Prosperity Bancshares, Inc. — Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
Prosperity Bancshares, Inc. is a Texas-based financial holding company whose principal subsidiary, Prosperity Bank, provides banking products and services across Texas and Oklahoma through 285 full-service locations as of September 30, 2023. The filing covers the unaudited three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods and December 31, 2022 balance-sheet data.
The company completed its acquisition of First Bancshares of Texas, Inc. on May 1, 2023. The transaction added 16 banking offices and contributed to increases in assets, loans, goodwill, credit-loss allowances and operating expenses.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net income | $112.2 million | $135.8 million | $323.8 million | $386.6 million |
| Diluted EPS | $1.20 | $1.49 | $3.50 | $4.22 |
| Net interest income | $239.5 million | $260.7 million | $719.5 million | $749.1 million |
| Noninterest income | $38.7 million | $34.7 million | $116.7 million | $107.4 million |
| Noninterest expense | $135.7 million | $122.2 million | $404.5 million | $364.9 million |
| Provision for credit losses | None | None | $18.5 million | None |
| Tax-equivalent net interest margin | 2.72% | 3.11% | 2.79% | 2.99% |
| Return on average assets | 1.13% | 1.45% | 1.11% | 1.37% |
| Return on average common equity | 6.39% | 8.24% | 6.25% | 7.88% |
| Efficiency ratio | 48.74% | 41.38% | 48.50% | 42.70% |
All dollar amounts are as reported, in millions unless otherwise indicated.
- Total assets were $39.30 billion at September 30, 2023, up 4.3% from $37.69 billion at year-end 2022.
- Total loans were $21.43 billion, up 13.8% from $18.84 billion. Loans represented 54.5% of total assets versus 50.0% at year-end 2022.
- Total deposits were $27.31 billion, down 4.3% from $28.53 billion. Noninterest-bearing deposits declined 5.8%, while interest-bearing deposits declined 3.3%.
- Shareholders’ equity was $7.03 billion, up 5.0% from $6.70 billion, reflecting net income and shares issued for the First Bancshares acquisition, partly offset by dividends and share repurchases.
- Cash and cash equivalents were $512.5 million, compared with $424.1 million at December 31, 2022. Operating activities generated $618.4 million of cash during the first nine months.
- Other borrowings were $4.25 billion, including $3.00 billion outstanding under the Federal Reserve Bank Term Funding Program and $1.25 billion of Federal Home Loan Bank advances.
- The Bank had $10.7 billion of FHLB borrowing capacity and $3.08 billion of secured BTFP borrowing capacity at September 30, 2023.
- The Bank’s reported capital ratios exceeded well-capitalized regulatory thresholds, including a 14.92% CET1 ratio, 14.92% Tier 1 risk-based ratio, 16.00% total risk-based ratio and 9.99% leverage ratio.
Material Changes Versus Prior Comparable Period
- Quarterly net income declined 17.4% and nine-month net income declined 16.2%, primarily because higher loan interest income was more than offset by sharply higher deposit and borrowing costs, higher operating expenses and, for the nine-month period, merger-related credit-loss provisions and expenses.
- Quarterly net interest income decreased 8.1%; the tax-equivalent net interest margin fell 39 basis points to 2.72%. The average rate on interest-bearing liabilities increased to 2.54% from 0.38%.
- Loan interest income increased 46.8% in the quarter and 41.3% for the first nine months, supported by loan growth and higher yields.
- Noninterest income increased 11.7% in the quarter and 8.7% for the first nine months, while noninterest expense increased 11.0% and 10.8%, respectively. Nine-month merger-related expense was $14.9 million.
- The allowance for credit losses on loans increased 24.8% to $351.5 million, or 1.64% of total loans, largely due to the First Bancshares acquisition. The nine-month provision included $12.0 million related to acquired loans and $6.5 million related to off-balance-sheet exposures.
- Net charge-offs increased to $3.4 million in the quarter and $18.9 million for the first nine months, compared with $1.8 million and $4.2 million, respectively, in the prior-year periods. The nine-month amount included a $15.0 million charge-off on one commercial real estate loan acquired in a previous merger.
- Nonperforming assets increased to $69.5 million, or 0.32% of loans and other real estate, from $27.5 million, or 0.15%, at year-end 2022. Management attributed much of the increase to the First Bancshares acquisition.
- Securities declined 8.9% to $13.19 billion. Held-to-maturity securities had $1.91 billion of gross unrealized losses, primarily attributed by management to interest-rate changes rather than credit deterioration.
- The company repurchased approximately 1.21 million shares for $72.2 million during the first nine months; no shares were repurchased during the third quarter.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide specific quantitative earnings or net-interest-margin guidance. Management states that future results are subject to changes in economic conditions, interest rates, deposit competition, credit quality, liquidity and acquisition-related factors.
- The pending Lone Star State Bancshares transaction had been approved by Lone Star shareholders but remained subject to customary closing conditions, including regulatory approvals. Consideration was expected to include 2,376,182 Prosperity shares and approximately $64.1 million in cash, subject to adjustments.
- Management identifies material exposure to interest-rate volatility, funding costs, deposit attrition, reduced loan demand, loan prepayments, real estate concentrations, commercial and industrial credit risk, oil and gas conditions, and changes in collateral values.
- Other stated risks include acquisition integration, goodwill impairment, changes in regulation and accounting standards, cybersecurity and system failures, vendor risk, model risk, climate-related impacts, litigation and broader economic or geopolitical disruptions.
- Off-balance-sheet commitments totaled $6.27 billion, including $5.01 billion of commitments to extend credit, $1.17 billion of unused Warehouse Purchase Program capacity and $80.8 million of standby letters of credit. The filing notes that commitments may expire unused.
- The company reported no material changes in market-risk disclosures from its 2022 Form 10-K, no material changes in risk factors, and no material adverse legal proceedings. Management concluded that disclosure controls were effective.
- As of September 30, 2023, the company had transitioned its interest-rate swaps and loan portfolio from LIBOR to SOFR or other alternative indexes.
Important Facts for Investors to Verify
- Whether elevated deposit and wholesale funding costs continue to compress net interest margin and profitability.
- The performance and integration of First Bancshares and the timing, approvals and economics of the pending Lone Star transaction.
- Changes in nonperforming assets, criticized loans, commercial real estate exposure and future charge-offs.
- The adequacy of the $351.5 million loan allowance and $36.5 million off-balance-sheet credit-exposure allowance under changing economic conditions.
- Refinancing and liquidity implications of the $3.00 billion BTFP balance and $1.25 billion of FHLB advances, largely maturing within one year.
- The effect of the securities portfolio’s $1.91 billion of unrealized held-to-maturity losses if funding needs require asset sales before maturity.
- Whether capital ratios remain comfortably above regulatory requirements as assets, borrowings, dividends, repurchases and acquisitions change.