Prosperity Bancshares, Inc. 2020 Form 10-K Summary
Business context and reporting period
Prosperity Bancshares, Inc. is a Texas-based financial holding company whose principal subsidiary, Prosperity Bank, provides commercial and consumer banking services in Texas and Oklahoma. The filing covers the fiscal year ended December 31, 2020; the source also provides fourth-quarter 2020 results. The Bank operated 275 full-service banking centers and had 3,756 full-time equivalent associates at year-end.
The 2020 results include a full year of operations from the November 1, 2019 merger with LegacyTexas Financial Group, which added a substantial North Texas franchise, loan portfolio and Warehouse Purchase Program.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total assets | $34.06 billion | $32.19 billion | 5.8% increase |
| Total deposits | $27.36 billion | $24.20 billion | 13.1% increase |
| Total loans | $20.25 billion | $18.85 billion | 7.4% increase |
| Net interest income | $1.03 billion | $695.8 million | 48.1% increase |
| Provision for credit losses | $20.0 million | $4.3 million | Increase |
| Noninterest income | $131.5 million | $124.3 million | 5.8% increase |
| Noninterest expense | $497.2 million | $396.5 million | 25.4% increase |
| Net income | $528.9 million | $332.6 million | 59.0% increase |
| Diluted earnings per share | $5.68 | $4.52 | 25.7% increase |
| Net interest margin, tax equivalent | 3.64% | 3.32% | 32 basis-point increase |
| Efficiency ratio | 42.58% | 48.25% | Improved |
| Return on average assets | 1.62% | 1.38% | Improved |
| Return on average common equity | 8.85% | 7.46% | Improved |
Interest income increased to $1.14 billion, primarily from the merger, loan growth and $63.3 million of additional loan discount accretion. Interest expense declined to $113.2 million as the average rate on interest-bearing liabilities fell from 1.02% to 0.63% and the average cost of funds declined from 0.70% to 0.43%.
Cash and cash equivalents increased to $1.34 billion from $574.1 million. Operating activities generated $582.3 million of cash, while investing activities used $1.27 billion, largely reflecting securities activity and substantial Warehouse Purchase Program originations and payoffs. Financing activities provided $1.46 billion, primarily from deposit growth, partly offset by debt repayment, share repurchases and dividends.
Shareholders’ equity was $6.13 billion, compared with $5.97 billion in 2019. The Company paid $173.8 million of common dividends, or $1.87 per share, and repurchased 2.2 million shares for $115.2 million during 2020.
Material changes versus the prior comparable period
- Net income rose by $196.4 million, principally due to the full-year contribution from LegacyTexas, lower merger-related expenses and a $20.1 million CARES Act net operating loss carryback tax benefit.
- Merger-related expenses declined to $8.0 million from $46.4 million.
- Loans grew $1.40 billion. Commercial and industrial loans increased 14.6%, one-to-four-family residential loans increased 9.6%, and Warehouse Purchase Program loans increased 83.1% to $2.84 billion.
- Commercial real estate loans declined 7.3%, while construction, land development and other land loans declined 5.2%.
- Deposits increased $3.16 billion, including a $1.39 billion increase in noninterest-bearing deposits. Noninterest-bearing deposits represented 33.4% of total deposits at year-end.
- The allowance for credit losses increased to $316.1 million from $87.5 million. The increase principally reflected adoption of CECL, which added $240.5 million to the allowance, together with COVID-19-related economic assumptions and other risk factors.
- Nonperforming assets declined to $59.6 million, or 0.29% of loans and other real estate, from $62.9 million, or 0.33%. Net charge-offs increased to $31.9 million from $3.3 million.
- The Company redeemed $125.0 million of subordinated notes assumed in the LegacyTexas merger. At December 31, 2020, no subordinated notes or FHLB advances were outstanding; securities sold under repurchase agreements totaled $389.6 million.
Capital, liquidity and asset quality
- Company capital ratios at December 31, 2020 were 13.74% CET1, 13.74% Tier 1 risk-based capital, 14.23% total risk-based capital and 9.67% leverage.
- Bank capital ratios were 13.64% CET1, 13.64% Tier 1, 14.14% total risk-based capital and 9.58% leverage. The Bank was classified as well-capitalized.
- The Company had $8.45 billion of available borrowing capacity under its FHLB line and $1.34 billion of cash and cash equivalents.
- Real estate-related lending represented approximately 65.2% of total loans, including commercial real estate, residential real estate, and construction, land development and other land loans.
- The allowance for credit losses represented 1.56% of total loans, or 1.82% excluding Warehouse Purchase Program loans, and 646.6% of nonperforming loans.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management states that it intends to continue community banking, internal growth, disciplined acquisitions, loan diversification, efficiency initiatives and cross-selling.
COVID-19 created material uncertainty. The Company originated approximately 11,900 PPP loans totaling $1.40 billion in 2020; 8,816 loans totaling $963.2 million remained outstanding at year-end and were fully guaranteed by the SBA. Approximately $328.0 million of loans remained subject to COVID-19-related deferral or modification agreements. Management stated that the pandemic’s effect on 2021 operations and financial results could not be reasonably estimated.
The Company adopted CECL on January 1, 2020 using modified retrospective transition. The adoption reduced retained earnings by $92.9 million in total and substantially increased reported credit-loss reserves. The Company elected regulatory capital relief that defers much of CECL’s capital impact for two years, with phase-in from 2022 through 2024.
Key risks include interest-rate sensitivity, credit deterioration in commercial real estate and commercial lending, Texas and Oklahoma economic conditions, oil and gas exposure, real estate values, COVID-19-related borrower stress, volatility in Warehouse Purchase Program balances, liquidity and deposit competition, acquisition integration, goodwill impairment, cybersecurity, regulatory compliance and litigation. Goodwill totaled $3.23 billion at year-end; management reported no impairment from its October 1, 2020 test.
The filing states that ordinary-course legal proceedings are not expected to have a material adverse effect. Management and Deloitte & Touche LLP reported effective internal control over financial reporting and an unqualified audit opinion.
Most important facts for investors to verify
- Whether COVID-19 relief loans and the $328.0 million of modified loans produce higher delinquencies, charge-offs or future reserve requirements.
- The sustainability of 2020 earnings given the $20.1 million tax benefit, merger-related effects and $91.3 million of loan discount accretion.
- Credit performance in the commercial real estate, commercial and industrial, energy, construction and residential portfolios.
- The economic sensitivity of the $2.84 billion Warehouse Purchase Program and its effect on reported loans, capital ratios and liquidity.
- The adequacy of the $316.1 million loan allowance under CECL and the future regulatory capital impact as CECL relief phases in.
- The potential for goodwill impairment given $3.23 billion of goodwill and the Company’s exposure to economic and market conditions.
- Future dividend and share-repurchase capacity, including regulatory limits on dividends from Prosperity Bank to the holding company.