621 363,505 370,043 404,356 409,081
—
—
19,792
2,107
9,086,422 8,917,863 8,986,153 8,972,614 8,424,083 8,467,180
$ 9,504,910 $ 9,339,455 $ 9,399,363 $ 9,393,175 $ 8,900,377 $ 8,948,692
—
19,585
—
2,122
100
850
100
851
48,396 $
52,353 $
Certain investment securities are valued at less than their historical cost. Management evaluates securities for other-than-
temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such
an evaluation.
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.
As of December 31, 2016, management does not have the intent to sell any of the securities classified as available for sale 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. As of
December 31, 2016, management believes any impairment in the Company’s securities is temporary and no impairment loss has been
realized in the Company’s consolidated statement of income. The Company recorded no other-than-temporary impairment charges in
2016, 2015 or 2014.
The following table summarizes the contractual maturity of securities and their weighted average yields as of December 31,
2016. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. The weighted
average life of the Company’s securities portfolio is 4.12 years, with a modified duration of 3.79 at December 31, 2016. Available for
sale securities are shown at fair value and held to maturity securities are shown at amortized cost. For purposes of the table below, tax-
exempt states and political subdivisions are calculated on a tax equivalent basis.
Within One
Year
Amount Yield
After One Year but
Within Five Years
Amount Yield
December 31, 2016
After Five Years but
Within Ten Years
Amount Yield
(Dollars in thousands)
After Ten Years
Amount
Yield
Total
Total
Yield
U.S. Treasury securities and
obligations of U.S. government
agencies
33,523 2.10 %
$ 1,517 1.37 % $ 32,006 2.14 % $
— — $
27,513 4.29 % 385,935 3.51 %
32,161 2.56 % 156,007 3.11 % 170,254 3.93 %
States and political subdivisions
— —
— —
Other Securities
12,894 2.35 %
12,894 2.35 %
220 2.56 % 121,229 0.95 % 121,449 0.96 %
— —
Collateralized mortgage obligations — —
1,829 4.71 % 426,389 3.42 % 760,863 2.68 % 7,983,204 2.09 % 9,172,285 2.20 %
Mortgage-backed securities
$ 48,401 2.55 % $ 614,402 3.28 % $ 931,337 2.91 % $ 8,131,946 2.08 % $ 9,726,086 2.24 %
— — $
— —
Total
48
The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of
their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities monthly pay
downs cause the average lives of the securities to be much different than their stated lives. During a period of increasing interest rates,
fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal, and consequently, the average life of
this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this
security.
At December 31, 2016 and 2015, 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.
The average tax equivalent yield of the securities portfolio was 2.24% as of December 31, 2016 compared with 2.28% as of
December 31, 2015 and 2.33% as of December 31, 2014. The decrease in yields was primarily due to the Company’s reinvestment of
funds at lower rates in 2016 and 2015 compared with the rates in 2014. The average yield excluding the tax equivalent adjustment was
2.13% for the year ended December 31, 2016 compared with 2.03% for the year ended December 31, 2015 and 2.16% for the year
ended December 31, 2014. The overall non-acquisition growth in the average securities portfolio over the comparable periods was
primarily funded by average deposit growth and other borrowings.
Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages and which are
principally issued by federal agencies such as Government National Mortgage Association (Ginnie Mae), Fannie Mae and Freddie
Mac. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest are
guaranteed by the issuing agencies.
Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed
securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the
securities. Premiums and discounts on mortgage-backed securities are amortized over the expected life of the security and may be
impacted by prepayments. As such, mortgage-backed securities which are purchased at a premium will generally suffer decreasing net
yields as interest rates drop because home owners tend to refinance their mortgages resulting in prepayments and an acceleration of
premium amortization. Securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment as
prepayments result in a acceleration of discount accretion. At December 31, 2016, 87.0% of the mortgage-backed securities held by
the Company had contractual final maturities of more than ten years with a weighted average life of 4.44 years.
Collateralized mortgage obligations (“CMOs”) are bonds that are backed by pools of mortgages. The pools can be Ginnie Mae,
Fannie Mae or Freddie Mac pools or they can be private-label pools. CMOs are designed so that the mortgage collateral will generate
a cash flow sufficient to provide for the timely repayment of the bonds. Provided that the collateral cash flow is adequate to meet
scheduled bond payments, the mortgage collateral pool can be structured to accommodate various desired bond repayment schedules.
This is accomplished by dividing the bonds into classes to which payments on the underlying mortgage pools are allocated in different
order. The bond’s cash flow, for example, can be dedicated to one class of bondholders at a time, thereby increasing call protection to
bondholders. In private-label CMOs, losses on underlying mortgages are directed to the most junior of all classes and then to the
classes above in order of increasing seniority, which means that the senior classes have enough credit protection to be given the
highest credit rating by the rating agencies.
Deposits
The Company’s lending and investing activities are primarily funded by deposits. The Company offers a variety of deposit
accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. The Company
relies primarily on competitive pricing policies and customer service to attract and retain these deposits.
Total deposits at December 31, 2016 were $17.31 billion, a decrease of $373.8 million or 2.1% compared with $17.68 billion at
December 31, 2015. Total deposits at December 31, 2015 were $17.68 billion, a decrease of $12.0 million or 0.1% compared with
$17.69 billion at December 31, 2014. Noninterest-bearing deposits at December 31, 2016 were $5.19 billion compared with $5.14
billion at December 31, 2015, an increase of $54.4 million or 1.1%. Noninterest-bearing deposits at December 31, 2015 were $5.14
billion compared with $4.94 billion at December 31, 2014, an increase of $200.2 million or 4.1%. Interest-bearing deposits at
December 31, 2016 were $12.12 billion, a decrease of $428.2 million or 3.4% compared with $12.54 billion at December 31, 2015.
Interest-bearing deposits at December 31, 2015 were $12.54 billion, a decrease of $212.2 million or 1.7% compared with $12.76
billion at December 31, 2014.
49
The daily average balances and weighted average rates paid on deposits for each of the years ended December 31, 2016, 2015
and 2014 are presented below:
Interest-bearing checking
Regular savings
Money market savings
Time deposits
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits
2016
Average
Balance
Average
Rate
Years Ended December 31,
2015
Average
Average
Balance
Rate
(Dollars in thousands)
2014
Average
Balance
Average
Rate
$ 4,066,799
2,037,051
3,621,390
2,505,526
12,230,766
5,117,621
$ 17,348,387
0.24 % $ 3,873,495
0.25 1,859,257
0.27 3,646,267
0.57 2,754,466
0.32 12,133,485
— 5,024,379
0.23 % $ 17,157,864
0.23 % $ 3,516,987
0.20 1,688,541
0.27 3,667,426
0.50 3,129,710
0.30 12,002,664
— 4,687,680
0.21 % $ 16,690,344
0.24 %
0.20
0.27
0.51
0.32
—
0.23 %
The Company’s ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2016,
2015 and 2014 was 29.5%, 29.3% and 28.1%, respectively.
The following table sets forth the amount of the Company’s certificates of deposit that are $100,000 or greater by time
remaining until maturity at December 31, 2016 (dollars in thousands):
Three months or less
Over three through six months
Over six through 12 months
Over 12 months
Total
$
434,438
298,138
371,298
317,859
$ 1,421,733
30.5 %
21.0
26.1
22.4
100.00 %
Other Borrowings
The Company utilizes borrowings to supplement deposits to fund its lending and investment activities. Borrowings consist of
funds from the Federal Home Loan Bank (“FHLB”) and securities sold under repurchase agreements.
The following table presents the Company’s borrowings at December 31, 2016 and 2015:
FHLB
Advances
FHLB Long-
Term Notes
Payable
(Dollars in thousands)
Securities
Sold Under
Repurchase
Agreements
December 31, 2016
Amount outstanding at year-end
Weighted average interest rate at year-end
Maximum month-end balance during the year
Average balance outstanding during the year
Weighted average interest rate during the year
December 31, 2015
Amount outstanding at year-end
Weighted average interest rate at year-end
Maximum month-end balance during the year
Average balance outstanding during the year
Weighted average interest rate during the year
$ 985,000 $
0.56 %
$ 985,000 $
$ 518,404 $
0.52 %
$ 485,000 $
0.31 %
$ 920,000 $
$ 616,534 $
0.18 %
0.29 %
5,781 $ 320,430
5.66 %
6,342 $ 331,599
6,086 $ 319,551
5.65 %
0.29 %
0.25 %
6,399 $ 315,253
5.64 %
8,655 $ 351,436
6,906 $ 329,745
5.62 %
0.25 %
FHLB advances and long-term notes payable—The Company has an available line of credit with the FHLB of Dallas, which
allows the Company to borrow on a collateralized basis. The Company’s FHLB advances are typically considered short-term
borrowings used to manage liquidity as needed. Maturing advances are replaced by drawing on available cash, making additional
borrowings or through increased customer deposits. At December 31, 2016, the Company had total funds of $5.04 billion available
under this agreement, of which a total amount of $990.8 million was outstanding. FHLB advances were $985.0 million at
50
December 31, 2016 with a weighted average interest rate of 0.56%. Long-term notes payable were $5.8 million at December 31, 2016,
with an average interest rate of 5.66%. The maturity dates on the FHLB notes payable range from the years 2018 to 2028 and have
interest rates ranging from 4.51% to 6.10%.
Securities sold under repurchase agreements with Company customers—At December 31, 2016, the Company had $320.4
million in securities sold under repurchase agreements compared with $315.3 million at December 31, 2015, with weighted average
rates paid of 0.29% and 0.25% for the years ended December 31, 2016 and 2015, respectively. Repurchase agreements are generally
settled on the following business day; however, approximately $11.8 million of repurchase agreements outstanding at December 31,
2016 have maturity dates ranging from 6 to 24 months. All securities sold under agreements to repurchase are collateralized by certain
pledged securities.
Junior Subordinated Debentures
On January 1, 2016, in connection with the acquisition of Tradition, the Company assumed $7.2 million in junior subordinated
debentures. During the second quarter of 2016, the Company redeemed all of its outstanding junior subordinated debentures.
Accordingly, as of December 31, 2016 and 2015, the Company had no junior subordinated debentures outstanding.
Interest Rate Sensitivity and Market Risk
The Company’s asset liability and funds management policy provides management with the guidelines for effective funds
management, and the Company has established a measurement system for monitoring its net interest rate sensitivity position. The
Company manages its sensitivity position within established guidelines.
As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on most of the Company’s assets and liabilities, and the
market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest
rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
The Company manages its exposure to interest rates by structuring its balance sheet in the ordinary course of business. The
Company does not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts
or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of the Company’s operations, with
the exception of how commodity prices may impact the Company’s borrowers’ ability to repay loans, the Company is not subject to
foreign exchange or commodity price risk. The Company does not own any trading assets.
The Company’s exposure to interest rate risk is managed by the Asset Liability Committee (“ALCO”), which is composed of
senior officers of the Company, in accordance with policies approved by the Company’s Board of Directors. The ALCO formulates
strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO
considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional
economies, liquidity, business strategies and other factors. The ALCO meets regularly to review, among other things, the sensitivity of
assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase
and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO reviews
liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management uses two
methodologies to manage interest rate risk: (1) an analysis of relationships between interest-earning assets and interest-bearing
liabilities; and (2) an interest rate shock simulation model. The Company has traditionally managed its business to reduce its overall
exposure to changes in interest rates.
The Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest
income and the balance sheet. Contractual maturities and repricing opportunities of loans are incorporated in the model as are
prepayment assumptions, maturity data and call options within the investment portfolio. Assumptions based on past experience are
incorporated into the model for nonmaturity deposit accounts. The assumptions used are inherently uncertain, and, as a result, the
model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net
interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and the application and timing of various management strategies.
The Company utilizes static balance sheet rate shocks to estimate the potential impact on net interest income of changes in
interest rates under various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base
scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet.
51
The following table summarizes the simulated change in net interest income at the 12-month horizon, considering the balance sheet
composition as of December 31, 2016.
Change in Interest
Rates (Basis Points)
+200
+100
Base
-100
Percent Change in
Net Interest Income
(1.4)%
(0.4)%
0.0%
(7.3)%
The results are significantly influenced by the behavior of demand, money market and savings deposits and the overall balance
sheet composition during such rate fluctuations. The Company has found that, historically, interest rates on these deposits change
more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is
generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result,
the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on
net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and the application and timing of various strategies.
Liquidity
Liquidity involves the Company’s ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit
withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing
basis and manage unexpected events. During 2016 and 2015, the Company’s liquidity needs have primarily been met by growth in
core deposits, security and loan maturities, amortizing investment and loan portfolios and advances from the FHLB of Dallas.
Although access to purchased funds from correspondent banks is available and has been utilized on occasion to take advantage of
investment opportunities, the Company does not generally rely on this external funding source.
The following table illustrates, during the years presented, the mix of the Company’s funding sources and the average assets in
which those funds are invested as a percentage of the Company’s average total assets for the periods indicated. Average assets totaled
$21.88 billion for 2016 compared with $21.62 billion for 2015.
Source of Funds:
Deposits:
Noninterest-bearing
Interest-bearing
Junior subordinated debentures
Securities sold under repurchase agreements
Other borrowings
Other noninterest-bearing liabilities
Shareholders’ equity
Total
Uses of Funds:
Loans
Securities
Federal funds sold and other interest-earning assets
Other noninterest-earning assets
Total
Average noninterest-bearing deposits to average
deposits
Average loans to average deposits
2016
2015
23.39 % 23.24 %
55.90 56.12
—
0.14
1.53
1.46
2.88
2.40
0.55
0.51
16.30 15.58
100.00 % 100.00 %
44.01 % 42.56 %
42.97
0.37
12.65
100.00 % 100.00 %
44.13
0.54
12.77
29.50 % 29.28 %
55.51 % 53.62 %
The Company’s largest source of funds is deposits and its largest uses of funds are securities and loans. The Company does not
expect a change in the source or use of its funds in the foreseeable future. The Company’s average loans increased 4.7% for the year
ended December 31, 2016 compared with the year ended December 31, 2015. The Company predominantly invests excess deposits in
government-backed securities until the funds are needed to fund loan growth. The Company’s securities portfolio has a weighted
average life of 4.12 years and a modified duration of 3.79 at December 31, 2016.
52
As of December 31, 2016, the Company had outstanding $2.04 billion in commitments to extend credit and $74.0 million in
commitments associated with outstanding standby letters of credit. Since commitments associated with letters of credit and
commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding
requirements.
As of December 31, 2016, the Company had no exposure to future cash requirements associated with known uncertainties or
capital expenditures of a material nature.
As of December 31, 2016, the Company had cash and cash equivalents of $437.4 million compared with $564.0 million at
December 31, 2015. The decrease was primarily due to the purchase of $10.07 billion of securities, the net decrease in interest-bearing
deposits of $794.8 million and dividends paid of $86.2 million. This decrease was partially offset by proceeds from the maturities and
repayments of securities of $10.05 billion, net proceeds from short-term borrowings of $500.0 million and net income of $274.5
million.
Contractual Obligations
The following table summarizes the Company’s contractual obligations and other commitments to make future payments as of
December 31, 2016 (other than deposit obligations and securities sold under repurchase agreements). The Company’s future cash
payments associated with its contractual obligations pursuant to its FHLB notes payable and operating leases as of December 31, 2016
are summarized below. The future interest payments were calculated using the current rate in effect at December 31, 2016. Payments
for FHLB notes payable include interest of $677 thousand that will be paid over the future periods. Payments related to leases are
based on actual payments specified in underlying contracts.
Federal Home Loan Bank notes payable
Operating leases
Total
Off-Balance Sheet Items
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
$ 985,871 $
5,685
$ 991,556 $
(Dollars in thousands)
586 $
5,786
6,372 $
4,787 $
9,062
13,849 $
214 $ 991,458
6,759
27,292
6,973 $ 1,018,750
In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, 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.
The Company’s commitments associated with outstanding standby letters of credit and commitments to extend credit expiring
by period as of December 31, 2016 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
Standby letters of credit
Commitments to extend credit
Total
74,008
67,221 $
$
1,010,327
585,075 2,039,109
$ 1,077,548 $ 295,830 $ 154,664 $ 585,075 $ 2,113,117
6,558 $
289,272
— $
(Dollars in thousands)
229 $
154,435
Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by the Company to guarantee the
payment by or performance of a customer to a third party. If the customer does not perform in accordance with the terms of the
agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future
payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is
funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby
letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
Commitments to Extend Credit. The Company enters into contractual commitments to extend credit, normally with fixed
expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Company’s commitments
53
to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company
minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance
for credit losses.
Capital Resources
Capital management consists of providing equity to support the Company’s current and future operations. The Company is
subject to capital adequacy requirements imposed by the Federal Reserve Board and the Bank is subject to capital adequacy
requirements imposed by the FDIC. Both the Federal Reserve Board and the FDIC have adopted risk-based capital requirements for
assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital
requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk.
In July 2013, the Federal Reserve Board and the FDIC published the Basel III Capital Rules establishing a new comprehensive
capital framework for U.S. banking organizations. The Basel III Capital Rules, among other things, (1) introduced a new capital
measure called “Common Equity Tier 1” (“CET1”), (2) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital”
instruments meeting specified requirements, (3) defined CET1 narrowly by requiring that most deductions/ adjustments to regulatory
capital measures be made to CET1 and not to the other components of capital and (4) expanded the scope of the deductions/
adjustments as compared to existing regulations.
The initial minimum capital ratios under the Basel III Capital Rules that became effective as of January 1, 2015 are (1) 4.5%
CET1 to risk-weighted assets, (2) 6.0% Tier 1 capital to risk-weighted assets, (3) 8.0% Total capital to risk-weighted assets and
(4) 4.0% Tier 1 capital to average quarterly assets as reported on consolidated financial statements (known as the “leverage ratio”).
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company to maintain an additional capital
conservation buffer of 2.5% CET1, effectively resulting in minimum ratios of (1) CET1 to risk-weighted assets of 7.0%, (2) Tier 1
capital to risk-weighted assets of 8.5%, (3) Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of 10.5% and (4) a leverage
ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets. The Bank is subject to capital adequacy guidelines of
the FDIC that are substantially similar to the Federal Reserve Board’s guidelines. Also pursuant to FDICIA, the FDIC has
promulgated regulations setting the levels at which an insured institution such as the Bank would be considered “well-capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under the FDIC’s
regulations, the Bank is classified “well-capitalized” for purposes of prompt corrective action.
Total shareholders’ equity increased to $3.64 billion at December 31, 2016, compared with $3.46 billion at December 31, 2015,
an increase of $179.4 million or 5.2%. This increase was primarily the result of net income of $274.5 million, partially offset by
dividends paid on the common stock of $86.2 million.
The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of
December 31, 2016 to the minimum and well-capitalized regulatory standards:
Minimum
Required
For
Capital
Adequacy
Purposes
Minimum
Required
Plus Capital
Conservation
Buffer for
2016
To Be Categorized
As Well Capitalized
Under Prompt
Corrective Action
Provisions
Actual Ratio at
December 31, 2016
4.50 %
6.00 %
8.00 %
4.00 % (1)
4.50 %
6.00 %
8.00 %
4.00 % (2)
5.125 %
6.625 %
8.625 %
4.000 %
5.125 %
6.625 %
8.625 %
4.000 %
N/A
N/A
N/A
N/A
6.50 %
8.00 %
10.00 %
5.00 %
14.48 %
14.48 %
15.20 %
8.68 %
14.35 %
14.35 %
15.07 %
8.60 %
The Company
CET1 capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio
The Bank
CET1 capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio
(1) The Federal Reserve Board may require the Company to maintain a leverage ratio above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio above the required minimum.
54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company’s financial instruments, see Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operation—Financial Condition—Interest Rate Sensitivity and Market Risk. The
Company’s principal market risk exposure is to changes in interest rates.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, the report thereon, the notes thereto and supplementary data commence at page 63 of this Annual
Report on Form 10-K.
The following table presents certain unaudited consolidated quarterly financial information concerning the Company’s results of
operations for each of the two years indicated below. The information should be read in conjunction with the historical consolidated
financial statements of the Company and the notes thereto appearing elsewhere in this Annual Report on Form 10-K.
CONSOLIDATED QUARTERLY FINANCIAL DATA OF THE COMPANY
December 31 September 30
June 30
March 31
Quarter Ended 2016
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share(1):
Basic
Diluted
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share(1):
Basic
Diluted
(Dollars in thousands, except per share data)
(unaudited)
$ 164,669 $ 164,460 $ 169,459 $ 177,191
10,934
166,257
14,000
152,257
30,793
80,528
102,522
33,571
68,951
10,396
154,064
2,000
152,064
29,684
79,476
102,272
33,621
68,651 $
10,837
153,832
2,000
151,832
29,475
79,148
102,159
33,366
68,793 $
10,992
158,467
6,000
152,467
28,473
79,235
101,705
33,634
68,071 $
$
$
$
0.99 $
0.99 $
0.99 $
0.99 $
0.98 $
0.98 $
0.98
0.98
December 31 September 30
June 30
March 31
Quarter Ended 2015
(Dollars in thousands, except per share data)
(unaudited)
$ 162,572 $ 165,543 $ 167,981 $ 173,605
10,700
162,905
1,250
161,655
28,421
79,462
110,614
36,973
73,641
9,314
153,258
500
152,758
30,283
77,909
105,132
34,657
70,475 $
9,435
156,108
5,310
150,798
31,780
76,430
106,148
35,550
70,598 $
9,742
158,239
500
157,739
30,297
79,735
108,301
36,369
71,932 $
$
$
$
1.01 $
1.01 $
1.01 $
1.01 $
1.03 $
1.03 $
1.05
1.05
(1) Earnings per share are computed independently for each of the quarters presented and therefore may not total earnings per share
for the year.
55
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A, CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was
required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act), were effective as of the end of the period covered by this report.
Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31,
2016, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
56
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s
Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting
principles.
As of December 31, 2016, management assessed the effectiveness of the Company’s internal control over financial reporting
based on the criteria for effective internal control over financial reporting established in “Internal Control—Integrated Framework,”
issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission (“2013 Framework”). This assessment
included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions
for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting requirements of
Section 112 of the Federal Deposit Insurance Corporation Improvement Act. Based on the assessment, management determined that
the Company maintained effective internal control over financial reporting as of December 31, 2016.
Deloitte & Touche LLP the independent registered public accounting firm that audited the consolidated financial statements of
the Company included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over
financial reporting as of December 31, 2016. The report is included in this Item under the heading “Report of Independent Registered
Public Accounting Firm.”
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Prosperity Bancshares, Inc.
Houston, Texas
We have audited the internal control over financial reporting of Prosperity Bancshares, Inc. and subsidiaries (the "Company") as
of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Because management's assessment and our audit were conducted to meet the
reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management's
assessment and our audit of the Company's internal control over financial reporting included controls over the preparation of the
schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for
Bank Holding Companies (Form FR Y-9C). The Company's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's Board of
Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have not examined and, accordingly, we do not express an opinion or any other form of assurance on management's statement
referring to compliance with laws and regulations.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended December 31, 2016 of the Company and our report dated February 28,
2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte & Touche LLP
Houston, Texas
February 28, 2017
58
ITEM 9B. OTHER INFORMATION
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the information under the captions “Election of
Directors,” “Continuing Directors and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate
Governance—Committees of the Board—Audit Committee,” “Corporate Governance—Director Nominations Process” and
“Corporate Governance—Code of Ethics” in the Company’s definitive Proxy Statement for its 2017 Annual Meeting of Shareholders
(the “2017 Proxy Statement”) to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days of
the Company’s fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information under the captions “Executive
Compensation and Other Matters” and “Director Compensation” in the 2017 Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
Certain information required by this Item 12 is included under “Securities Authorized for Issuance under Equity Compensation
Plans” in Part II, Item 5 of this Annual Report on Form 10-K. The other information required by this Item is incorporated herein by
reference to the information under the caption “Beneficial Ownership of Common Stock by Management of the Company and
Principal Shareholders” in the 2017 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the information under the captions “Corporate
Governance—Director Independence” and “Certain Relationships and Related Transactions” in the 2017 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the information under the caption “Fees and
Services of Independent Registered Public Accounting Firm” in the 2017 Proxy Statement.
59
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
PART IV.
1. Consolidated Financial Statements. Reference is made to the Consolidated Financial Statements, the report thereon and
the notes thereto commencing at page 63 of this Annual Report on Form 10-K. Set forth below is a list of such Consolidated Financial
Statements:
Report of Independent Registered Public Accounting Firm ...........................................................................................................
Consolidated Balance Sheets as of December 31, 2016 and 2015 ..................................................................................................
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015, and 2014 ....................................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014 ...........................
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014 .............
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 ..............................................
Notes to Consolidated Financial Statements ...................................................................................................................................
64
65
66
67
68
69
70
2. Financial Statement Schedules. All supplemental schedules are omitted as inapplicable or because the required
information is included in the Consolidated Financial Statements or notes thereto.
3. The exhibits to this Annual Report on Form 10-K listed below have been included only with the copy of this report
filed with the Securities and Exchange Commission. The Company will furnish a copy of any exhibit to shareholders upon written
request to the Company and payment of a reasonable fee not to exceed the Company’s reasonable expense.
Each exhibit marked with an asterisk is filed or furnished with this Annual Report on Form 10-K as noted below.
Exhibit
Number (1)
Description
3.1 —
Amended and Restated Articles of Incorporation of Prosperity Bancshares, Inc. (incorporated herein by reference to
Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-63267))
3.2 —
Articles of Amendment to Amended and Restated Articles of Incorporation of Prosperity Bancshares, Inc.
(incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006)
3.3 —
Amended and Restated Bylaws of Prosperity Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed April 23, 2015)
4.1 —
Form of certificate representing shares of Prosperity Bancshares, Inc. common stock (incorporated herein by reference
to Exhibit 4 to the Company’s Registration Statement on Form S-1 (Registration No. 333-63267))
10.1† —
Prosperity Bancshares, Inc. 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the
Company’s Registration Statement on Form S-4 (Registration No. 333-121767))
10.2† —
Prosperity Bancshares, Inc. 2012 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on April 23, 2012)
10.3† —
Second Amended and Restated Employment Agreement effective January 1, 2009 by and among Prosperity
Bancshares, Inc., Prosperity Bank and David Zalman (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed January 7, 2009)
10.4† —
First Amendment to the Second Amended and Restated Employment Agreement effective February 22, 2012 by and
among Prosperity Bancshares, Inc., Prosperity Bank and H. E. Timanus, Jr. (incorporated herein by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed February 24, 2012)
10.5† —
Second Amended and Restated Employment Agreement effective January 1, 2009 by and among Prosperity
Bancshares, Inc., Prosperity Bank and H. E. Timanus, Jr. (incorporated herein by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed January 7, 2009)
10.6† —
Amended and Restated Employment Agreement effective January 1, 2009 by and among Prosperity Bancshares, Inc.,
Prosperity Bank and David Hollaway (incorporated herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on January 7, 2009)
60
Exhibit
Number (1)
Description
10.7 —
Agreement and Plan of Reorganization by and between Prosperity Bancshares, Inc. and American State Financial
Corporation dated February 26, 2012 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report
on Form 8-K filed on February 27, 2012)
10.8† —
Amended and Restated Employment Agreement dated October 20, 2014 by and between W.R. Collier and Prosperity
Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2014)
10.09† —
Employment Agreement dated February 26, 2012 by and between Michael F. Epps and Prosperity Bank (incorporated
herein by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2014)
10.10† —
Management Security Plan Agreement of American State Bank, amended and restated effective as of January 1, 2005,
as assumed by Prosperity Bank (incorporated herein by reference to Exhibit 10.11 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2014)
10.11† —
Employment Agreement, dated July 30, 2004, by and between Prosperity Bank and Edward Z. Safady (incorporated
herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2015)
10.12† —
Amendment to Employment Agreement, dated December 24, 2008, by and between Prosperity Bank and Edward
Safady (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on
August 7, 2015)
10.13† —
Non- Disclosure and Non-Solicitation Agreement, effective May 15, 2015, by and between Prosperity Bank and
Edward Safady (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
filed on August 7, 2015)
10.14† —
Amended and Restated Prosperity Bancshares, Inc. 401(k) Profit Sharing Plan (incorporated herein by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2016)
21.1* — Subsidiaries of Prosperity Bancshares, Inc.
23.1* — Consent of Deloitte & Touche LLP
31.1* —
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended
31.2* —
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended
32.1** —
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2** —
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101* — Interactive financial data
† Management contract or compensatory plan or arrangement.
*
**
(1) The Company has other long-term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation
Filed with this Annual Report on Form 10-K.
Furnished with this Annual Report on Form 10-K.
S-K. The Company hereby agrees to furnish a copy of such agreements to the Commission upon request.
(b) Exhibits. See the exhibit list included in Item 15(a)3 of this Annual Report on Form 10-K.
(c) Financial Statement Schedules. See Item 15(a)2 of this Annual Report on Form 10-K.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant,
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2017
PROSPERITY BANCSHARES, INC.®
(Registrant)
BY:
/S/ DAVID ZALMAN
David Zalman
Chairman of the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
/s/ DAVID ZALMAN
David Zalman
/s/ DAVID HOLLAWAY
David Hollaway
/s/ JAMES A. BOULIGNY
James A. Bouligny
/s/ W. R. COLLIER
W. R. Collier
/s/ LEAH HENDERSON
Leah Henderson
/s/ NED S. HOLMES
Ned S. Holmes
/s/ JACK LORD
Jack Lord
/s/ WILLIAM T. LUEDKE IV
William T. Luedke IV
/s/ PERRY MUELLER, JR., D.D.S.
Perry Mueller, Jr., D.D.S.
/s/ HARRISON STAFFORD II
Harrison Stafford II
/s/ ROBERT STEELHAMMER
Robert Steelhammer
/s/ H.E. TIMANUS, JR.
H.E. Timanus, Jr.
Date
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
Positions
Chairman of the Board and Chief Executive Officer
(principal executive officer); Director
Chief Financial Officer (principal financial officer
and principal accounting officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
62
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
Prosperity Bancshares, Inc.® ..................................................................................................................................................................................................................................................
Report of Independent Registered Public Accounting Firm ...........................................................................................................
Consolidated Balance Sheets as of December 31, 2016 and 2015 ..................................................................................................
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014 .....................................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014 ...........................
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014 .............
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 ..............................................
Notes to Consolidated Financial Statements ...................................................................................................................................
64
65
66
67
68
69
70
Page
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Prosperity Bancshares, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Prosperity Bancshares, Inc. and subsidiaries (the
"Company") as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes
in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Prosperity Bancshares,
Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 28, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Houston, Texas
February 28, 2017
64
PROSPERITY BANCSHARES, INC.
® AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Cash and due from banks
Federal funds sold
Total cash and cash equivalents
ASSETS
$
Available for sale securities, at fair value
Held to maturity securities, at cost (fair value of $9,339,455 and $9,393,175 respectively)
Total securities
Loans held for sale
Loans held for investment
Total loans
Less: allowance for credit losses
Loans, net
Accrued interest receivable
Goodwill
Core deposit intangibles, net
Bank premises and equipment, net
Other real estate owned
Bank owned life insurance (BOLI)
Federal Home Loan Bank of Dallas stock
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Fed funds purchased and other borrowings
Securities sold under repurchase agreements
Accrued interest payable
Other liabilities
Total liabilities
$
$
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, $1 par value; 20,000,000 shares authorized; none issued or outstanding
Common stock, $1 par value; 200,000,000 shares authorized; 69,491,012 shares issued
and outstanding at December 31, 2016; 70,058,761 shares issued and 70,021,673
shares outstanding at December 31, 2015
Capital surplus
Retained earnings
Accumulated other comprehensive income—net unrealized gain on available for sale
securities, net of tax of $760 and $1,098, respectively
Less treasury stock, at cost, none at December 31, 2016 and 37,088 shares at
December 31, 2015
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
See notes to consolidated financial statements.
65
December 31,
2016
2015
(Dollars in thousands)
436,203 $
1,178
437,381
221,176
9,504,910
9,726,086
26,975
9,595,085
9,622,060
(85,326 )
9,536,734
53,310
1,900,845
45,784
262,083
15,463
247,116
55,430
50,840
22,331,072 $
5,190,973 $
12,116,329
17,307,302
990,781
320,430
2,319
67,929
18,688,761
—
562,544
1,418
563,962
103,064
9,399,363
9,502,427
23,933
9,414,656
9,438,589
(81,384 )
9,357,205
51,924
1,868,827
49,417
267,996
2,963
235,429
68,413
68,653
22,037,216
5,136,579
12,544,540
17,681,119
491,399
315,253
1,896
84,639
18,574,306
—
—
—
69,491
2,028,129
1,543,280
70,059
2,036,378
1,355,040
1,411
2,040
—
3,642,311
22,331,072 $
(607 )
3,462,910
22,037,216
PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
2016
For the Years Ended December 31,
2015
(Dollars in thousands, except per share data)
2014
INTEREST INCOME:
Loans, including fees
Securities
Federal funds sold
Total interest income
INTEREST EXPENSE:
$
475,059 $
200,375
345
675,779
475,427 $
194,003
271
669,701
Deposits
Other borrowings
Securities sold under repurchase agreements
Junior subordinated debentures
Total interest expense
NET INTEREST INCOME
PROVISION FOR CREDIT LOSSES
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NONINTEREST INCOME:
Nonsufficient funds (NSF) fees
Credit card, debit card and ATM card income
Service charges on deposit accounts
Trust income
Mortgage income
Brokerage income
Net gain on sale of assets
Other
Total noninterest income
NONINTEREST EXPENSE:
Salaries and employee benefits
Net occupancy and equipment
Credit and debit card, data processing and software amortization
Regulatory assessments and FDIC insurance
Core deposit intangibles amortization
Depreciation
Communications
Other real estate expense
Other
Total noninterest expense
INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
EARNINGS PER SHARE:
Basic
Diluted
$
$
$
39,125
3,065
932
37
43,159
632,620
24,000
608,620
33,536
23,561
18,832
8,120
7,076
4,571
1,864
20,865
118,425
197,897
23,058
17,050
12,735
9,200
13,094
11,561
514
33,278
318,387
408,658
134,192
274,466 $
36,074
1,508
818
791
39,191
630,510
7,560
622,950
34,284
23,534
17,095
8,030
5,720
5,953
2,403
23,762
120,781
192,872
23,638
15,782
14,433
9,530
12,959
11,121
625
32,576
313,536
430,195
143,549
286,646 $
525,716
188,744
335
714,795
37,871
772
938
4,060
43,641
671,154
18,275
652,879
37,048
22,889
16,452
8,108
4,264
5,868
4,658
21,545
120,832
199,270
24,756
15,790
15,017
9,940
13,730
11,609
1,019
36,831
327,962
445,749
148,308
297,441
3.94 $
3.94 $
4.09 $
4.09 $
4.32
4.32
See notes to consolidated financial statements.
66
PROSPERITY BANCSHARES, INC. ® AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive loss, before tax:
Securities available for sale:
Change in unrealized gain during period
Total other comprehensive loss
Deferred tax benefit related to other comprehensive income
Other comprehensive loss, net of tax
Comprehensive income
$
2016
For the Years Ended December 31,
2015
(Dollars in thousands)
2014
$
274,466 $
286,646 $
297,441
(967 )
(967 )
338
(629 )
273,837 $
(2,599 )
(2,599 )
910
(1,689 )
284,957 $
(1,776 )
(1,776 )
622
(1,154 )
296,287
See notes to consolidated financial statements.
67
PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock
Shares
Amount
Capital
Surplus
Retained
Earnings
Comprehensive Treasury
Income
Stock
(In thousands, except share and per share data)
Accumulated
Other
Total
Shareholders’
Equity
BALANCE AT DECEMBER 31, 2013 66,085,179 $ 66,085 $ 1,798,862 $ 917,595 $
297,441
Net income
Other comprehensive loss
Common stock issued in connection
4,883 $
(1,154 )
(607 ) $ 2,786,818
297,441
(1,154 )
with the exercise of stock
options and restricted stock
awards
433,452
434
3,271
Common stock issued in connection
with the acquisition of F&M
Bancorporation Inc.
3,298,022
Stock based compensation expense
Cash dividends declared, $0.9925
per share
BALANCE AT DECEMBER 31, 2014 69,816,653
3,298 214,866
8,236
3,705
218,164
8,236
(68,384 )
69,817 2,025,235 1,146,652
286,646
3,729
(1,689 )
(68,384 )
(607 ) 3,244,826
286,646
(1,689 )
BALANCE AT DECEMBER 31, 2015 70,058,761
242,108
242
48
11,095
290
11,095
(78,258 )
70,059 2,036,378 1,355,040
274,466
2,040
(629 )
(78,258 )
(607 ) 3,462,910
274,466
(629 )
34,701
35
743
679,528
(37,088 )
(1,244,890 )
679
(37 )
(1,245 )
31,843
(570 )
(49,812 )
9,547
778
32,522
—
(51,057 )
9,547
607
per share
(86,226 )
BALANCE AT DECEMBER 31, 2016 69,491,012 $ 69,491 $ 2,028,129 $ 1,543,280 $
1,411 $
(86,226 )
— $ 3,642,311
See notes to consolidated financial statements.
68
Net income
Other comprehensive loss
Common stock issued in connection
with the exercise of stock
options and restricted stock
awards
Stock based compensation expense
Cash dividends declared, $1.1175
per share
Net income
Other comprehensive loss
Common stock issued in connection
with the exercise of stock
options and restricted stock
awards
Common stock issued in connection
with the acquisition of Tradition
Bancshares, Inc.
Treasury stock cancellation
Common stock repurchase
Stock based compensation expense
Cash dividends declared, $1.2400
PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization
Provision for credit losses
Deferred income tax expense
Net amortization of premium on investments
Gain on sale or write down of premises, equipment and other real estate
Net amortization of premium on deposits
Net accretion of discount on loans
Proceeds from sale of loans held for sale
Originations of loans held for sale
Stock based compensation expense
Decrease (increase) in accrued interest receivable and other assets
(Decrease) increase in accrued interest payable and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of held to maturity securities
Purchase of held to maturity securities
Proceeds from maturities, sales and principal paydowns of available for sale
securities
Purchase of available for sale securities
Net decrease (increase) in loans held for investment
Purchase of bank premises and equipment
Proceeds from the sale of Bankers Credit Card Services, Inc.
Proceeds from sale of bank premises, equipment and other real estate
Net cash and cash equivalents acquired in the purchase of F&M
Bancorporation Inc.
Net cash used in the purchase of Traditions Bancshares, Inc.
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing deposits
Net decrease in interest-bearing deposits
Net proceeds from other short-term borrowings
Repayments of other long-term borrowings
Net increase (decrease) in securities sold under repurchase agreements
Redemption of junior subordinated debentures
Proceeds from stock option exercises
Repurchase of common stock
Payments of cash dividends
Net cash (used in) provided by financing activities
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
NONCASH ACTIVITIES:
Stock issued in connection with the F&M Bancorporation Inc. acquisition
Stock issued in connection with the Tradition Bancshares, Inc. acquisition
Acquisition of real estate through foreclosure of collateral
SUPPLEMENTAL INFORMATION:
Income taxes paid
Interest paid
For the Years Ended December 31,
2016
2015
2014
(Dollars in thousands)
$
274,466 $
286,646 $ 297,441
22,294
24,000
19,047
43,474
(1,578 )
(1,167 )
(38,970 )
272,873
(278,259 )
9,547
15,615
(26,987 )
334,355
22,489
7,560
34,999
58,229
(2,437 )
(1,055 )
(52,122 )
233,535
(248,866 )
11,095
(44,756 )
5,497
310,814
23,670
18,275
45,713
51,680
(3,974 )
(2,556 )
(95,876 )
182,138
(188,530 )
8,236
9,786
2,258
348,261
1,916,701
(1,820,346 )
1,654,471 1,365,005
(2,211,731 ) (2,218,105 )
8,133,829
(8,253,214 )
64,390
(5,007 )
—
13,617
7,974,775 7,050,232
(7,934,994 ) (6,999,997 )
219,952
(12,075 )
6,440
28,765
(136,829 )
(9,357 )
—
13,037
—
(8,963 )
41,007
—
—
(650,628 )
487,599
—
(72,184 )
(67,958 )
(794,822 )
500,000
(618 )
5,177
(7,217 )
778
(51,057 )
(86,226 )
(501,943 )
(126,581 )
563,962
437,381 $
— $
32,522
14,816
176,477
200,159
(40,612 )
(211,143 )
—
485,000
(1,965 )
(2,325 )
(48,834 )
(270 )
—
(167,531 )
3,705
290
—
—
(68,384 )
(78,258 )
20,387
225,922
296,464
(113,892 )
677,854
381,390
563,962 $ 677,854
— $ 218,164
—
—
6,914
2,591
122,418 $
42,736
103,116 $ 105,852
43,209
44,277
$
$
$
See notes to consolidated financial statements.
69
PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations—Prosperity Bancshares, Inc.® (“Bancshares”) and its subsidiary, Prosperity Bank® (the “Bank”,
collectively referred to as the “Company”), provide retail and commercial banking services.
As of December 31, 2016, the Bank operated 245 full-service banking locations; with 65 in the Houston area, including The
Woodlands; 29 in the South Texas area including Corpus Christi and Victoria; 36 in the Dallas/Fort Worth, Texas area; 22 in the East
Texas area; 29 in the Central Texas area, including Austin and San Antonio; 34 in the West Texas area including Lubbock, Midland-
Odessa and Abilene; 16 in the Bryan/College Station area; 6 in the Central Oklahoma area and 8 in the Tulsa, Oklahoma area.
Summary of Significant Accounting and Reporting Policies—The accounting and reporting policies of the Company
conform to generally accepted accounting principles (“GAAP”) and the prevailing practices within the financial services industry. A
summary of significant accounting and reporting policies are as follows:
Basis of Presentation—The consolidated financial statements include the accounts of Bancshares and its subsidiaries.
Intercompany transactions have been eliminated in consolidation. Operations are managed and financial performance is evaluated on a
company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one
reportable operating segment. Because the overall banking operations comprise the vast majority of the consolidated operations, no
separate segment disclosures are presented.
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but
are not limited to certain fair value measures including the calculation of stock-based compensation, the valuation of goodwill and
available for sale and held to maturity securities and the calculation of allowance for credit losses. Actual results could differ from
these estimates.
Securities —Securities held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of
discounts. Management has the positive intent and the Company has the ability to hold these assets until their estimated maturities.
Securities available for sale are carried at fair value. Unrealized gains and losses are excluded from earnings and reported, net of
tax, as a separate component of shareholders’ equity until realized. Securities within the available for sale portfolio may be used as
part of the Company’s asset/liability strategy and may be sold in response to changes in interest rate risk, prepayment risk or other
similar economic factors.
For debt securities, when other-than-temporary impairment (“OTTI”) occurs, the amount of the OTTI recognized in earnings
depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of
its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the
security before recovery of its amortized cost basis less any current-period credit loss, the OTTI 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.
Premiums and discounts are amortized and accreted to operations using the level-yield method of accounting, adjusted for
prepayments as applicable. The specific identification method of accounting is used to compute gains or losses on the sales of these
assets. Interest earned on these assets is included in interest income.
Loans Held for Sale—Loans held for sale are carried at the lower of aggregate cost or market value. Premiums, discounts and
loan fees (net of certain direct loan origination costs) on loans held for sale are deferred until the related loans are sold or repaid. Gains
or losses on loan sales are recognized at the time of sale and determined using the specific identification method.
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Loans Held for Investment—Loans originated and held for investment are stated at the principal amount outstanding, net of
unearned fees. The related interest income for multipayment loans is recognized principally by the simple interest method; for single
payment loans, such income is recognized using the straight-line method.
The Company has two general categories of loans in its portfolio. Loans originated by the Bank and made pursuant to the
Company’s loan policy and procedures in effect at the time the loan was made are referred to as “legacy loans” and loans acquired in a
business combination are referred to as “acquired loans.” Acquired loans are initially recorded at fair value based on a discounted cash
flow valuation methodology that considers, among other things, interest rates, projected default rates, loss given default and recovery
rates, with no carryover of any existing allowance for credit losses. Those acquired loans that are renewed or substantially modified
after the date of the business combination, which therefore causes them to become subject to the Company’s allowance for credit
losses methodology, are referred to as “acquired legacy loans.” Modifications are reviewed for determination of troubled debt
restructuring status independently of this process. In certain instances, acquired loans to one borrower may be combined or otherwise
re-originated such that they are re-categorized as legacy loans. Acquired loans with a fair value discount or premium at the date of the
business combination that remained at the reporting date are referred to as “fair-valued acquired loans.” All fair-valued acquired loans
are further categorized into “Non-PCI loans” and “PCI loans” (purchased credit impaired loans). Acquired loans with evidence of
credit quality deterioration at acquisition are reviewed to determine if it is probable that the Company will not be able to collect all
contractual amounts due, including both principal and interest. When both conditions exist, such loans are accounted for as PCI loans.
The Company estimates the total cash flows expected to be collected from the PCI loans, which include undiscounted expected
principal and interest, using credit risk, interest rate and prepayment risk assessments that incorporate management’s best estimate of
current key assumptions such as default rates, loss severity and payment speeds. The excess of the undiscounted total cash flows
expected to be collected over the fair value of the related PCI loans represents the accretable yield, which is recognized as interest
income on a level-yield basis over the life of the related loan. The difference between the undiscounted contractual principal and
interest and the undiscounted total cash flows expected to be collected is the nonaccretable difference, which reflects the impact of
estimated credit losses and other factors. Subsequent increases in expected cash flows will result in a recovery of any previously
recorded allowance for credit losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield,
which is recognized prospectively over the then remaining life of the loan. Subsequent decreases in expected cash flows will result in
an impairment charge to the provision for credit losses, resulting in an addition to the allowance for credit losses, and a reclassification
from accretable yield to nonaccretable difference.
A loan disposal, which may include a loan sale, receipt of payment in full from the borrower or foreclosure, results in removal
of the loan from the balance sheet at its allocated carrying amount and accretion of any remaining fair value discount to income.
Nonrefundable Fees and Costs Associated with Lending Activities—Loan origination fees in excess of the associated costs
are recognized over the life of the related loan as an adjustment to yield using the interest method.
Loan commitment fees and loan origination costs are deferred and recognized as an adjustment of yield by the interest method
over the related loan life or, if the commitment expires unexercised, recognized in income upon expiration of the commitment.
Nonperforming and Past Due Loans—Included in the nonperforming loan category are loans which have been categorized by
management as nonaccrual because collection of interest is doubtful and loans which have been restructured to provide a reduction in
the interest rate or a deferral of interest or principal payments. When the payment of principal or interest on a loan is delinquent for 90
days, or earlier in some cases, the loan is placed on nonaccrual status unless the loan is in the process of collection and the underlying
collateral fully supports the carrying value of the loan. If the decision is made to continue accruing interest on the loan, periodic
reviews are made to confirm the accruing status of the loan. When a loan is placed on nonaccrual status, interest accrued but not yet
collected prior to the determination of uncollectibility is charged to operations. Interest accrued during prior periods is charged to the
allowance for credit losses. Any payments received on nonaccrual loans are applied first to outstanding principal of the loan amount,
next to the recovery of charged-off loan amounts and finally, any excess is treated as recovery of lost interest.
Restructured loans are those loans on which concessions in terms have been granted because of a borrower’s financial difficulty.
Interest is generally not accrued on such loans in accordance with the new terms.
Allowance for Credit Losses—The allowance for credit losses is a valuation allowance available for losses incurred on loans.
All losses are charged to the allowance when the loss actually occurs or when a determination is made that such a loss is probable and
reasonably estimatable. Recoveries are credited to the allowance at the time of recovery.
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Throughout the year, management estimates the probable level of losses to determine whether the allowance for credit losses is
adequate to absorb losses inherent in the loan portfolio. Based on these estimates, an amount is charged to the provision for credit
losses and credited to the allowance for credit losses in order to adjust the allowance to a level determined to be adequate to absorb
losses.
In making its evaluation of the adequacy of the allowance for credit losses, management considers factors such as historical loan
loss experience, 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.
Estimates of credit losses involve an exercise of judgment. While it is possible that in the short term the Company may sustain
losses which are substantial in relation to the allowance for credit losses, it is the judgment of management that the allowance for
credit losses reflected in the consolidated balance sheets is adequate to absorb probable losses that exist in the loan portfolio as of
December 31, 2016.
The Company’s allowance for credit losses consists of two elements: (1) specific valuation allowances based on probable losses
on impaired loans; and (2) 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. A loan is defined as impaired if, based on current information
and events, it is probable that a creditor will be unable to collect all amounts due, both interest and principal, according to the
contractual terms of the loan agreement. The allowance for credit losses related to impaired loans is determined based on the
difference of carrying value of loans and the present value of expected cash flows discounted at the loan’s effective interest rate or, as
a practical expedient, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected
to be realized over the remaining lives of the loans, and therefore no corresponding allowance for credit losses is recorded for these
loans at acquisition. These fair value estimates associated with acquired loans, based on a discounted cash flow model, include
estimates related to market interest rates and undiscounted projections of future cash flows that incorporate expectations of
prepayments and the amount and timing of principal, interest and other cash flows, as well as any shortfalls thereof. At period-end
after acquisition, the fair-valued acquired loans from each acquisition are reassessed to determine whether an addition to the allowance
for credit losses is appropriate due to further credit quality deterioration. Methods utilized to estimate any subsequently required
allowance for acquired loans not deemed credit impaired at acquisition are similar to originated loans; however, the estimate of loss is
based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the
calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference.
Premises and Equipment—Premises and equipment are carried at cost less accumulated depreciation. Depreciation expense is
computed principally using the straight-line method over the estimated useful lives of the assets which range from three to 39 years.
Leasehold improvements are amortized using the straight-line method over the periods of the leases or the estimated useful lives,
whichever is shorter.
Goodwill —Goodwill is annually assessed for impairment or when events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable.
Under Accounting Standards Codification (“ASC”) topic 350-20, “Intangibles—Goodwill and Other—Goodwill” companies
have 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 first step of the
goodwill impairment test compares the estimated fair value of the Company’s reporting unit to its carrying value. If the estimated fair
value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the estimated fair value of the
reporting unit is less than the carrying value, the second step must be performed to determine the implied fair value of the reporting
unit’s goodwill and the amount of goodwill impairment, if any.
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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 units, discount rates (including market risk premiums) and market multiples.
Material assumptions used in the valuation tools included 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 value 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, valuation
is 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) are discounted. The discount rate was based on the imputed cost of equity capital.
Amortization of Core Deposit Intangibles—Core deposit intangibles are being amortized on a non-pro rata basis over an
estimated life of 10 to 15 years.
Income Taxes—The Company files a consolidated federal income tax return and a consolidated Oklahoma state income tax
return.
Deferred tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are recorded in other assets on
the Company’s consolidated balance sheets. The Company records uncertain tax positions in accordance with ASC topic 740 “Income
Taxes” on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions
will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not
recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon
ultimate settlement with the related tax authority.
Realization of net deferred tax assets is based upon the level of historical income and on estimates of future taxable income.
Although realization is not assured, management believes it is more likely than not that all of the net deferred tax assets will be
realized.
Stock-Based Compensation—The Company accounts for stock-based employee compensation plans using the fair value-based
method of accounting. The expense associated with stock-based compensation is recognized over the vesting period of each individual
arrangement. 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. The fair value of restricted stock awards is based on the current market price
on the date of grant.
Cash and Cash Equivalents—For purposes of reporting cash flows, cash and cash equivalents include cash and due from
banks as well as federal funds sold that mature in three days or less.
Earnings Per Common Share—Basic earnings per common share are calculated using the two-class method. The two-class
method provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of basic earnings per share.
Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings
per common share computation plus the potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock using the treasury stock method. Outstanding stock options issued by the Company
represent the only dilutive effect reflected in diluted weighted average shares.
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The following table illustrates the computation of basic and diluted earnings per share:
Net income
Basic:
2016
Year Ended December 31,
2015
2014
Amount
Per Share
Amount
Amount
Per Share
Amount
Amount
Per Share
Amount
$ 274,466
$ 286,646
$ 297,441
(Amounts in thousands, except per share data)
Weighted average shares outstanding
69,674 $
3.94 70,033 $
4.09 68,855 $
4.32
Diluted:
Add incremental shares for:
Effect of dilutive securities - options
Total
6
69,680 $
16
3.94 70,049 $
56
4.09 68,911 $
4.32
There were no stock options exercisable at December 31, 2016, 2015 and 2014 that would have had an anti-dilutive effect on the
above computation.
New Accounting Standards
Accounting Standards Updates (“ASU”)
ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350).” ASU 2017-04 simplifies the subsequent measurement of
goodwill by eliminating the second step of the goodwill impairment test, which required computing the implied fair value of goodwill.
Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying
amount exceeds the reporting unit’s fair value; however the loss recognized should not exceed the total amount of goodwill allocated
to that reporting unit. ASU 2017-04 will be effective for the Company on January 1, 2020 and is not expected to have a significant
impact on the Company’s financial statements.
ASU 2017-01, “Business Combinations (Topic 805).” ASU 2017-01 in intended to clarify or correct unintended application of
ASU 2014-09 “Revenue from Contract with Customers (Topic 606).” ASU 2017-01 clarifies the definition of a business with the
objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. Additionally, the amendments in this update provide a more robust framework to assist entities in
evaluating whether a set of assets and activities constitutes a business. Lastly, the amendments in this update narrow the definition of
the term output sot that the term is consistent with how outputs are described in Topic 606. ASU 2017-01 will be effective for the
Company on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.
ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash.” ASU 2016-18 requires the Statement of Cash Flows
to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, restricted cash or cash equivalents should be included with cash and cash equivalents when
recording the beginning-of-period and end-of-period total amounts on the Statement of Cash Flows. ASU 2016-18 will be effective for
the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.
ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU
2016-15 addresses certain cash receipts and cash payments with the objective of reducing the existing diversity in practice. ASU 2016-
15 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company's financial
statements.
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments.”
ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net
amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events,
including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the
reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in
its circumstances. Additionally, available for sale debt securities may realize value either through collection of contractual cash flows
or through sale of the security at fair value. Therefore, the amendments limit the amount of the allowance for credit losses to the
difference between amortized cost and fair value. ASU 2016-13 will be effective for the Company as of January 1, 2020. The
Company is currently evaluating the potential impact of ASU 2016-13 on the Company’s financial statements.
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ASU 2016-12, “Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients.”
ASU 2016-12 addresses narrow-scope improvements to the guidance on collectability, noncash consideration and completed contracts
at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The amendments
in this update affect the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is effective
January 1, 2018. The Company is in the process of evaluating the impact of this guidance and does not currently anticipate a
significant impact on the Company’s financial statements.
ASU 2016-10, “Revenue from Contracts with Customers (Topic 606)—Identifying Performance Obligations and Licensing.”
ASU 2016-10 clarifies two aspects of “Revenue from Contracts with Customers (Topic 606)” (i) identifying performance obligations
and (ii) the licensing implementation guidance. This ASU adds guidance on how to identify the promised goods or services in the
contract and how to evaluate whether promised goods and services are distinct. Additionally, this update includes guidance on
determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual
property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time) and
when to recognize revenue for a sales-based or use-based royalty promised in exchange for a license of intellectual property. The
amendments in this update affect the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is
effective January 1, 2018. The Company is in the process of evaluating the impact of this guidance and does not currently anticipate a
significant impact on the Company’s financial statements.
ASU 2016-09, “Compensation - Stock Compensation (Topic 718) — Improvements to Employee Share-Based Payment
Accounting.” ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based
payment awards to their employees. This ASU covers accounting for income taxes, forfeitures and statutory tax withholding
requirements, as well as classification in the statement of cash flows. ASU 2016-09 will be effective for the Company as of January 1,
2017, and is not expected to have a significant impact on the Company’s financial statements.
ASU 2016-08, “Revenue from Contracts with Customers (Topic 606)—Principal versus Agent Considerations (Reporting
Revenue Gross versus Net).” ASU 2016-08 states that when another party is involved in providing goods or services to a customer, an
entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a
principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). Additionally, when an
principal entity satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it
expects to be entitled in exchange for the specified good or service transferred to the customer, but when an agent entity satisfies a
performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in
exchange for arranging for the specified good or service to be provided by the other party. The amendments in this update affect the
guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is effective January 1, 2018. The Company
is in the process of evaluating the impact of this guidance and does not currently anticipate a significant impact on the Company’s
financial statements.
ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that lessees and lessors recognize lease assets and lease liabilities
on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 is effective for public companies for
annual periods beginning January 1, 2019, including interim periods within those fiscal years. The Company is currently evaluating
the potential impact of ASU 2016-02 on the Company’s financial statements.
ASU 2016-01 “Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and
Financial Liabilities” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. ASU 2016-01 (i) requires equity investments (except those accounted for under the equity method of accounting or those
that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
(ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative
assessment to identify impairment; (iii) eliminates the requirement to disclose the fair value of financial instruments measured at
amortized cost for entities that are not public business entities; (iv) eliminates the requirement for public business entities to disclose
the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments
measured at amortized cost on the balance sheet; (v) requires public business entities to use the exit price notion when measuring the
fair value of financial instruments for disclosure purposes; (vi) requires an entity to present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the
entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vii) requires
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities
or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (viii) clarifies that an entity
should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with
the entity’s other deferred tax assets. The amendments in this update affect all entities that hold financial assets or owe financial
liabilities. ASU 2016-01 is effective for the Company beginning January 1, 2018, and is not expected to have a significant impact on
the Company’s financial statements.
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ASU 2015-16, “Business Combinations (Topic 805)—Simplifying the Accounting for Measurement-Period Adjustments.”
ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement
period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s
financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the
change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Additionally, the entity
is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in
current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional
amounts had been recognized as of the acquisition date. ASU 2015-16 became effective for the Company on January 1, 2016 and did
not have a significant impact on the Company’s financial statements.
ASU 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)—Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from GAAP the concept of extraordinary
items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the
results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing
operations. ASU 2015-01 became effective for the Company on January 1, 2016 and did not have a significant impact on the
Company’s financial statements.
ASU 2014-12 “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 became effective for the Company on January 1, 2016
and did not have a significant impact on the Company’s financial statements.
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 became
effective for the Company on January 1, 2016 and did not 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 January 1, 2018, with retrospective application to each
prior reporting period presented. The Company is currently evaluating the requirements of ASU 2014-09, but it is not expected to have
a significant impact on the Company’s financial statements.
2. ACQUISITIONS
Acquisitions are an integral part of the Company’s growth strategy. All acquisitions were accounted for using the acquisition
method of accounting. Accordingly, the assets and liabilities of the acquired entities were recorded at their fair values at the
acquisition date. The excess of the purchase price over the estimated fair value of the net assets for tax-free acquisitions was recorded
as goodwill, none of which is deductible for tax purposes. The excess of the purchase price over the estimated fair value of the net
assets for taxable acquisitions was also recorded as goodwill, and is deductible for tax purposes. The identified core deposit
intangibles for each acquisition are being amortized using a non-pro rata basis over an estimated life of 10 to 15 years. The results of
operations for each acquisition have been included in the Company’s consolidated financial results beginning on the respective
acquisition date.
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The measurement period for the Company to determine the fair values of acquired identifiable assets and assumed liabilities will
end at the earlier of (1) twelve months from the date of the acquisition or (2) as soon as the Company receives the information it was
seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. The
following acquisitions were completed on the dates indicated:
2016 Acquisition
Acquisition of Tradition Bancshares, Inc. — On January 1, 2016, the Company completed the acquisition of Tradition
Bancshares, Inc. (“Tradition”) and its wholly-owned subsidiary Tradition Bank, headquartered in Houston, Texas. Tradition Bank
operated 7 banking offices in the Houston, Texas area, including its main office in Bellaire, 3 banking centers in Katy and 1 banking
center in The Woodlands. 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 $239.7 million and $489.7 million, respectively, at acquisition
date. Under the terms of the definitive agreement, Bancshares issued 679,528 shares of its common stock plus $39.0 million in cash
for all outstanding shares of Tradition capital stock, for total merger consideration of $71.5 million, based on Bancshares’ closing
stock price of $47.86 on December 31, 2015. During 2016, the Company recognized goodwill of $32.0 million, which 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 $5.6 million of core deposit
intangibles.
Merger-Related Expenses: The Company incurred $670 thousand of pre-tax merger-related expenses during 2016 attributable to
the Tradition acquisition. The merger-related expenses are reflected on the Company’s income statement for the applicable periods
and are reported primarily in the categories of salaries and benefits, data processing and travel and development. There were no other
merger-related costs incurred during 2016.
2014 Acquisition
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 (collectively, “F&M”) headquartered in Tulsa,
Oklahoma. F&M operated 13 banking locations: 9 in Tulsa, Oklahoma and surrounding areas; 1 (a loan production office) in
Oklahoma City, Oklahoma; and 3 in Dallas, Texas. The Company acquired FMBC to further expand its Oklahoma and Dallas, Texas
area markets. The acquisition is not considered significant to the Company’s financial statements and therefore pro forma financial
data is 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 definitive agreement, Bancshares issued 3,298,022 shares of its 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 Bancshares’ closing stock price of
$66.15. During 2014, the Company recognized goodwill of $198.2 million. As of December 31, 2015, total goodwill related to the
FMBC acquisition was $192.9 million, after recording $5.3 million of net measurement period adjustments during 2015. Additionally,
the Company recognized $27.1 million of core deposit intangibles.
Merger-Related Expenses: The Company incurred $3.1 million of pre-tax merger-related expenses during 2014. The merger-
related expenses are reflected on the Company’s income statement for the applicable periods and are reported primarily in the
categories of salaries and benefits, data processing and professional and legal fees. Merger-related costs incurred during 2014 are
presented in the table below by acquisition (dollars in thousands).
FVNB Corp.
F&M Bancorporation Inc.
All other
$
$
604
2,476
34
3,114
Acquired Loans
Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers,
among other things, interest rates, projected default rates, loss given default and recovery rates, with no carryover of any existing
allowance for credit losses from acquisitions completed during 2016 and 2014. During the valuation process, the Company identified
PCI and Non-PCI loans in the acquired loan portfolios. PCI loan identification considers the following factors: payment history and
past due status, debt service coverage, loan grading, collateral values and other factors that may indicate deterioration of credit quality
77
since origination. Non-PCI loan identification considers the following factors: account types, remaining terms, annual interest rates or
coupons, current market rates, interest types, past delinquencies, timing of principal and interest payments, loan to value ratios, loss
exposures and remaining balances. Accretion of purchased discounts on PCI loans will be based on estimated future cash flows,
regardless of contractual maturities. Accretion of purchased discounts on Non-PCI loans will be recognized on a level-yield basis
based on contractual maturity of individual loans.
PCI Loans. The carrying amount of PCI loans included in the consolidated balance sheets and the related outstanding balances
at December 31, 2016 and 2015 are presented in the table below. The outstanding balance represents the total amount owed as of
December 31, 2016 and 2015.
PCI loans:
Outstanding balance
Less: discount
Recorded investment
December 31,
December 31,
2016
2015
(Dollars in thousands)
$
$
51,640 $
24,007
27,633 $
79,802
39,976
39,826
Changes in the accretable yield for PCI loans for the years ended December 31, 2016 and 2015 were as follows:
Balance at beginning of period
Additions
Reclassifications from nonaccretable
Accretion
Balance at December 31
Year Ended December 31,
2016
2015
(Dollars in thousands)
$
$
5,664 $
10,222
11,114
(17,222 )
9,778 $
9,867
—
13,691
(17,894 )
5,664
Income recognition on PCI loans is subject to the Company’s ability to reasonably estimate both the timing and amount of
future cash flows. PCI loans for which the Company is accruing interest income are not considered non-performing or impaired. The
non-accretable difference represents contractual principal and interest the Company does not expect to collect.
Non-PCI Loans. The carrying amount of Non-PCI loans included in the consolidated balance sheets and the related outstanding
balances at December 31, 2016 and 2015 are presented in the table below. The outstanding balance represents the total amount owed
as of December 31, 2016 and 2015, including accrued but unpaid interest.
Non-PCI loans:
Outstanding balance
Less: discount
Recorded investment
December 31,
December 31,
2016
2015
(Dollars in thousands)
$ 1,115,061 $ 1,430,501
54,734
$ 1,079,660 $ 1,375,767
35,401
Changes in the discount accretion for Non-PCI loans for the years ended December 31, 2016 and 2015 were as follows:
Balance at beginning of period
Additions
Accretion charge-offs
Accretion
Balance at December 31
78
Year Ended December 31,
2015
2016
(Dollars in thousands)
$
$
54,734 $
3,491
(1,076 )
(21,748 )
35,401 $
89,105
—
(143 )
(34,228 )
54,734
At December 31, 2016, the Company had $59.4 million of total outstanding discounts on Non-PCI and PCI loans, of which
$45.2 million was accretable.
3. GOODWILL AND CORE DEPOSIT INTANGIBLES
Changes in the carrying amount of the Company’s goodwill and core deposit intangibles for fiscal years 2016 and 2015 were as
follows:
Balance as of December 31, 2014
Less:
Amortization
Add:
Goodwill
Core Deposit
Intangibles
(Dollars in thousands)
$ 1,874,191 $
58,947
—
(9,530 )
Measurement period adjustments
Balance as of December 31, 2015
(5,364 )
1,868,827
—
49,417
Less:
Amortization
Add:
—
(9,200 )
Acquisition of Tradition Bancshares, Inc.
Balance as of December 31, 2016
32,018
$ 1,900,845 $
5,567
45,784
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 December 31,
2016, there was no impairment recorded on goodwill and core deposit intangibles.
Core deposit intangibles are being amortized on a non-pro rata basis over their estimated lives, which the Company believes is
between 10 and 15 years. The estimated aggregate future amortization expense for core deposit intangibles remaining as of
December 31, 2016 is as follows (dollars in thousands):
2017
2018
2019
2020
Thereafter
Total
$
$
6,942
5,959
5,051
4,483
23,349
45,784
4. CASH AND DUE FROM BANKS
The Federal Reserve Bank requires banks to maintain minimum average reserve balances. The amount of the required reserve
balance for the Bank was $120.7 million and $96.5 million at December 31, 2016 and 2015, respectively.
79
5. SECURITIES
The amortized cost and fair value of investment securities were as follows:
Available for Sale
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
Total
Held to Maturity
U.S. Treasury securities and obligations of U.S.
Government agencies
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
Total
Available for Sale
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
Total
Held to Maturity
U.S. Treasury securities and obligations of U.S.
Government agencies
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
Total
Amortized
Cost
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair Value
$
1,915 $
120,478
84,024
12,588
$ 219,005 $
5 $
240
2,004
252
2,501 $
1,920
— $
120,599
(119 )
85,863
(165 )
(46 )
12,794
(330 ) $ 221,176
$
33,523 $
384,015
850
9,086,422
100
$ 9,504,910 $
497 $
3,934
6
30,880
—
35,317 $
— $
(1,328 )
(5 )
34,020
386,621
851
(199,439 ) 8,917,863
100
(200,772 ) $ 9,339,455
—
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair Value
$
$
5,463 $
25,991
55,884
12,588
99,926 $
22 $
25
3,098
150
3,295 $
5,485
— $
25,916
(100 )
58,971
(11 )
12,692
(46 )
(157 ) $ 103,064
$
47,598 $
363,505
2,107
8,986,153
—
$ 9,399,363 $
798 $
7,080
17
68,868
—
76,763 $
— $
(542 )
(2 )
48,396
370,043
2,122
(82,407 ) 8,972,614
—
(82,951 ) $ 9,393,175
—
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when
economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating
the portfolio into two general segments and applying the appropriate OTTI analysis. Investment securities classified as available for
sale or held to maturity are evaluated for OTTI under Financial Accounting Standards Board (“FASB”): 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.
80
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.
As of December 31, 2016, 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 December 31,
2016, management believes any impairment in the Company’s securities is temporary and no impairment loss has been realized in the
Company’s consolidated statements of income.
Securities with unrealized losses segregated by length of time such securities have been in a continuous loss position were as
follows:
Less than 12 Months
December 31, 2016
More than 12 Months
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
Total
Held to Maturity
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Total
$
$
10,723 $
45,456
—
56,179 $
(119 ) $
(160 )
—
(279 ) $
— $
2,334
1,691
4,025 $
— $
(5 )
(46 )
(51 ) $
10,723 $
47,790
1,691
60,204 $
(119 )
(165 )
(46 )
(330 )
115,132
589
6,903,919
$ 7,019,640 $
(1,288 )
(4 )
(195,556 )
(196,848 ) $
5,080
44
90,293
95,417 $
(40 )
(1 )
120,212
633
(3,883 ) 6,994,212
(3,924 ) $ 7,115,057 $
(1,328 )
(5 )
(199,439 )
(200,772 )
Less than 12 Months
December 31, 2015
More than 12 Months
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
Total
Held to Maturity
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Total
$
$
14,331 $
793
—
15,124 $
(100 ) $
(1 )
—
(101 ) $
1 $
2,465
1,691
4,157 $
— $
(10 )
(46 )
(56 ) $
14,332 $
3,258
1,691
19,281 $
(100 )
(11 )
(46 )
(157 )
15,700
156
3,233,601
$ 3,249,457 $
(82 )
—
45,952
94
(36,016 ) 1,662,482
(36,098 ) $ 1,708,528 $
(460 )
(2 )
61,652
250
(46,391 ) 4,896,083
(46,853 ) $ 4,957,985 $
(542 )
(2 )
(82,407 )
(82,951 )
At December 31, 2016, there were 276 securities in an unrealized loss position for more than 12 months.
81
The amortized cost and fair value of investment securities at December 31, 2016, 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
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
$
33,678 $
186,193
170,254
27,513
417,638
Amortized
Cost
Fair Value
Fair Value
Amortized
Cost
(Dollars in thousands)
33,726 $
187,156
171,928
27,931
420,741
12,688 $
1,815
—
—
14,503
12,894
1,820
—
—
14,714
Mortgage-backed securities and collateralized mortgage
obligations
Total
9,087,272 8,918,714
206,462
$ 9,504,910 $ 9,339,455 $ 219,005 $ 221,176
204,502
The Company recorded no gain or loss on the sale of securities for the years ended December 31, 2016 and 2015. The Company
recorded a net gain on the sale of securities of $7 thousand for the year ended December 31, 2014. The net gain was the result of a loss
of $41 thousand on the sale of eight non-agency collateralized mortgage obligations with a total book value of $1.2 million offset by a
gain of $48 thousand on the sale of an available for sale mortgage-backed security with a total book value of $490 thousand.
At December 31, 2016 and 2015, 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 $5.64 billion and $5.81 billion and a fair value of $5.51 billion and $5.79 billion at
December 31, 2016 and 2015, respectively, were pledged to collateralize public deposits and for other purposes required or permitted
by law.
6. 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 categorized by major type as follows:
Residential mortgage loans held for sale
$
26,975 $
23,933
Commercial and industrial
Real estate:
1,539,439 1,692,246
December 31,
2016
2015
(Dollars in thousands)
1,263,923 1,073,198
Construction, land development and other land loans
1-4 family residential (including home equity)
2,690,856 2,616,732
Commercial real estate (including multi-family residential) 3,162,109 3,131,083
434,349
Farmland
214,469
252,579
9,595,085 9,414,656
$ 9,622,060 $ 9,438,589
Agriculture
Consumer and other
Total loans held for investment
484,588
187,748
266,422
Total
Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to
maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a
regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan
production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification
in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. Loans to borrowers with
aggregate debt relationships over $1.0 million and below $3.5 million are evaluated and acted upon on a daily basis by two of the
company-wide loan concurrence officers. Loans to borrowers with aggregate debt relationships above $3.5 million are evaluated and
acted upon by an officers’ loan committee which meets weekly. In addition to the officers’ loan committee evaluation, loans to
82
borrowers with aggregate debt relationships from $25.0 million to $50.0 million are evaluated and acted upon by the directors’ loan
committee which consists of three directors of the Bank and meets as necessary. Loans to borrowers with aggregate debt relationships
over $50.0 million are evaluated and acted upon by the Bank’s Board of Directors either at a regularly scheduled monthly board
meeting or by teleconference or written consent.
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.
(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 as well as 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) Commercial Real Estate. The Company makes commercial real estate loans collateralized by owner-occupied and
nonowner-occupied real estate to finance the purchase of real estate. The Company’s commercial real estate 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 nonowner-occupied 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 December 31, 2016, the Company had total
commercial real estate loans totaling $3.65 billion which include farmland and multi-family residential loans. At December 31, 2016,
approximately 39.9% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-
occupied properties.
(iii) 1-4 Family Residential Loans. The Company’s lending activities also include the origination of 1-4 family residential
mortgage loans (including home equity loans) 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 Home Loan Center 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 Home Loan Center into the secondary market.
(iv) 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, the Company may not 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. Although the Company has underwriting procedures designed to identify what it believes to be
acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above.
(v) Agriculture Loans. The Company provides agriculture loans for short-term beef and crop production, including rice, cotton,
milo and corn, farm equipment financing and agriculture real estate financing. The Company evaluates agriculture borrowers
83
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), credit cards 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 contractual maturity ranges of the Company’s loan portfolio by type of loan and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of December 31, 2016 are summarized in the following table.
Contractual maturities are based on contractual amounts outstanding and do not include loan purchase discounts of $59.4 million or
loans held for sale of $27.0 million at December 31, 2016:
Commercial and industrial
Real estate:
Construction, land development and other land loans
1-4 family residential (includes home equity)
Commercial (includes multi-family residential)
Agriculture (includes farmland)
Consumer and other
Total
Loans with a predetermined interest rate
Loans with a floating interest rate
Total
One Year or
Less
After Five
Years
(Dollars in thousands)
$ 528,465 $ 512,657 $ 514,508 $ 1,555,630
Through
Five Years
Total
422,190
37,777
148,271
154,031
84,662
236,314
608,593 1,267,097
141,180 2,521,358 2,700,315
342,424 2,697,427 3,188,122
675,911
267,418
$ 1,375,396 $ 1,382,782 $ 6,896,315 $ 9,654,493
$ 373,813 $ 776,615 $ 2,821,521 $ 3,971,949
1,001,583
606,167 4,074,794 5,682,544
$ 1,375,396 $ 1,382,782 $ 6,896,315 $ 9,654,493
459,399
95,030
62,481
87,726
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 December 31, 2016 and 2015, 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 was not significant at December 31, 2016 or
2015.
Related Party Loans. As of December 31, 2016 and 2015, loans outstanding to directors, officers and their affiliates totaled $4.5
million and $4.1 million, respectively. All transactions between the Company and such related parties are conducted in the ordinary
course of business and 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:
Beginning balance on January 1
New loans
Repayments and reclassified related loans
Ending balance
84
December 31,
2016
2015
(Dollars in thousands)
$
$
4,063 $
699
(269 )
4,493 $
4,940
428
(1,305 )
4,063
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. Nevertheless, the Company’s loan
portfolio could 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.
An aging analysis of past due loans, segregated by category of loan, in presented below:
December 31, 2016
Loans Past Due and Still Accruing
90 or More
Days
Total Past
Due Loans
30-89 Days
Nonaccrual
Loans
Current
Loans
Total Loans
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
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
8,766 $
514 $
9,280 $
73 $ 1,254,570 $ 1,263,923
(Dollars in thousands)
1,813
8,645
381
53
2,194
8,698
161 669,981 672,336
3,726 2,705,407 2,717,831
4,250
8,290
886
$ 32,650 $
4,250
3,528 3,154,331 3,162,109
—
8,298 23,999 1,507,142 1,539,439
8
155 265,381 266,422
—
956 $ 33,606 $ 31,642 $ 9,556,812 $ 9,622,060
886
December 31, 2015
Loans Past Due and Still Accruing
90 or More
Days
Total Past
Due Loans
30-89 Days
Nonaccrual
Loans
Current
Loans
Total Loans
4,097 $
— $
4,097 $
134 $ 1,068,967 $ 1,073,198
(Dollars in thousands)
946
4,748
—
220
946
4,968
208 647,664 648,818
1,894 2,633,803 2,640,665
12,922
4,793
1,274
$ 28,780 $
— 12,922 15,535 3,102,626 3,131,083
5,187 21,692 1,665,367 1,692,246
394
—
248 251,057 252,579
1,274
614 $ 29,394 $ 39,711 $ 9,369,484 $ 9,438,589
(1)
Includes $27.0 million and $23.9 million of residential mortgage loans held for sale at December 31, 2016 and December 31,
2015, respectively.
85
The following table presents information regarding nonperforming assets at the dates indicated:
Nonaccrual loans (1)
Accruing loans 90 or more days past due
Total nonperforming loans
Repossessed assets
Other real estate
Total nonperforming assets
Nonperforming assets to total loans and other real estate
December 31,
2016
2015
2014
2013
2012
$
$
31,642 $
956
32,598
241
15,463
48,302 $
0.50 %
(Dollars in thousands)
39,711 $
614
40,325
171
2,963
43,459 $
0.46 %
31,422 $
2,193
33,615
67
3,237
36,919 $
0.40 %
10,231 $
4,947
15,178
27
7,299
22,504 $
0.29 %
5,382
331
5,713
68
7,234
13,015
0.25 %
(1)
Includes troubled debt restructurings of $97 thousand, $681 thousand, $911 thousand, $1.4 million and $3.6 million for the
years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
The Company had $48.3 million in nonperforming assets at December 31, 2016 compared with $43.5 million at December 31,
2015 and $36.9 million at December 31, 2014. Nonperforming assets were 0.50% of total loans and other real estate at December 31,
2016 compared with 0.46% of total loans and other real estate at December 31, 2015 and 0.40% of total loans and other real estate at
December 31, 2014. The nonperforming assets consisted of 158 separate credits or ORE properties at December 31, 2016, compared
with 147 at December 31, 2015 and 169 at December 31, 2014. These results are reflective of the Company’s conservative lending
approach.
If interest on nonaccrual loans had been accrued under the original loan terms, approximately $3.2 million, $3.9 million, and
$2.7 million would have been recorded as income for the years ended December 31, 2016, 2015 and 2014, respectively.
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 allocated, 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.
86
Year-end 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.
December 31, 2016
Recorded
Investment
Unpaid
Contractual
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(Dollars in thousands)
With no related allowance recorded:
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
With an allowance recorded:
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
Total:
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
$
14 $
7
2,450
3,184
8,925
119
14,699
—
154
437
288
13,327
4
14,210
14
161
2,887
3,472
22,252
123
28,909 $
220 $
12
2,682
3,327
9,446
157
15,844
—
181
449
288
13,821
4
14,743
220
193
3,131
3,615
23,267
161
30,587 $
— $
—
—
—
—
—
—
—
17
150
178
2,851
1
3,197
—
17
150
178
2,851
1
3,197 $
24
14
1,828
9,150
5,139
88
16,243
3
171
408
275
13,961
93
14,911
27
185
2,236
9,425
19,100
181
31,154
87
December 31, 2015
Recorded
Investment
Unpaid
Contractual
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(Dollars in thousands)
With no related allowance recorded:
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
With an allowance recorded:
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
Total:
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
$
33 $
20
1,206
15,115
1,354
58
17,786
7
189
379
262
14,594
181
15,612
40
209
1,585
15,377
15,948
239
33,398 $
346 $
23
1,365
15,398
1,630
131
18,893
11
201
386
1,857
16,413
220
19,088
357
224
1,751
17,255
18,043
351
37,981 $
— $
—
—
—
—
—
—
2
52
93
262
7,082
44
7,535
2
52
93
262
7,082
44
7,535 $
142
10
1,458
10,104
5,419
4,101
21,234
141
118
902
162
8,524
208
10,055
283
128
2,360
10,266
13,943
4,309
31,289
Credit Quality Indicators. As part of the on-going 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.
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 to be of acceptable credit quality with moderately greater risk than Grade 3
and receiving closer monitoring. 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
Company 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.
88
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 weakness 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 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 PCI loans by category of loan at December 31, 2016. Impaired loans include loans
in risk grades 7, 8 and 9, as well as any PCI loan that has a specific reserve allocated to it.
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
Grade 1
Grade 2
Grade 3
Grade 4
Grade 5
Grade 6
Grade 7
Grade 8
Grade 9
PCI Loans (2)
Total
$
—
2,261
1,200,623
54,380
2,525
2,690
13
—
—
1,431
$ 1,263,923 $
(Dollars in thousands)
—
8,317
—
22,863
14,616
4,218
54,908
12,772
570,324 2,622,304 2,859,433 1,143,634
176,287
57,283
68,682
21,475
714
—
3,684
672,336 $ 2,717,831 $ 3,162,109 $ 1,539,439 $
220,533
45,533
8,401
3,472
—
—
16,420
74,079
7,703
847
161
—
—
388
55,367
3,605
5,095
2,857
30
—
5,710
40,688
11,041
110,212
61,472
194,210 8,590,528
596,741
119,052
87,544
28,134
744
—
27,633
266,422 $ 9,622,060
16,095
2,403
1,829
156
—
—
—
(1)
Includes $27.0 million of residential mortgage loans held for sale at December 31, 2016.
(2) Of the total PCI loans, $2.7 million were classified as substandard at December 31, 2016, which includes $31 thousand with
specific reserves of $31 thousand allocated to them.
89
The following table presents risk grades and PCI loans by category of loan at December 31, 2015. 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
Grade 2
Grade 3
Grade 4
Grade 5
Grade 6
Grade 7
Grade 8
Grade 9
PCI Loans (2)
Total
$
— $
3,975
1,034,792
29,831
2,431
1,209
40
—
—
920
$ 1,073,198 $
— $
27,272
— $
24,965
12,733 $
5,603
57,625 $
27,755
553,782 2,539,282 2,861,872 1,355,887
123,772
68,618
28,005
12,487
2,485
—
15,612
648,818 $ 2,640,665 $ 3,131,083 $ 1,692,246 $
164,924
20,078
26,237
15,377
—
—
17,630
67,453
7,191
1,452
209
—
—
395
58,172
1,261
7,824
1,526
59
—
5,269
44,389 $
34,668
114,747
124,238
162,892 8,508,507
447,547
106,487
64,815
29,878
2,544
—
39,826
252,579 $ 9,438,589
3,395
6,908
88
239
—
—
—
Includes $23.9 million of residential mortgage loans held for sale at December 31, 2015.
(1)
(2) Of the total PCI loans, $7.3 million were classified as substandard at December 31, 2015, which includes $976 thousand with
specific reserves allocated to them.
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
losses in the Company’s loan portfolio. The amount of the allowance for credit losses is affected by the following: (1) charge-offs of
loans that occur when loans are deemed uncollectible and decrease the allowance, (2) recoveries on loans previously charged off that
increase the allowance and (3) 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. Although management believes it uses the best information available to make determinations with
respect to the allowance for credit losses, future adjustments may be necessary if economic conditions or the borrower’s performance
differ from the assumptions used in making the initial determinations.
The Company’s allowance for credit losses consists of two components: (1) a specific valuation allowance based on probable
losses on specifically identified loans and (2) 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 total
loan portfolio and assigns risk grades to each loan. 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 certain impaired loans, the Company allocates a specific loan loss
reserve primarily based on the value of the collateral securing the impaired loan in accordance with ASC Topic 310-10,“Receivables.”
The specific reserves are determined on an individual loan basis. Loans for which specific reserves are provided are excluded from the
general valuation allowance described below.
In connection with this 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;
90
for construction, land development and other land 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 agricultural 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 agricultural 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.
In determining the amount of the general valuation allowance, management considers factors such as historical loan loss
experience, 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
loan that has a specific reserve allocated to it. The Company uses this information to establish the amount of the general valuation
allowance.
A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific reserves identified for
impaired loans, (2) historical credit loss information, (3) changes in environmental factors and (4) growth in the balance of legacy
loans and the renewal or substantial modification of acquired loans (Non-PCI and PCI loans as discussed in Note 2) into the loan
portfolio subject to the allowance methodology.
Changes in the Company’s asset quality are reflected in the allowance in several ways. Specific reserves that are calculated on a
loan-by-loan basis and the qualitative assessment of all other loans reflect current changes in the credit quality of the loan portfolio.
Historical credit losses, on the other hand, are based on a three-year look back period, which are then applied to estimate current credit
losses inherent in the loan portfolio. A deterioration in the credit quality of the loan portfolio in the current period would increase the
historical credit loss factor to be applied in future periods, just as an improvement in credit quality would decrease the historical credit
loss factor.
The allowance for credit losses is further determined by the size of the loan portfolio subject to the allowance methodology and
environmental factors that include Company-specific risk indicators and general economic conditions, both of which are constantly
changing. The Company evaluates the economic and portfolio-specific factors on a quarterly basis to determine a qualitative
component of the general valuation allowance. The factors include economic metrics, business conditions, delinquency trends, credit
concentrations, nature and volume of the portfolio and other adjustments for items not covered by specific reserves and historical loss
experience. Management’s assessment of qualitative factors is a statistically based approach to determine the inherent probable loss
associated with such factors. Based on the Company’s actual historical loan loss experience relative to economic and loan portfolio-
specific factors at the time the losses occurred, management is able to identify the probabilities of default and loss severity based on
current economic conditions. The correlation of historical loss experience with current economic conditions provides an estimate of
inherent and probable losses that has not been previously factored into the general valuation allowance by the determination of
specific reserves and recent historical losses. Additionally, the Company considers qualitative factors not easily quantified and the
possibility of model imprecision.
Utilizing the aggregation of specific reserves, historical loss experience and a qualitative component, management is able to
determine the valuation allowance to reflect the full inherent probable loss.
91
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of inherent credit losses
expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for credit losses is recorded
for these loans at acquisition. When a fair-valued acquired loan is renewed at its maturity date, the loan is re-categorized and is subject
to the allowance methodology. When a fair-valued acquired loan is modified after acquisition, the loan is independently evaluated
subsequent to the modification decision to determine whether the modification was, substantial, and therefore, requires that the loan be
re-categorized as an acquired legacy loan. The determination is based on a discounted cash-flow analysis. Generally, when a change in
discounted cash-flow of greater than 10% is identified, the fair-valued acquired loan becomes re-categorized and is evaluated at the
time of renewal or modification in accordance with the Company’s allowance for credit losses methodology described above.
Non-PCI loans which were not deemed impaired subsequent to the acquisition date are considered non-impaired and are
evaluated as part of the general valuation allowance. Non-PCI loans that have not become impaired subsequent to acquisition are
segregated into a pool for each acquisition for allowance calculation purposes. For each pool, the Company estimates a hypothetical
allowance for credit losses also referred to as an “indicated reserve” that is calculated in accordance with GAAP requirements. The
Company uses the acquired bank’s past loss history adjusted for qualitative factors to establish the indicated reserve. The indicated
reserve for each pool of Non-PCI loans is compared with the remaining discount for the respective pool to test for credit quality
deterioration and the possible need for a loan loss provision. To the extent the remaining discount of the pool is greater than the
indicated reserve, no additional allowance is necessary. If the remaining discount of the pool is less than the indicated reserve, the
difference results in an increase to the allowance recorded through a provision for credit losses.
Non-PCI loans that have deteriorated to an impaired status subsequent to acquisition are evaluated for a specific reserve on a
quarterly basis which, when identified, is added to the allowance for credit losses. The Company reviews impaired Non-PCI loans on
a loan-by-loan basis and determines the specific reserve based on the difference between the recorded investment in the loan and one
of three factors: expected future cash flows, observable market price or fair value of the collateral. Because essentially all of the
Company’s impaired Non-PCI loans have been collateral-dependent, the amount of the specific reserve historically has been
determined by comparing the fair value of the collateral securing the Non-PCI loan with the recorded investment in such loan. In the
future, the Company will continue to analyze impaired Non-PCI loans on a loan-by-loan basis and may use an alternative
measurement method to determine the specific reserve, as appropriate and in accordance with applicable accounting standards.
PCI loans are individually monitored on a quarterly basis to assess for deterioration subsequent to acquisition and are only
subject to the Company’s allowance methodology when a deterioration in projected cash flows is identified. In the event that a
deterioration in cash flows is identified, an additional provision for credit losses is made. PCI loans were recorded at their acquisition
date fair values, which were based on expected cash flows and included estimates of expected future credit losses. The Company’s
estimates of loan fair values at the acquisition date may be adjusted for a period of up to one year as the Company continues to
evaluate its estimate of expected future cash flows at the acquisition date. If the Company determines that losses arose after the
acquisition date, the additional losses will be reflected as a provision for credit losses. An allowance for credit losses is not calculated
for PCI loans that have not experienced deterioration subsequent to the acquisition date.
At December 31, 2016, the allowance for credit losses totaled $85.3 million or 0.89% of total loans, including acquired loans
with discounts. At December 31, 2015, the allowance for credit losses totaled $81.4 million or 0.86% of total loans, and at
December 31, 2014, the allowance aggregated $80.8 million or 0.87% of total loans, both including acquired loans with discounts.
The allowance for credit losses totaled $85.3 million at December 31, 2016 compared with $81.4 million at December 31, 2015, an
increase of $3.9 million or 4.8%.
92
The following tables detail the recorded investment in loans, excluding $27.0 million and $23.9 million of residential mortgage
loans held for sale, and activity in the allowance for credit losses by category of loan for the years ended December 31, 2016 and
2015, respectively. During the fourth quarter of 2014, the Company enhanced its allowance for credit losses methodology. Under the
enhanced methodology, qualitative environmental factors have been more precisely aligned to portfolio segments based on a statistical
analysis which was undertaken by management. Such enhancement captures inherent probable loss in the portfolio associated with
qualitative factors based on empirical data which includes various economic indicators, loss history, and levels of concentration.
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)
(Dollars in thousands)
Commercial
and
Industrial
Consumer
and Other
Total
$
$
14,882
(2,399 )
(7 )
2,508
2,501
14,984
$
$
3,845
6,795
(7,375 )
808
(6,567 )
4,073
$
$
14,891
1,598
(116 )
198
82
16,571
$
$
12,996
(444 )
(298 )
2
(296 )
12,256
$
$
33,409
13,986
(14,371 )
2,812
(11,559 )
35,836
$ 1,361
4,464
(5,346 )
1,127
(4,219 )
$ 1,606
$
$
81,384
24,000
(27,513 )
7,455
(20,058 )
85,326
Allowance for credit losses:
Balance January 1, 2016
Provision for credit losses
Charge-offs
Recoveries
Net charge-offs
Balance December 31, 2016
Allowance for credit losses
related to:
December 31, 2016
Individually evaluated for
impairment
$
—
$
17
$
150
$
178
$
2,820
$
1
$
3,166
Collectively evaluated for
impairment
PCI loans
Total allowance for credit losses $
Recorded investment in loans:
December 31, 2016
Individually evaluated for
14,984
—
14,984 $
4,056
—
4,073 $
16,421
—
16,571 $
12,078
—
12,256 $
32,985
31
1,605
—
35,836 $ 1,606 $
82,129
31
85,326
impairment
$
14
$
161
$
2,887
$
3,472
$
22,221
$
123
$
28,878
Collectively evaluated for
impairment
PCI loans
Total loans evaluated for
impairment
1,262,478
1,431
671,787
388
2,682,259
5,710
3,142,217
16,420
1,513,534
3,684
266,299
—
9,538,574
27,633
$ 1,263,923 $
672,336 $ 2,690,856 $ 3,162,109 $ 1,539,439 $ 266,422 $ 9,595,085
93
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)
(Dollars in thousands)
Commercial
and
Industrial
Consumer
and Other
Total
$
$
15,825
(736 )
(366 )
159
(207 )
14,882
$
$
3,722
(137 )
(24 )
284
260
3,845
$
$
16,377
(1,277 )
(262 )
53
(209 )
14,891
$
$
12,744
646
(498 )
104
(394 )
12,996
$
$
30,002
7,781
(7,696 )
3,322
(4,374 )
33,409
$ 2,092
1,283
(3,304 )
1,290
(2,014 )
$ 1,361
$
$
80,762
7,560
(12,150 )
5,212
(6,938 )
81,384
Allowance for credit losses:
Balance January 1, 2015
Provision for credit losses
Charge-offs
Recoveries
Net charge-offs
Balance December 31, 2015
Allowance for credit losses
related to:
December 31, 2015
Individually evaluated for
impairment
$
2
$
52
$
93
$
262
$
7,082
$
44
$
7,535
Collectively evaluated for
impairment
PCI loans
Total allowance for credit losses $
Recorded investment in loans:
December 31, 2015
Individually evaluated for
14,880
—
14,882
$
3,793
—
3,845
$
14,798
—
14,891
$
12,734
—
12,996
$
25,491
836
33,409
1,317
—
$ 1,361
$
73,013
836
81,384
impairment
$
40
$
209
$
1,585
$
15,377
$
15,948
$
239
$
33,398
Collectively evaluated for
impairment
PCI loans
Total loans evaluated for
impairment
1,072,238
920
648,214
395
2,609,878
5,269
3,098,076
17,630
1,660,686
15,612
252,340
—
9,341,432
39,826
$ 1,073,198
$
648,818
$ 2,616,732
$ 3,131,083
$ 1,692,246
$ 252,579
$ 9,414,656
94
An analysis of activity in the allowance for credit losses for the year ended December 31, 2014 is as follows (dollars in
thousands):
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)
(Dollars in thousands)
Commercial
and
Industrial
Consumer
and Other
Total
$
$
14,353
1,541
(155 )
86
(69 )
15,825
$
$
1,229
1,503
(71 )
1,061
990
3,722
$
$
17,046
358
(1,223 )
196
(1,027 )
16,377
$
$
24,835
(10,300 )
(2,009 )
218
(1,791 )
12,744
$
$
8,167
22,187
(818 )
466
(352 )
30,002
$ 1,652
2,986
(5,674 )
3,128
(2,546 )
$ 2,092
$
$
67,282
18,275
(9,950 )
5,155
(4,795 )
80,762
Allowance for credit losses:
Balance January 1, 2014
Provision for credit losses
Charge-offs
Recoveries
Net charge-offs
Balance December 31, 2014
Allowance for credit losses
related to:
December 31, 2014
Individually evaluated for
impairment
$
225
$
24
$
418
$
24
$
1,597
$
205
$
2,493
Collectively evaluated for
impairment
PCI loans
Total allowance for credit losses $
Recorded investment in loans:
December 31, 2014
Individually evaluated for
15,600
—
15,825
$
3,698
—
3,722
$
15,959
—
16,377
$
12,720
—
12,744
$
28,405
—
30,002
1,887
—
$ 2,092
$
78,269
—
80,762
impairment
$
526
$
46
$
3,136
$
5,155
$
11,939
$ 8,378
$
29,180
Collectively evaluated for
impairment
PCI loans
Total loans evaluated for
impairment
1,024,807
1,142
551,093
507
2,504,517
5,926
3,001,718
23,467
1,768,228
26,100
298,896
—
9,149,259
57,142
$ 1,026,475
$
551,646
$ 2,513,579
$ 3,030,340
$ 1,806,267
$ 307,274
$ 9,235,581
Troubled Debt Restructurings. The restructuring of a loan is considered a “troubled debt restructuring” if both (1) the borrower
is experiencing financial difficulties and (2) 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. Under ASC topic 310-40 “Receivables—Troubled Debt Restructurings by Creditors,” the Company evaluates all
loan modifications for identification as troubled debt restructurings. The following table presents information regarding the recorded
95
investment at December 31, 2016 and 2015 of loans modified in a troubled debt restructuring during the years ended December 31,
2016 and 2015:
2016
Recorded
Investment
at Date of
Restructure
Number of
Loans
Years Ended December 31,
Recorded
Investment
at Year-End
Number of
Loans
(Dollars in thousands)
2015
Recorded
Investment
at Date of
Restructure
Recorded
Investment
at Year-End
Troubled Debt Restructurings
Construction, land development and other land loans
Agriculture and agriculture real estate
1-4 Family (includes home equity)
Commercial real estate (commercial mortgage and
multi-family)
Commercial and industrial
Consumer and other
Total
— $
1
—
—
—
—
1 $
— $
154
—
—
—
—
154 $
—
—
—
—
—
—
—
1 $
—
—
—
1
1
3 $
390 $
—
—
—
250
10
650 $
20
—
—
—
250
9
279
As of December 31, 2016, there have been no defaults on any loans that were modified as troubled debt restructurings during
the preceding twelve 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. At December 31, 2016 and 2015, the Company had $97 thousand and $681 thousand, respectively, in
outstanding troubled debt restructurings. For the year ended December 31, 2016, the Company added one loan totaling $154 thousand
as a new troubled debt restructuring of which nothing was still outstanding on December 31, 2016. These modifications did not have a
material impact on the Company’s determination of the allowance for credit losses.
7. 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. 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 or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy
is as follows:
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.
96
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 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 measured at fair value on a recurring basis:
Available for sale securities:
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
Available for sale securities:
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Other securities
As of December 31, 2016
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
$
— $
—
—
12,794
1,920 $
120,599
85,863
—
— $
—
—
—
1,920
120,599
85,863
12,794
Level 1
As of December 31, 2015
Level 3
Level 2
(Dollars in thousands)
Total
$
— $
—
—
12,692
5,485 $
25,916
58,971
—
— $
—
—
—
5,485
25,916
58,971
12,692
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 year ended December 31, 2016, the Company had additions to other real estate owned of $14.8
million, of which $14.2 million were outstanding as of December 31, 2016. For the year ended December 31, 2016, the Company had
additions to impaired loans of $40.9 million, of which $22.9 million were outstanding as of December 31, 2016. The remaining
financial assets and liabilities measured at fair value on a non-recurring basis that were recorded in 2016 and remained outstanding at
December 31, 2016 were not significant.
97
The following tables summarize the carrying values and estimated fair values of certain financial instruments not recorded at
fair value on a recurring basis:
Carrying
Amount
As of December 31, 2016
Estimated Fair Value
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
Assets
Cash and due from banks
Federal funds sold
Held to maturity securities
Loans held for sale
Loans held for investment, net of allowance
Other real estate owned
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Other borrowings
Securities sold under repurchase agreements
Assets
Cash and due from banks
Federal funds sold
Held to maturity securities
Loans held for sale
Loans held for investment, net of allowance
Other real estate owned
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Other borrowings
Securities sold under repurchase agreements
$
436,203 $ 436,203 $
1,178
1,178
9,504,910
26,975
9,509,759
15,463
— $
—
— 9,339,455
—
26,975
—
—
436,203
— $
—
1,178
— 9,339,455
26,975
—
— 9,533,310 9,533,310
15,463
—
15,463
$ 5,190,973 $
12,116,329
990,781
320,430
— $ 5,190,973 $
— 12,121,157
991,181
—
320,428
—
— $ 5,190,973
— 12,121,157
991,181
—
320,428
—
Carrying
Amount
As of December 31, 2015
Estimated Fair Value
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
$
562,544 $ 562,544 $
1,418
1,418
9,399,363
23,933
9,333,272
2,963
— $
—
— 9,393,175
23,933
—
—
—
562,544
— $
—
1,418
— 9,393,175
23,933
—
— 9,365,758 9,365,758
2,963
—
2,963
$ 5,136,579 $
12,544,540
491,399
315,253
— $ 5,136,579 $
— 12,548,050
492,061
—
315,241
—
— $ 5,136,579
— 12,548,050
492,061
—
315,241
—
Entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value
measurement option (1) may be applied instrument by instrument, with certain exceptions, (2) is generally irrevocable and (3) is
applied only to entire instruments and not to portions of instruments. Unrealized gains and losses on items for which the fair value
measurement option has been elected must be reported in earnings at each subsequent reporting date. During the reported periods, the
Company had no financial instruments measured at fair value under the fair value measurement option.
The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated.
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.
98
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value, non-financial
assets and non-financial liabilities, and for estimating fair value for financial instruments not recorded at fair value:
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.
Other real estate owned—Other real estate owned is primarily foreclosed properties securing residential loans and commercial
real estate. Foreclosed assets are adjusted to fair value less estimated costs to sell upon transfer of the loans to other real estate owned.
Subsequently, these assets are carried at the lower of carrying value or fair value less estimated costs to sell. Other real estate carried
at fair value based on an observable market price or a current appraised value is classified by the Company as Level 2. When
management determines that the fair value of other real estate requires additional adjustments, either as a result of a non-current
appraisal or when there is no observable market price, the Company classifies the other real estate 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.
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.
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.
99
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.
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Land
Buildings
Furniture, fixtures and equipment
Construction in progress
Total
Less accumulated depreciation
Premises and equipment, net
December 31,
2015
2016
(Dollars in thousands)
90,696 $
205,500
65,027
643
361,866
(99,783 )
262,083 $
88,897
202,555
63,212
1,998
356,662
(88,666 )
267,996
$
$
Depreciation expense was $13.1 million, $13.0 million and $13.7 million for the years ended December 31, 2016, 2015 and
2014, respectively.
9. DEPOSITS
Included in interest-bearing deposits are certificates of deposit in amounts of $100,000 or more. These certificates and their
remaining maturities at December 31, 2016 were as follows (dollars in thousands):
Three months or less
Over three through six months
Over six through 12 months
Over 12 months
Total
$
434,438
298,138
371,298
317,859
$ 1,421,733
30.5 %
21.0
26.1
22.4
100.00 %
Interest expense for certificates of deposit in excess of $100,000 was $9.7 million, $9.6 million and $11.6 million for the years
ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, the Company had $89.7 million of deposits classified as brokered deposits for regulatory purposes,
and there are no major concentrations of deposits with any one depositor.
10. OTHER BORROWINGS AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company utilizes borrowings to supplement deposits to fund its lending and investment activities. Borrowings consist of
funds from the Federal Home Loan Bank (“FHLB”) and securities sold under repurchase agreements.
The following table presents the Company’s borrowings at December 31, 2016 and 2015:
December 31,
2016
2015
FHLB advances
FHLB long-term notes payable
Total other borrowings
Securities sold under repurchase agreements
Total
100
$
(Dollars in thousands)
985,000 $
5,781
990,781
320,430
$ 1,311,211 $
485,000
6,399
491,399
315,253
806,652
FHLB advances and long-term notes payable—The Company has an available line of credit with the FHLB of Dallas, which
allows the Company to borrow on a collateralized basis. FHLB advances are considered short-term borrowings and used to manage
liquidity as needed. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased
customer deposits. At December 31, 2016, the Company had total funds of $5.04 billion available under this agreement, of which a
total amount of $990.8 million was outstanding at December 31, 2016. FHLB advances were $985.0 million at December 31, 2016,
with a weighted average interest rate of 0.56%. Long-term notes payable were $5.8 million at December 31, 2016, with a weighted
average interest rate of 5.66%. The maturity dates on the FHLB notes payable range from the years 2018 to 2028 and have interest
rates ranging from 4.51% to 6.10%.
Securities sold under repurchase agreements with Company customers—At December 31, 2016, the Company had $320.4
million in securities sold under repurchase agreements compared with $315.3 million at December 31, 2015, with average rates paid
of 0.29% and 0.25% for the years ended December 31, 2016 and 2015, respectively. Repurchase agreements are generally settled on
the following business day; however, approximately $11.8 million of repurchase agreements outstanding at December 31, 2016 have
maturity dates ranging from 6 to 24 months. All securities sold under agreements to repurchase are collateralized by certain pledged
securities.
11. INCOME TAXES
The components of the provision for federal income taxes are as follows:
2016
Current
Deferred
Total
$
$
Year Ended December 31,
2015
(Dollars in thousands)
108,550 $
34,999
143,549 $
115,145 $
19,047
134,192 $
2014
102,595
45,713
148,308
The provision for federal income taxes differs from the amount computed by applying the federal income tax statutory rate of
35% to income before income taxes as follows:
2016
Year Ended December 31,
2015
(Dollars in thousands)
150,568 $
143,030 $
(7,234 )
(1,218 )
(295 )
(1,982 )
—
—
1,188
703
134,192 $
(6,351 )
(1,239 )
(60 )
(1,917 )
2
—
1,193
1,353
143,549 $
2014
156,012
(7,102 )
(794 )
(677 )
(1,788 )
6
86
1,898
667
148,308
Taxes calculated at statutory rate
(Decrease) increase resulting from:
Tax-exempt interest
Qualified School Construction Bond credit
Non taxable death benefits
BOLI income
Qualified stock options
Merger related expenses
State tax, net
Other, net
Total
$
$
101
Deferred tax assets and liabilities are as follows:
Deferred tax assets:
Loan purchase discounts
Allowance for credit losses
Accrued liabilities
Restricted stock
Deferred compensation
Certificates of Deposit
Net operating losses
ORE write-downs
Investments in partnerships
Other
Total deferred tax assets
Deferred tax liabilities:
$
Goodwill and core deposit intangibles
Bank premises and equipment
Securities
Unrealized gain on available for sale securities
Prepaid expenses
Deferred loan fees and costs
Total deferred tax liabilities
Net deferred tax assets
$
December 31,
2015
2016
(Dollars in thousands)
20,793 $
28,745
2,985
10,088
4,100
113
424
-
213
162
67,623
(35,813 )
(13,504 )
(1,517 )
(760 )
(1,295 )
(5,300 )
(58,189 )
9,434 $
33,149
25,847
4,364
9,423
3,873
244
688
30
215
560
78,393
(34,579 )
(11,312 )
(2,176 )
(1,098 )
(1,396 )
(3,202 )
(53,763 )
24,630
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable
income and estimates of future taxable income over the periods for which the deferred tax assets are deductible, management believes
it is more likely than not the Company will realize the benefits of these deductible differences at December 31, 2016.
Net operating loss carryforwards expire on various dates beginning in 2028 through 2035.
Benefits from tax positions are recognized in the financial statements only when it is more likely than not that the tax position
will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A
tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not
recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent
financial reporting period in which that threshold is no longer met. The Company had no tax positions at December 31, 2016 or
December 31, 2015 that did not meet the more-likely-than not recognition threshold. ASC Topic 740 “Income Taxes” also provides
guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company’s policy for
recording interest and penalties associated with audits is to record such items as a component of income before taxes. Penalties are
recorded in other (gains) losses and interest paid or received is recorded in interest expense or interest income, respectively, in the
consolidated statement of income. As of December 31, 2016 and 2015, the Company has not accrued any interest and penalties related
to unrecognized tax benefits. The Company has identified its federal tax return and its state tax returns in Texas and Oklahoma as
“major” tax jurisdictions, as defined. The periods subject to examination for the Company’s federal return are the 2013 through 2016
tax years. The Company has assumed to net operating loss carryforwards, “acquired NOLs”, through its acquisitions. The tax periods
of the acquired entities from which these acquired NOLs originated are considered open years for purposes of adjusting the amount of
the acquired NOLs used in the Company’s open years.
During 2016, the Internal Revenue Service completed its examination of F&M’s Federal income tax return for the short period
ended April 1, 2014 which resulted in a payment of tax of $70 thousand. The Internal Revenue Service also completed its review of
the Company’s federal income tax return for the tax year 2013 which resulted in no change.
102
12. STOCK INCENTIVE PROGRAMS
At December 31, 2016, the Company had two stock-based employee compensation plans with awards outstanding. One of these
plans has expired and therefore no additional awards may be issued under that plan. The Company accounts for stock-based employee
compensation plans using the fair value-based method of accounting. The Company recognized stock-based compensation expense of
$9.5 million, $11.1 million and $8.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. There was
approximately $3.3 million, $3.9 million and $2.9 million of income tax benefit recorded for the stock-based compensation expense
for the same periods, respectively.
In December 2004, Bancshares’ Board of Directors established the Prosperity Bancshares, Inc. 2004 Stock Incentive Plan (the
“2004 Plan”), which was approved by Bancshares’ shareholders on February 23, 2005. The 2004 Plan authorized the issuance of up to
1,250,000 shares of common stock upon the exercise of options granted under the 2004 Plan or upon the grant or exercise, as the case
may be, of other awards granted under the 2004 Plan. The 2004 Plan provided for grants of incentive and nonqualified stock options to
employees and nonqualified stock options to directors who are not employees. The 2004 Plan also provided for grants of shares of
restricted stock, stock appreciation rights, phantom stock awards and performance awards on substantially similar terms. A total of
191,625 options and 815,768 shares of restricted stock have been granted under the 2004 Plan as of December 31, 2016. Options to
purchase a total of 5,000 shares of common stock of Bancshares granted under the 2004 Plan were outstanding at December 31, 2016,
all of which were exercisable. The 2004 Plan has expired and therefore no additional shares may be issued from the 2004 Plan.
On February 22, 2012, Bancshares’ Board of Directors adopted the Prosperity Bancshares, Inc. 2012 Stock Incentive Plan (the
“2012 Plan”), which was approved by Bancshares’ shareholders on April 17, 2012. The 2012 Plan 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. A total of 341,685 shares of restricted stock have been granted under the 2012 Plan as of December 31,
2016.
Stock Options
Stock options are issued at the current market price on the date of the grant, subject to a pre-determined vesting period with a
contractual term of 10 years. Options assumed in connection with acquisitions have contractual terms as established in the original
option grant agreements entered into prior to acquisition. The fair value of stock options granted is estimated at the date of grant using
the Black-Scholes option-pricing model. The Black-Scholes pricing model utilizes certain assumptions including expected life of the
option, risk free interest rate, volatility and dividend yield. Stock-based compensation expense is recognized ratably over the requisite
service period for all awards. There were no options issued for the years ended December 31, 2016, 2015 and 2014.
A summary of changes in outstanding vested and unvested options during the three-year period ended December 31, 2016 is set
forth below:
Options outstanding, January 1, 2014
Options granted
Options forfeited
Options exercised
Options outstanding, December 31, 2014
Options granted
Options forfeited
Options exercised
Options outstanding, December 31, 2015
Options granted
Options forfeited
Options exercised
Options outstanding, December 31, 2016
Shares vested or expected to vest, December 31, 2016
Shares exercisable, December 31, 2016
Weighted
Average
Exercise Price
Weighted
Average
Contractual
Term
(In years)
Aggregate
Intrinsic
Value
(In thousands)
6,500
3.70 $
Number of
Options
(In thousands)
188 $
—
(5 )
(130 )
53 $
—
(15 )
(9 )
29 $
—
—
(24 )
5 $
5 $
5 $
103
28.88
—
23.88
28.46
27.68
—
27.15
29.92
32.14
—
—
32.65
29.69
29.69
29.69
2.69
1,473
2.60
453
2.75 $
2.75 $
2.75 $
210
210
210
The total intrinsic value of the options exercised during the years ended December 31, 2016 and 2015 was $931 thousand and
$174 thousand, respectively. No options vested during the year ended December 31, 2016, as all options vested prior to 2016. There
were no unvested options forfeited during the years ended December 31, 2016 and 2015.
The Company received $778 thousand, $290 thousand and $3.7 million in cash from the exercise of stock options during the
years ended December 31, 2016, 2015 and 2014, respectively. There was no tax benefit realized from exercises of the stock-based
compensation arrangements during the years ended December 31, 2016, 2015 and 2014.
Restricted Stock
The Company has granted shares of restricted stock pursuant to the 2004 and 2012 Plans. These shares of restricted stock
generally vest over a period of one to five years. The Company accounts for restricted stock grants by recording the fair value of the
grant as compensation expense over the vesting period. Compensation expense related to restricted stock was $9.5 million, $11.1
million and $8.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
A summary of the status of nonvested shares of restricted stock as of December 31, 2016, and changes during the year then
ended is as follows:
Nonvested share awards outstanding, December 31, 2015
Share awards granted
Unvested share awards forfeited
Share awards vested
Nonvested shares outstanding, December 31, 2016
Number of
Shares
Weighted
Average Grant
Date Fair
Value
(Shares in thousands)
617 $
56
(45 )
(125 )
503 $
57.31
53.37
64.69
61.37
45.35
The total fair value of restricted stock awards that fully vested during the year ended December 31, 2016 was $6.7 million.
As of December 31, 2016, there was $9.8 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 1.30 years.
13. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense totals are more fully detailed in the following tables. Any components of these totals
exceeding 1% of the aggregate of total net interest income and total noninterest income for any of the years presented, as well as
amounts the Company elected to present, are stated separately.
Other noninterest income
Banking related service fees
Bank Owned Life Insurance (BOLI)
Rental income
Other
Total
Other noninterest expense
Advertising
Losses
Printing and supplies
Professional and legal fees
Property taxes
Travel and development
Other
Total
2016
Years Ended December 31,
2015
(Dollars in thousands)
2014
$
$
$
$
4,825 $
5,663
2,484
7,893
20,865 $
2,845 $
2,439
2,334
4,346
7,770
4,455
9,089
33,278 $
4,690 $
5,548
2,594
10,930
23,762 $
2,974 $
3,361
2,158
3,044
7,028
4,434
9,577
32,576 $
4,796
5,189
2,378
9,182
21,545
3,016
4,143
2,427
5,636
7,410
4,848
9,351
36,831
104
14. PROFIT SHARING PLAN
The Company has adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the “Code”), whereby
the participants may contribute a percentage of their compensation as permitted under the Code. Matching contributions are made at
the discretion of the Company. Presently, the Company matches 50% of an employee’s contributions, up to 15% of such employee’s
compensation, not to exceed the maximum allowable pursuant to the Code and excluding catch-up contributions. Such matching
contributions were approximately $4.4 million, $4.3 million and $4.6 million for the years ended December 31, 2016, 2015 and 2014,
respectively.
15. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES
The following table summarizes the Company’s contractual obligations and other commitments to make future payments as of
December 31, 2016 (other than deposit obligations and securities sold under repurchase agreements). The Company’s future cash
payments associated with its contractual obligations pursuant to its FHLB notes payable and operating leases as of December 31, 2016
are summarized below. Payments for FHLB notes payable include interest of $677 thousand that will be paid over the future periods.
Payments related to leases are based on actual payments specified in underlying contracts.
Federal Home Loan Bank notes payable
Operating leases
Total
Off-Balance Sheet Items
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
$ 985,871 $
5,685
$ 991,556 $
(Dollars in thousands)
586 $
5,786
6,372 $
4,787 $
9,062
13,849 $
214 $ 991,458
6,759
27,292
6,973 $ 1,018,750
In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, 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.
The Company’s commitments associated with outstanding standby letters of credit and commitments to extend credit expiring
by period as of December 31, 2016 are summarized below.
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
Standby letters of credit
Commitments to extend credit
Total
74,008
$
67,221 $
1,010,327
585,075 2,039,109
$ 1,077,548 $ 295,830 $ 154,664 $ 585,075 $ 2,113,117
6,558 $
289,272
— $
(Dollars in thousands)
229 $
154,435
Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by the Company to guarantee the
payment by or performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of
the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future
payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is
funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby
letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
Commitments to Extend Credit. The Company enters into contractual commitments to extend credit, normally with fixed
expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Company’s commitments
to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company
minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance
for credit losses. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment
amounts disclosed above do not necessarily represent future cash funding requirements. At December 31, 2016, $217.0 million of
commitments to extend credit have fixed rates ranging from 1.4% to 21.0%.
105
The Company evaluates customer creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered
necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.
Leases—The following table presents a summary of non-cancelable future operating lease commitments as of December 31,
2016 (dollars in thousands):
2017
2018
2019
2020
2021
Thereafter
$
5,685
4,857
4,205
3,399
2,387
6,759
$ 27,292
It is expected that in the normal course of business, expiring leases will be renewed or replaced by leases on other property or
equipment.
Rent expense under all noncancelable operating lease obligations aggregated approximately $7.4 million for the year ended
December 31, 2016, $7.4 million for the year ended December 31, 2015 and $7.5 million for the year ended December 31, 2014.
Litigation—The Company and the Bank are defendants, from time to time, in legal actions arising from transactions conducted
in the ordinary course of business. After consultations with legal counsel, the Company and the Bank believe that the ultimate
liability, if any, arising from such actions will not have a material adverse effect on their financial statements.
16. OTHER COMPREHENSIVE (LOSS) INCOME
Before
Tax
2016
Tax
For the Years Ended December 31,
2015
Net of
Tax
Before
Tax
Tax
Net of
Tax
Before
Tax
2014
Tax
Amount
Benefit
Amount
Amount
Benefit
Amount
Amount
Benefit
Net of
Tax
Amount
(Dollars in thousands)
Other comprehensive loss:
Securities available for sale:
Change in unrealized gain during
period
Total securities available for
sale
Total other comprehensive loss
$ (967 ) $ 338 $ (629 )
$ (2,599 ) $ 910 $ (1,689 ) $ (1,776 ) $ 622 $ (1,154 )
(967 )
(629 )
$ (967 ) $ 338 $ (629 )
338
(2,599 )
(1,154 )
(1,689 ) (1,776 )
$ (2,599 ) $ 910 $ (1,689 ) $ (1,776 ) $ 622 $ (1,154 )
910
622
Activity in accumulated other comprehensive income, net of tax, was as follows:
Securities
Available
for Sale
Accumulated
Other
Comprehensive
Income
(Dollars in thousands)
$
$
$
$
$
$
2,040 $
(629 )
1,411 $
3,729 $
(1,689 )
2,040 $
4,883 $
(1,154 )
3,729 $
2,040
(629 )
1,411
3,729
(1,689 )
2,040
4,883
(1,154 )
3,729
Balance at January 1, 2016
Other comprehensive loss
Balance at December 31, 2016
Balance at January 1, 2015
Other comprehensive loss
Balance at December 31, 2015
Balance at January 1, 2014
Other comprehensive loss
Balance at December 31, 2014
106
17. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Any institution that fails to meet its minimum capital requirements is subject to actions by regulators that could have a direct material
effect on the Company’s financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines based on the Bank’s assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and the Bank’s
classification under the regulatory framework for prompt corrective action are also subject to qualitative judgments by the regulators
about the components, risk weightings and other factors.
The Basel III Capital Rules adopted by the federal regulatory authorities in 2013 substantially revised the risk-based capital
requirements applicable to the Company and the Bank. The Basel III Capital Rules became effective for the Company and the Bank
on January 1, 2015, subject to a phase-in period for certain provisions. Among other things, the Basel III Capital Rules introduced a
new capital measure called “Common Equity Tier 1” (“CET1”), which is a comparison of the sum of certain equity capital
components to total risk-weighted assets, and revised the risk-weighting approach of the capital ratios with a more risk-sensitive
approach that expanded the risk-weighting categories from the previous Basel I derived categories to a much larger and more risk-
sensitive number of categories, depending on the nature of the assets.
To meet the capital adequacy requirements, the Company and the Bank must maintain minimum capital amounts and ratios of
CET1, Tier 1 and Total capital to risk weighted assets, and of Tier 1 capital to adjusted quarterly average assets as defined in the
regulations. As of December 31, 2016, the Company and the Bank met all capital adequacy requirements to which they were subject.
The CET1, Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk weighted assets. Risk
weighted assets include total assets, excluding goodwill and other intangible assets, allocated by risk weight category, and certain off-
balance-sheet items. The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, excluding
goodwill and other intangible assets.
As of December 31, 2016, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the
regulatory framework for prompt corrective action. There have been no conditions or events since that notification which management
believes have changed the Bank’s category. To be categorized as well capitalized the Bank must maintain minimum CET1 risk-based,
Tier 1 risk-based, total risk-based and Tier 1 leverage ratios as set forth in the table below.
107
The following is a summary of the Company’s and the Bank’s capital ratios at December 31, 2016 and 2015:
Minimum Required
For Capital
Adequacy Purposes
Minimum Required
Plus Capital
Conservation Buffer
for 2016
To Be Categorized As
Well Capitalized Under
Prompt Corrective Action
Provisions
Actual
Amount
Ratio
Amount Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
CONSOLIDATED:
As of December 31, 2016 (1)
CET1 Capital (to Risk Weighted Assets) $ 1,721,055 14.48 % $ 534,852 4.50 % $ 609,136 5.125 %
Tier 1 Capital (to Risk Weighted Assets) 1,721,055 14.48 % 713,135 6.00 % 787,420 6.625 %
Total Capital (to Risk Weighted Assets)
1,806,382 15.20 % 950,847 8.00 % 1,025,132 8.625 %
Tier 1 Capital (to Average Tangible
N/A N/A
N/A N/A
N/A N/A
Assets)
As of December 31, 2015 (1)
1,721,055 8.68 % 793,457 4.00 % 793,457 4.000 %
N/A N/A
CET1 Capital (to Risk Weighted Assets) $ 1,578,312 13.55 % $ 524,089 4.50 %
Tier 1 Capital (to Risk Weighted Assets) 1,578,312 13.55 % 698,785 6.00 %
Total Capital (to Risk Weighted Assets)
1,659,695 14.25 % 931,714 8.00 %
Tier 1 Capital (to Average Tangible
N/A N/A
N/A N/A
N/A N/A
N/A N/A
N/A N/A
N/A N/A
Assets)
BANK ONLY:
As of December 31, 2016 (1)
1,578,312 7.97 % 792,102 4.00 %
N/A N/A
N/A N/A
CET1 Capital (to Risk Weighted Assets) $ 1,704,620 14.35 % $ 534,392 4.50 % $ 608,613 5.125 % $ 771,899
Tier 1 Capital (to Risk Weighted Assets) 1,704,620 14.35 % 712,522 6.00 % 786,743 6.625 % 950,030
Total Capital (to Risk Weighted Assets)
Tier 1 Capital (to Average Tangible
6.50 %
8.00 %
1,789,946 15.07 % 950,030 8.00 % 1,024,251 8.625 % 1,187,537 10.00 %
Assets)
As of December 31, 2015 (1)
1,704,620 8.60 % 793,006 4.00 % 793,006 4.000 % 991,257
5.00 %
CET1 Capital (to Risk Weighted Assets) $ 1,524,298 13.10 % $ 523,660 4.50 %
1,524,298 13.10 % 698,214 6.00 %
Tier 1 Capital to Risk Weighted Assets)
1,605,682 13.80 % 930,952 8.00 %
Total Capital (to Risk Weighted Assets)
Tier 1 Capital (to Average Tangible
6.50 %
N/A N/A $ 756,398
N/A N/A 930,952
8.00 %
N/A N/A 1,163,689 10.00 %
Assets)
1,524,298 7.70 % 791,721 4.00 %
N/A N/A 989,652
5.00 %
(1) Calculated pursuant to the phase-in provisions of the Basel III Capital Rules.
Dividends paid by Bancshares and the Bank are subject to restrictions by certain regulatory agencies. Dividends paid by
Bancshares during the years ended December 31, 2016, 2015 and 2014 were $86.2 million, $78.3 million and $68.4 million,
respectively. Dividends paid by the Bank to Bancshares during the years ended December 31, 2016, 2015 and 2014 were $141.5
million, $258.3 million and $103.1 million, respectively.
108
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS
PROSPERITY BANCSHARES, INC.
(Parent Company Only)
CONDENSED BALANCE SHEETS
ASSETS
Cash
Investment in subsidiary
Investment in capital and statutory trusts
Goodwill
Other assets
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Accrued interest payable and other liabilities
Junior subordinated debentures
Total liabilities
SHAREHOLDERS’ EQUITY:
Common stock
Capital surplus
Retained earnings
Unrealized gain on available for sale securities, net of tax benefit
Less treasury stock, at cost, 37,088 shares
Total shareholders’ equity
TOTAL
December 31,
2016
2015
(Dollars in thousands)
1,950 $
3,621,893
—
3,982
14,486
3,642,311 $
40,157
3,404,913
—
3,982
13,858
3,462,910
— $
—
—
69,491
2,028,129
1,543,280
1,411
—
3,642,311
3,642,311 $
—
—
—
70,059
2,036,378
1,355,040
2,040
(607 )
3,462,910
3,462,910
$
$
$
$
109
PROSPERITY BANCSHARES, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
2016
For the Years Ended December 31,
2015
(Dollars in thousands)
2014
$
141,456 $
34
141,490
258,250 $
69
258,319
103,100
159
103,259
37
9,547
613
10,197
791
11,095
526
12,412
131,293
3,568
245,907
4,331
4,060
8,236
608
12,904
90,355
4,468
134,861
139,605
274,466 $
250,238
36,408
286,646 $
94,823
202,618
297,441
OPERATING INCOME:
Dividends from subsidiary
Other income
Total income
OPERATING EXPENSE:
Junior subordinated debentures interest expense
Stock based compensation expense (includes restricted stock)
Other expenses
Total operating expense
INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARIES
FEDERAL INCOME TAX BENEFIT
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES
NET INCOME
$
110
PROSPERITY BANCSHARES, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
2016
For the Years Ended December 31,
2015
(Dollars in thousands)
2014
$
274,466 $
286,646 $
297,441
(967 )
(967 )
338
(629 )
273,837 $
(2,599 )
(2,599 )
910
(1,689 )
284,957 $
(1,776 )
(1,776 )
622
(1,154 )
296,287
Net income
Other comprehensive loss, before tax:
Securities available for sale:
Change in unrealized gain during period
Total other comprehensive loss
Deferred tax benefit related to other comprehensive income
Other comprehensive loss, net of tax
Comprehensive income
$
111
PROSPERITY BANCSHARES, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
2016
For the Years Ended December 31,
2015
(Dollars in thousands)
2014
$
274,466 $
286,646 $
297,441
(139,605 )
9,547
41
—
144,449
(39,006 )
72
(38,934 )
(7,217 )
778
(51,057 )
(86,226 )
(143,722 )
(38,207 )
40,157
1,950 $
(36,408 )
11,095
3,298
(309 )
264,322
(202,618 )
8,236
4,838
(968 )
106,929
—
—
—
(167,531 )
290
—
(78,258 )
(245,499 )
18,823
21,334
40,157 $
(34,246 )
2,733
(31,513 )
—
3,705
—
(68,384 )
(64,679 )
10,737
10,597
21,334
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries
Stock based compensation expense (includes restricted stock)
Decrease in other assets
Decrease in accrued interest payable and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions
Cash acquired from acquisitions
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of junior subordinated debentures
Proceeds from stock option exercises
Repurchase of common stock
Payments of cash dividends
Net cash used in financing activities
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
112