Prosperity Bancshares, Inc. 2023 Form 10-K Summary
Business context and reporting period
Prosperity Bancshares, Inc. is a Texas-based financial holding company whose primary subsidiary, Prosperity Bank, provides commercial and retail banking services in Texas and Oklahoma. The filing covers the fiscal year ended December 31, 2023, including fourth-quarter results. The Bank operated 285 full-service locations and had 3,850 full-time equivalent associates at year-end.
The Company completed its acquisition of First Bancshares of Texas on May 1, 2023, adding 16 banking offices. The transaction involved approximately $91.5 million of cash and 3,583,370 shares of common stock. The Company also continued to pursue the pending acquisition of Lone Star State Bancshares, subject to regulatory approval and customary closing conditions.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total assets | $38.55 billion | $37.69 billion | +2.3% |
| Total loans | $21.18 billion | $18.84 billion | +12.4% |
| Total deposits | $27.18 billion | $28.53 billion | -4.7% |
| Net interest income | $956.4 million | $1.005 billion | -4.9% |
| Noninterest income | $153.3 million | $145.1 million | +5.6% |
| Net income | $419.3 million | $524.5 million | -20.1% |
| Diluted EPS | $4.51 | $5.73 | -21.3% |
| Net interest margin, tax equivalent | 2.78% | 3.00% | -22 basis points |
| Return on average assets | 1.08% | 1.39% | Down |
| Return on average common equity | 6.03% | 7.97% | Down |
| Efficiency ratio | 50.26% | 42.23% | Higher cost intensity |
| Cash and cash equivalents | $458.4 million | $424.1 million | +8.1% |
Fourth-quarter 2023 net income was $95.5 million, or $1.02 diluted EPS, compared with $137.9 million, or $1.51 diluted EPS, in the fourth quarter of 2022. Fourth-quarter net interest income was $237.0 million, noninterest income was $36.6 million and noninterest expense was $152.2 million.
Credit quality, liquidity, capital and debt
- Nonperforming assets increased to $72.7 million, or 0.34% of loans and other real estate, from $27.5 million, or 0.15%, at December 31, 2022. Management attributed much of the increase to the First Bancshares acquisition.
- Nonaccrual loans increased to $68.7 million from $19.6 million. No Warehouse Purchase Program loans were nonperforming.
- The allowance for credit losses on loans increased to $332.4 million, or 1.57% of total loans, from $281.6 million, or 1.49%. Net charge-offs increased to $38.0 million from $4.8 million.
- The Company recorded an $18.5 million provision for credit losses in 2023, including $12.0 million related to loans acquired in the First Bancshares merger and $6.5 million related to off-balance-sheet exposures.
- Deposits funded most assets, but year-end deposits declined by $1.35 billion. Noninterest-bearing deposits were $9.78 billion, or approximately 36% of total deposits.
- Year-end borrowings included $3.725 billion under the Federal Reserve Bank Term Funding Program, with a 4.83% weighted-average rate and maturity in December 2024. The Company also had $309.3 million of repurchase agreements and no FHLB advances.
- The Company reported $4.40 billion of secured BTFP borrowing capacity and $10.85 billion of FHLB borrowing capacity at year-end.
- Consolidated capital ratios were strong: CET1 15.54%, Tier 1 risk-based capital 15.54%, total risk-based capital 16.56% and leverage 10.39%. The Bank was classified as well capitalized, with CET1 of 15.48%, total capital of 16.50% and leverage of 10.35%.
- Operating cash flow was $646.4 million. Investing activities provided $1.09 billion, while financing activities used $1.71 billion, primarily reflecting deposit outflows, dividends, share repurchases and other financing changes.
Material changes versus the prior comparable period
- Loan growth accelerated, driven partly by the First Bancshares acquisition and growth in 1-4 family residential, commercial real estate and construction lending.
- Net interest income declined despite higher loan yields because deposit and borrowing costs rose substantially. Average interest-bearing liability costs increased to 2.27% from 0.45%, while total cost of funds increased to 1.54% from 0.29%.
- Interest expense increased by $398.5 million, or approximately 445%, to $488.1 million. Interest income increased by $349.7 million, or 31.9%, to $1.44 billion.
- Noninterest expense increased 15.0% to $556.7 million. Key drivers included the First Bancshares merger, merger-related expenses of $15.1 million and higher regulatory assessments.
- The Company accrued a $19.9 million FDIC special assessment in the fourth quarter related to the 2023 bank failures. Management stated this reduced diluted EPS by approximately $0.17 after tax.
- Shareholders’ equity increased 5.7% to $7.08 billion, primarily from net income and shares issued in the First Bancshares transaction, partially offset by $205.7 million of dividends and $72.2 million of share repurchases.
- The Company repurchased approximately 1.21 million shares during 2023 at an average price of $59.88 per share and authorized a new program for up to approximately 4.7 million shares through January 2025.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management’s strategy remains focused on internal loan and deposit growth, community banking, disciplined acquisitions, asset quality, efficiency and cross-selling.
Management noted that the Federal Reserve held rates steady in December 2023 and indicated that rate reductions could occur in 2024 and beyond. The Company’s interest-rate simulation showed that a parallel 200-basis-point rate increase would reduce projected 12-month net interest income by 5.5%, while a 200-basis-point decrease would increase it by 3.2%. These estimates depend on deposit behavior, balance-sheet composition and model assumptions.
- Key risks include deposit competition and outflows, increased funding costs, reliance on BTFP borrowings, interest-rate volatility and potential deterioration in liquidity.
- The loan portfolio is concentrated in real estate: approximately 82.6% of total loans consisted of commercial real estate, residential real estate and construction-related loans. Commercial real estate represented approximately 26.8% of total loans.
- Credit risk could increase from economic weakness, elevated interest rates, inflation, declining real estate values, commercial real estate stress, oil and gas volatility and borrower-specific problems.
- The Company had $3.40 billion of goodwill at year-end. Management concluded that goodwill was not impaired, but future impairment could result from adverse changes in market value, profitability or cash flows.
- Off-balance-sheet commitments totaled approximately $5.80 billion, including $4.60 billion of commitments to extend credit, $1.12 billion of unused Warehouse Purchase Program capacity and $79.8 million of standby letters of credit.
- The Company identified cybersecurity, vendor disruption, fraud, regulatory compliance, climate-related events and potential changes in banking regulation as material risks. It stated that prior cybersecurity incidents had not materially affected the Company as of the filing date.
- The Company and Bank are defendants in ordinary-course legal proceedings, but management and counsel believe any ultimate liability will not materially affect the financial statements.
Most important facts for investors to verify
- Whether deposit balances stabilize and whether the Company can reduce reliance on higher-cost borrowings as the BTFP advance approaches its December 2024 maturity.
- Whether nonperforming assets, net charge-offs and the allowance for credit losses continue to rise, particularly in acquired loans, commercial real estate and commercial lending.
- Future net interest margin performance as deposit repricing, borrowing costs and Federal Reserve policy evolve.
- Regulatory approval, timing, consideration and integration risks associated with the pending Lone Star acquisition.
- Whether the First Bancshares acquisition produces expected revenue benefits and expense synergies after the 2023 integration costs.
- The fair value and liquidity implications of the securities portfolio, including approximately $1.38 billion of unrealized losses on held-to-maturity securities at December 31, 2023.
- The sustainability of the $2.21 per-share 2023 dividend and share repurchase activity given deposit trends, capital requirements and acquisition funding needs.
- Assumptions underlying the allowance for credit losses and goodwill impairment analyses, both of which involve significant management judgment.