PROSPERITY BANCSHARES INC quarterly report, Q2 FY2022

Prosperity Bancshares, Inc. — 2022 Q2 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 to businesses and consumers in Texas and Oklahoma. The Bank operated 272 full-service locations as of June 30, 2022. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, with comparisons to the same 2021 periods and December 31, 2021 balance-sheet data. Dollar amounts are in thousands unless otherwise stated.

Key financial metrics

Metric	Three months ended June 30, 2022	Three months ended June 30, 2021	Six months ended June 30, 2022	Six months ended June 30, 2021
Net interest income	$248.5 million	$245.4 million	$488.4 million	$500.0 million
Noninterest income	$37.6 million	$35.6 million	$72.7 million	$69.6 million
Noninterest expense	$122.9 million	$115.2 million	$242.7 million	$234.3 million
Net income	$128.5 million	$130.6 million	$250.8 million	$263.9 million
Diluted earnings per share	$1.40	$1.41	$2.73	$2.84
Tax-equivalent net interest margin	2.97%	3.11%	2.92%	3.26%
Efficiency ratio	43.12%	40.96%	43.40%	41.11%

Total assets were $37.39 billion at June 30, 2022, compared with $37.83 billion at December 31, 2021.
Total loans were $18.21 billion, including $1.14 billion of Warehouse Purchase Program loans. Loans declined 2.2% from year-end 2021.
Total securities were $14.91 billion, up 16.3% from December 31, 2021, and represented 39.9% of total assets.
Total deposits were $29.87 billion, down 2.9% from year-end. Noninterest-bearing deposits increased 2.6% to $11.03 billion, while interest-bearing deposits declined 5.9% to $18.83 billion.
Cash and cash equivalents were $393.9 million, down from $2.55 billion at December 31, 2021.
Shareholders’ equity was $6.52 billion, up 1.5% from year-end.
The allowance for credit losses on loans was $284.0 million, or 1.56% of total loans, compared with $286.4 million, or 1.54%, at December 31, 2021. The company recorded no provision for credit losses in either 2022 comparison period.
Net charge-offs were $1.2 million in the second quarter and $2.4 million year to date, compared with $4.3 million and $13.2 million, respectively, in the prior-year periods.
Net cash provided by operating activities was $315.2 million. Investing activities used $1.74 billion, primarily because of securities purchases, while financing activities used $733.5 million. Ending cash and cash equivalents were $393.9 million.
FHLB advances totaled $300.0 million at a weighted-average rate of 1.75%; the company reported $14.18 billion of available capacity under its FHLB line.
The Bank’s June 30, 2022 capital ratios exceeded well-capitalized regulatory thresholds, including a 15.21% CET1 ratio, 15.21% Tier 1 risk-based ratio, 15.87% total risk-based ratio and 9.55% Tier 1 leverage ratio.

Material changes versus comparable periods

Second-quarter net income declined 1.6%, while year-to-date net income declined 5.0%. Diluted EPS declined from $1.41 to $1.40 for the quarter and from $2.84 to $2.73 year to date.
Second-quarter net interest income increased 1.3%, but year-to-date net interest income decreased 2.3%. The year-to-date decline reflected lower loan balances and yields, reduced loan discount accretion and lower PPP fee and interest income.
Loan interest income fell 11.1% in the quarter and 14.2% year to date. Securities interest income increased 46.7% in the quarter and 44.6% year to date as securities balances and rates increased.
The tax-equivalent net interest margin contracted by 14 basis points in the quarter and 34 basis points year to date, primarily because of lower loan discount accretion and PPP-related income.
Noninterest income increased 5.7% in the quarter and 4.5% year to date, supported by higher NSF fees, gains on asset sales or write-downs and other income; mortgage income declined materially.
Noninterest expense increased 6.7% in the quarter and 3.6% year to date, principally due to higher salaries and benefits, data-processing and card expenses, and other operating costs.
Nonperforming assets declined to $22.2 million, or 0.12% of loans and other real estate, from $28.1 million, or 0.15%, at December 31, 2021. Nonaccrual loans declined to $20.6 million from $26.3 million.
The company repurchased 981,884 shares during the quarter at an average price of $66.90, reducing shares outstanding from 92.17 million at year-end to 91.20 million at June 30, 2022. Approximately 3.63 million shares remained available under the repurchase authorization.

Guidance, outlook, risks and unusual items

The filing provides no formal earnings or financial guidance. Management states that six-month results are not necessarily indicative of full-year results.
Management expects deposits to remain the principal funding source and loans the principal use of funds. Liquidity was described as adequate, but cash declined substantially because of securities purchases, deposit reductions, dividends and share repurchases.
Off-balance-sheet commitments totaled $6.70 billion, including $5.01 billion of commitments to extend credit, $1.61 billion of unused Warehouse Purchase Program capacity and $89.8 million of standby letters of credit. These commitments may expire unused.
The loan portfolio is concentrated in Texas and Oklahoma and in real estate-related lending. Commercial real estate, 1-4 family residential and construction, land development and other land loans represented 79.2% of loans excluding Warehouse Purchase Program loans.
Management identified risks from economic weakness, interest-rate and market-value volatility, loan prepayments, oil and gas and commodity conditions, deposit and loan competition, real estate concentrations, liquidity, cybersecurity, vendors, regulatory changes, acquisitions, climate change, geopolitical events and COVID-19.
At June 30, 2022, held-to-maturity securities had $1.41 billion of gross unrealized losses, largely attributable to interest-rate changes. Management stated it had the intent and ability to hold these securities to maturity and did not identify material credit-related impairment.
Approximately 4.2% of the loan portfolio and certain interest-rate swaps still used LIBOR at June 30, 2022. The company was transitioning affected instruments to SOFR or other alternative indexes.
COVID-19 restrictions in Texas and Oklahoma remained lifted, and the company had no outstanding loans subject to COVID-related deferral or modification agreements. Management stated that future pandemic effects could not be reliably estimated.
ASU 2022-02, effective January 1, 2023, is not expected to have a significant financial-statement impact. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
The company disclosed ordinary-course legal proceedings and believes any resulting liability will not materially affect the financial statements.

Most important facts for investors to verify

Whether the sharp decline in cash and deposit balances affects liquidity, securities purchases or future funding costs.
Whether net interest margin continues to decline as PPP income and acquired-loan discount accretion diminish and market interest rates change.
The stability of the real-estate-heavy loan portfolio, including commercial real estate, construction and residential lending concentrations.
Whether the allowance for credit losses remains adequate if economic conditions, collateral values, borrower performance or oil and gas conditions deteriorate.
The market-value sensitivity of the large held-to-maturity securities portfolio and the company’s ability to hold securities through maturity without forced sales.
The execution and financial effects of the LIBOR-to-SOFR transition.
The effect of continued share repurchases and dividends on capital, liquidity and regulatory capital buffers.
The utilization and credit risk associated with $6.70 billion of off-balance-sheet commitments.