Prosperity Bancshares, Inc. — Q1 2021 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 275 full-service locations. The filing covers the unaudited three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020 and the December 31, 2020 balance sheet.
All dollar amounts below are in thousands unless stated otherwise.
Key Financial Metrics
| Metric | Q1 2021 / March 31, 2021 | Comparable Period / December 31, 2020 |
|---|---|---|
| Total assets | $35.56 billion | $34.06 billion at December 31, 2020 |
| Total loans | $19.64 billion | $20.25 billion at December 31, 2020 |
| Total deposits | $28.76 billion | $27.36 billion at December 31, 2020 |
| Net interest income | $254.6 million | $256.0 million in Q1 2020 |
| Tax-equivalent net interest margin | 3.41% | 3.81% in Q1 2020 |
| Net income | $133.3 million | $130.8 million in Q1 2020 |
| Diluted EPS | $1.44 | $1.39 in Q1 2020 |
| Net cash from operating activities | $230.7 million | $209.9 million in Q1 2020 |
| Cash and cash equivalents | $1.96 billion | $1.34 billion at December 31, 2020 |
| Shareholders’ equity | $6.22 billion | $6.13 billion at December 31, 2020 |
- Net income increased 1.9% year over year, while diluted EPS increased 3.6% to $1.44.
- Annualized return on average common equity was 8.60%, return on average assets was 1.54%, and the efficiency ratio was 41.25%.
- Total interest income declined 8.1% to $272.1 million, primarily because of lower loan and securities yields and reduced loan discount accretion.
- Interest expense declined 56.4% to $17.5 million, reflecting lower deposit costs and the absence of other borrowings and subordinated-note expense reported in Q1 2020.
- Noninterest income decreased 1.1% to $34.0 million. NSF fees declined by $2.8 million, partially offset by higher card, mortgage, trust and brokerage income.
- Noninterest expense decreased 4.5% to $119.1 million. Lower data processing, occupancy, other expenses and merger-related costs more than offset higher salaries and benefits.
- No provision for credit losses was recorded in either Q1 2021 or Q1 2020.
Material Changes Versus Prior Periods
- Total assets increased $1.50 billion, or 4.4%, from December 31, 2020, driven primarily by higher cash and securities balances.
- Total securities increased $1.55 billion, or 18.1%, to $10.09 billion, with held-to-maturity securities increasing substantially.
- Total loans decreased $608.1 million, or 3.0%, primarily because Warehouse Purchase Program loans declined $570.0 million to $2.27 billion. Loans excluding that program were broadly stable.
- Deposits increased $1.40 billion, or 5.1%; noninterest-bearing deposits increased 7.3% and interest-bearing deposits increased 4.0% from year-end.
- Cash and cash equivalents increased $612.7 million, or 45.6%, to $1.96 billion.
- Nonperforming assets declined to $44.2 million from $59.6 million, and the ratio to total loans and other real estate improved to 0.22% from 0.29%.
- The allowance for credit losses on loans declined to $307.2 million from $316.1 million but remained 1.56% of total loans. Q1 net charge-offs were $8.9 million, including $7.1 million related to resolved purchased credit-deteriorated loans.
- The company declared cash dividends of $45.5 million, or $0.49 per share. No share repurchases occurred during the quarter, although a program authorizes repurchases of up to approximately 4.65 million shares through January 26, 2022.
Debt, Liquidity and Capital
- Borrowings consisted primarily of $377.1 million of securities sold under repurchase agreements. The company had no FHLB advances, other borrowings or subordinated notes outstanding at March 31, 2021.
- The company reported $9.40 billion of available capacity under its FHLB of Dallas line of credit.
- Operating cash flow was $230.7 million, while investing activities used $963.2 million, largely reflecting purchases of held-to-maturity securities. Financing activities provided $1.35 billion, primarily from deposit growth.
- Off-balance-sheet commitments totaled $5.60 billion, including $3.99 billion of commitments to extend credit, $1.50 billion of unused Warehouse Purchase Program capacity and $103.9 million of standby letters of credit.
- The allowance for off-balance-sheet credit exposures was $29.9 million.
- The Bank remained above “well capitalized” regulatory thresholds. Its March 31, 2021 CET1, Tier 1, total risk-based and Tier 1 leverage ratios were 14.51%, 14.51%, 14.97% and 9.62%, respectively.
Outlook, Commentary, Risks and Unusual Items
- The filing does not provide quantitative earnings or revenue guidance. Management states that first-quarter results are not necessarily indicative of full-year results.
- COVID-19 continues to create economic uncertainty. The company states that the pandemic’s effect on 2021 operations and financial results cannot be reasonably or reliably estimated.
- As of March 31, 2021, approximately $316.7 million of loans remained subject to COVID-19-related deferral or modification agreements.
- The company had approximately $1.14 billion of PPP loans outstanding, fully guaranteed by the SBA and not subject to an allowance for credit losses. Since the program began, the company had obtained SBA approvals on approximately 18,500 loans totaling approximately $1.98 billion.
- Key disclosed risks include deterioration in economic or borrower credit conditions, interest-rate volatility, concentration in residential and commercial real estate, oil and gas exposure, deposit and liquidity pressures, competition, cybersecurity and technology risks, regulatory and accounting changes, acquisition integration risk, goodwill impairment and model risk in credit-loss and fair-value estimates.
- Oil and gas loans totaled $503.9 million, or 2.6% of total loans, excluding PPP loans; unfunded commitments to oil and gas companies were $248.1 million.
- Management reported no material credit impairment in the securities portfolio, no material changes in market-risk exposure from the 2020 Form 10-K, and no material legal proceedings. Disclosure controls were considered effective.
Most Important Facts for Investors to Verify
- Whether the lower 3.41% net interest margin and reduced loan discount accretion persist as interest rates and deposit balances change.
- Whether the decline in total loans, particularly Warehouse Purchase Program balances, affects future interest income and fee generation.
- The performance of the heavily real-estate-oriented loan portfolio, including commercial real estate, residential and construction exposures.
- Whether COVID-19 loan deferrals, PPP forgiveness and the economic environment lead to higher delinquencies, charge-offs or future credit-loss provisions.
- The sustainability of deposit growth and the company’s substantial liquidity and securities allocation.
- Future effects of the $5.60 billion of off-balance-sheet commitments and the adequacy of the $29.9 million related allowance.
- The potential impact of interest-rate changes on securities fair values, prepayments, net interest income and liquidity.