Prosperity Bancshares, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Prosperity Bancshares, Inc. operates Prosperity Bank, providing commercial and consumer banking services across Texas and Oklahoma. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. The Bank operated 286 full-service locations at quarter-end.
Effective May 1, 2023, the Company completed the acquisition of First Bancshares of Texas, Inc. and its subsidiary FirstCapital Bank of Texas. The acquired bank had approximately $2.14 billion of assets, $1.65 billion of loans and $1.71 billion of deposits at March 31, 2023.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Total interest income | $360.4 million | $257.8 million | $687.8 million | $506.7 million |
| Net interest income | $236.5 million | $248.5 million | $479.9 million | $488.4 million |
| Provision for credit losses | $18.5 million | — | $18.5 million | — |
| Noninterest income | $39.7 million | $37.6 million | $78.0 million | $72.7 million |
| Noninterest expense | $145.9 million | $122.9 million | $268.9 million | $242.7 million |
| Net income | $86.9 million | $128.5 million | $211.6 million | $250.8 million |
| Diluted EPS | $0.94 | $1.40 | $2.30 | $2.73 |
| Tax-equivalent net interest margin | 2.73% | 2.97% | 2.83% | 2.92% |
| Annualized return on average assets | 0.89% | 1.36% | 1.09% | 1.32% |
| Annualized return on average common equity | 5.01% | 7.84% | 6.18% | 7.69% |
| Efficiency ratio | 53.21% | 43.12% | 48.38% | 43.40% |
At June 30, 2023, total assets were $39.91 billion, loans were $21.65 billion, securities were $13.67 billion, deposits were $27.38 billion and shareholders’ equity was $6.97 billion. Cash and cash equivalents totaled $397.0 million.
Loans increased 14.9% from December 31, 2022, while deposits decreased 4.0%. Noninterest-bearing deposits declined 5.0% and interest-bearing deposits declined 3.4%. The allowance for credit losses on loans was $345.2 million, or 1.59% of total loans, compared with $281.6 million, or 1.49%, at year-end 2022.
Borrowings totaled $4.80 billion, including $3.00 billion of Federal Reserve Bank Term Funding Program advances and $1.80 billion of Federal Home Loan Bank advances. The Company also had $434.2 million of repurchase agreements and $3.1 million of subordinated debentures.
Cash Flow, Liquidity and Capital
- Six-month operating cash flow was $374.7 million, compared with $315.2 million in the prior-year period.
- Investing activities used $203.2 million, primarily reflecting net loan growth and the First Bancshares acquisition; financing activities used $198.6 million.
- Cash and cash equivalents decreased by $27.1 million from year-end 2022.
- The Company reported $9.02 billion of available FHLB borrowing capacity at June 30, 2023.
- The Bank was above the regulatory thresholds for “well capitalized” status. The Bank’s CET1, Tier 1, total risk-based and Tier 1 leverage ratios were 14.45%, 14.45%, 15.48% and 9.94%, respectively.
- The Company paid $101.7 million of cash dividends and repurchased $72.2 million of common stock during the first six months.
Material Changes Versus Prior Comparable Period
- Net income declined 32.3% in the second quarter and 15.6% in the first six months, primarily because of higher funding costs, credit-loss provisions and merger-related expenses.
- Net interest income decreased 4.8% in the quarter and 1.7% year to date, despite substantially higher loan interest income. Interest expense increased sharply as deposit and borrowing rates rose.
- Average interest-bearing liability costs increased to 2.28% in the quarter from 0.19% and to 1.97% year to date from 0.18%.
- Noninterest expense increased 18.7% in the quarter and 10.8% year to date. Merger-related expenses were $12.9 million in the quarter and $13.8 million year to date.
- Nonperforming assets increased to $62.7 million from $27.5 million at December 31, 2022, primarily because of the First Bancshares acquisition. Nonaccrual loans increased to $57.7 million from $19.6 million.
- Net charge-offs were $16.1 million in the quarter and $15.5 million year to date, including a $15.0 million charge-off related to one commercial real estate loan acquired in a prior merger.
- Total securities declined 5.6% from year-end, while their share of total assets declined to 34.2% from 38.4%.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or margin guidance. Management expects funding sources and uses to remain broadly consistent, but results remain sensitive to interest rates, deposit competition, loan demand, credit performance and liquidity conditions.
The pending merger with Lone Star State Bancshares remained subject to customary closing conditions and regulatory approvals. Shareholder approval had been received, and closing was expected during the third quarter of 2023, although delays were possible. Consideration was expected to include 2,376,182 shares of common stock and approximately $64.1 million in cash.
- The First Bancshares acquisition added $152.1 million of goodwill and $25.3 million of core deposit intangibles at June 30, 2023; purchase accounting remained subject to refinement.
- The second quarter included $12.0 million of loan credit-loss provision and $6.5 million of off-balance-sheet credit-exposure provision attributable to acquired loans.
- Held-to-maturity securities had $1.56 billion of unrealized losses. Management attributed the losses primarily to interest-rate changes and stated that it intended and expected to be able to hold the securities to recovery or maturity.
- Commitments to extend credit totaled $5.14 billion, unused Warehouse Purchase Program capacity totaled $959.1 million and standby letters of credit totaled $81.2 million. The related off-balance-sheet credit-loss allowance was $36.5 million.
- Borrowing and liquidity risks include the $3.00 billion of BTFP advances maturing in May and June 2024 and $1.80 billion of FHLB advances. The Company had pledged securities supporting these facilities.
- In July 2023, the Company gave notice that it intended to redeem the $3.1 million subordinated debentures on September 18, 2023.
- Principal risks include higher interest rates, deposit outflows and funding costs, real estate and commercial-credit concentrations, economic deterioration, acquisition integration, goodwill impairment, cyber and operational risks, regulatory changes and model uncertainty in expected credit losses.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. Legal proceedings were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether deposit stabilization and funding costs improve enough to support net interest margin and earnings.
- Whether the increase in nonperforming assets and charge-offs remains primarily acquisition-related or broadens across the originated loan portfolio.
- The quality and valuation of commercial real estate, construction and other real-estate-concentrated loans.
- The final purchase accounting for First Bancshares, including acquired-loan marks, goodwill and core deposit intangibles.
- The closing timing, regulatory approvals, consideration and integration risks associated with the Lone Star transaction.
- The Company’s ability to refinance or repay BTFP and FHLB borrowings while maintaining adequate liquidity and regulatory capital.
- The duration and potential economic impact of the securities portfolio’s unrealized losses if interest rates remain elevated.