Prosperity Bancshares, Inc. — 2021 Q3 Form 10-Q Summary
Business context and reporting period
Prosperity Bancshares, Inc. is a Texas-based financial holding company operating Prosperity Bank, which provides banking products and services across Texas and Oklahoma through 273 full-service locations. This Form 10-Q covers the three and nine months ended September 30, 2021. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 |
|---|---|---|---|---|
| Net interest income | $248.6 million | $258.1 million | $748.5 million | $773.1 million |
| Provision for credit losses | $0 | $10.0 million | $0 | $20.0 million |
| Noninterest income | $34.6 million | $34.9 million | $104.2 million | $95.0 million |
| Noninterest expense | $119.8 million | $117.9 million | $354.1 million | $377.0 million |
| Net income | $128.6 million | $130.1 million | $392.5 million | $391.8 million |
| Diluted EPS | $1.39 | $1.40 | $4.23 | $4.20 |
| Tax-equivalent net interest margin | 3.10% | 3.57% | 3.20% | 3.69% |
| Efficiency ratio | 42.34% | 40.17% | 41.52% | 43.19% |
| Return on average assets | 1.42% | 1.58% | 1.47% | 1.62% |
| Return on average common equity | 8.07% | 8.64% | 8.32% | 8.78% |
At September 30, 2021, total assets were $36.51 billion, total loans were $18.96 billion, total deposits were $29.45 billion, shareholders’ equity was $6.35 billion and cash and cash equivalents were $1.06 billion. The company had $440.97 million of securities sold under repurchase agreements and no FHLB advances, other borrowings or subordinated notes outstanding.
Nine-month net cash provided by operating activities was $619.7 million. Investing activities used $2.86 billion, primarily reflecting purchases of held-to-maturity securities and Warehouse Purchase Program activity. Financing activities provided $1.96 billion, primarily from deposit growth. Cash and cash equivalents declined by $287.9 million from year-end 2020.
Material changes versus prior comparable periods
- Third-quarter net income declined 1.1% year over year, while nine-month net income increased 0.2%. Nine-month diluted EPS increased 0.7% to $4.23.
- Net interest income decreased 3.7% in the quarter and 3.2% year to date. The primary pressures were lower loan balances and yields and reduced accretion of acquired-loan discounts. Loan discount accretion declined by $17.2 million in the quarter and $41.4 million year to date.
- Tax-equivalent net interest margin fell 47 basis points to 3.10% in the quarter and 49 basis points to 3.20% year to date.
- Noninterest income was essentially flat in the quarter but increased 9.7% year to date, helped by higher card income, other income and lower asset write-down losses.
- Noninterest expense increased 1.6% in the quarter but declined 6.1% year to date, primarily because 2020 included $8.0 million of merger-related expense and higher post-conversion operating costs.
- Total assets increased 7.2% from December 31, 2020, while deposits increased 7.6%. Total loans declined 6.4%, including an $844.3 million decline in Warehouse Purchase Program loans. Securities increased 47.8% to $12.63 billion.
- The allowance for credit losses on loans declined to $287.2 million, or 1.51% of total loans, from $316.1 million, or 1.56%, at year-end 2020. No credit-loss provision was recorded in 2021 year to date.
- Nonperforming assets declined to $36.5 million, or 0.19% of loans and other real estate, from $59.6 million, or 0.29%, at December 31, 2020.
Outlook, commentary, risks and unusual items
The filing does not provide numerical earnings or balance-sheet guidance. Management stated that the nine-month results are not necessarily indicative of full-year results and that it intends to continue pursuing internal growth, operating efficiency and acquisition opportunities.
- COVID-19 remains a material uncertainty. As of September 30, 2021, approximately $79.5 million of loans were subject to payment deferral or modification agreements. The company had 3,233 outstanding PPP loans totaling $365.8 million.
- Third-quarter net charge-offs were $15.7 million, including $4.6 million from resolved purchased credit-deteriorated loans and $10.8 million from a partial charge-off of one acquired commercial real estate loan. Nine-month net charge-offs were $28.9 million.
- The allowance for credit losses was described as adequate by management, but future adjustments could be substantial if economic conditions or borrower performance differ from assumptions.
- Loan concentrations create exposure to residential and commercial real estate, which represented 78.2% of loans excluding Warehouse Purchase Program loans. Oil and gas loans totaled $569.3 million, with $363.3 million of unfunded commitments, at September 30, 2021.
- Other principal risks include interest-rate and net-interest-margin pressure, deposit and loan competition, liquidity availability, securities credit and valuation risk, acquisition integration and goodwill impairment, cybersecurity and technology failures, vendor risk, regulatory changes, and local economic conditions including oil and gas prices.
- The nine-month 2020 effective tax rate benefited from a $20.1 million CARES Act-related net operating loss carryback benefit; consequently, the 2021 nine-month effective tax rate was 21.3% versus 16.8% in 2020.
- The company repurchased 767,134 shares during the quarter and nine months at an average price of $67.87, for $52.1 million. The January 2021 authorization permitted repurchases of approximately 4.65 million shares through January 26, 2022.
- The Bank remained above the regulatory thresholds for classification as well capitalized. Its September 30, 2021 CET1, Tier 1, total risk-based and leverage ratios were 14.78%, 14.78%, 15.14% and 9.52%, respectively.
- Management reported no material changes in market-risk disclosures, no material changes in internal control over financial reporting, and no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether the lower net interest margin and reduced acquired-loan discount accretion persist as interest rates, prepayments and loan mix change.
- The sustainability of the zero provision for credit losses and whether charge-offs, particularly in acquired commercial real estate and PCD loans, require future reserve increases.
- Trends in residential and commercial real estate concentrations, oil and gas exposure, $4.08 billion of commitments to extend credit and $1.16 billion of unused Warehouse Purchase Program capacity.
- The performance of the $79.5 million of loans subject to COVID-19-related deferrals or modifications and the remaining PPP portfolio.
- The liquidity impact of the substantial securities portfolio, deposit movements, share repurchases and dividend payments.
- Future tax rates relative to 2020, which benefited from the $20.1 million NOL carryback benefit.
- Potential changes in the value of acquired loan discounts, goodwill and other acquisition-related balances.