Business Context and Reporting Period
Prosperity Bancshares, Inc. is a Texas-based financial holding company whose subsidiary, Prosperity Bank, provides banking services to businesses and consumers across Texas and Oklahoma. The unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods and December 31, 2020 balance-sheet data. The Bank operated 274 full-service locations at quarter-end.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total interest income | $260.9 million | $286.6 million | $533.0 million | $582.8 million |
| Net interest income | $245.4 million | $259.0 million | $500.0 million | $515.0 million |
| Provision for credit losses | $0 | $10.0 million | $0 | $10.0 million |
| Noninterest income | $35.6 million | $25.7 million | $69.6 million | $60.1 million |
| Noninterest expense | $115.2 million | $134.4 million | $234.3 million | $259.1 million |
| Net income | $130.6 million | $130.9 million | $263.9 million | $261.7 million |
| Diluted EPS | $1.41 | $1.41 | $2.84 | $2.80 |
| Tax-equivalent net interest margin | 3.11% | 3.69% | 3.26% | 3.75% |
| Efficiency ratio | 40.96% | 46.56% | 41.11% | 44.72% |
Balance Sheet, Liquidity and Capital
- Total assets were $36.10 billion, up 6.0% from $34.06 billion at December 31, 2020.
- Total loans were $19.25 billion, down 4.9%; loans represented 53.3% of assets versus 59.4% at year-end. Warehouse Purchase Program loans declined to $2.10 billion from $2.84 billion.
- Total securities increased 39.5% to $11.92 billion, primarily reflecting growth in held-to-maturity securities.
- Total deposits increased 6.4% to $29.11 billion. Noninterest-bearing deposits rose 10.4% to $10.10 billion.
- Cash and cash equivalents were $1.06 billion, down from $1.34 billion at year-end. Net cash provided by operating activities was $435.6 million; investing activities used $2.42 billion, primarily for securities purchases, while financing activities provided $1.70 billion through deposit growth and other financing.
- Borrowings consisted principally of $433.1 million of securities sold under repurchase agreements. The Company reported no FHLB advances, other borrowings or subordinated notes at June 30, 2021 and had $12.91 billion available under its FHLB line.
- Shareholders’ equity was $6.31 billion, up 2.9% from year-end. The Bank remained well capitalized, with a CET1 ratio of 15.16%, total risk-based capital ratio of 15.61% and Tier 1 leverage ratio of 9.44%.
Material Changes Versus Prior Comparable Period
- Second-quarter net income was essentially unchanged, declining 0.2%, while six-month net income increased 0.8%.
- Net interest income declined 5.2% in the quarter and 2.9% year to date. Management attributed the decline principally to lower loan balances and yields, lower acquired-loan discount accretion and increased lower-yielding securities and cash balances.
- Net interest margin declined 58 basis points in the quarter and 49 basis points year to date.
- Noninterest income increased 38.5% in the quarter and 15.8% year to date, helped by card income, mortgage income, other income and lower asset write-down losses.
- Noninterest expense declined 14.3% in the quarter and 9.6% year to date, primarily because 2020 included LegacyTexas merger-related costs and higher post-conversion operating expenses.
- The 2020 comparison benefited from a $20.1 million CARES Act net operating loss tax benefit; consequently, the effective tax rate increased to 21.2% from 6.7% in the quarter and to 21.3% from 14.4% year to date.
- Nonperforming assets declined to $33.7 million, or 0.17% of loans and other real estate, from $59.6 million, or 0.29%, at December 31, 2020.
- The allowance for credit losses on loans declined to $302.9 million from $316.1 million, while the allowance ratio increased modestly to 1.57% from 1.56% of total loans. Net charge-offs were $4.3 million in the quarter and $13.2 million year to date.
Outlook, Commentary, 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 to continue pursuing internal growth, operating efficiency and acquisition opportunities, but cautions that future acquisitions and merger-related synergies may not occur as expected.
- COVID-19 restrictions had been lifted in Texas and Oklahoma as of June 30, 2021, but management warned that variants, including Delta, could lead to renewed restrictions and continued economic effects. Approximately $210.4 million of loans remained subject to COVID-19 deferral or modification agreements.
- PPP loans outstanding totaled $780.0 million and were fully guaranteed by the SBA. The Company had obtained approvals for approximately 18,700 PPP loans totaling $2.036 billion.
- Credit risk remains concentrated in Texas and Oklahoma and in real estate-related lending; commercial real estate, 1-4 family residential and construction/land loans represented 75.7% of loans excluding Warehouse Purchase Program loans.
- Other identified risks include interest-rate volatility, reduced net interest margin, loan prepayments, oil and gas exposure, deposit and loan competition, liquidity changes, cybersecurity and technology risks, regulatory changes, model risk and potential goodwill impairment.
- Off-balance-sheet commitments totaled $5.53 billion, including $4.08 billion of commitments to extend credit, $1.36 billion of unused Warehouse Purchase Program capacity and $88.6 million of standby letters of credit. The related allowance was $29.9 million.
- The Company authorized a repurchase program for up to approximately 4.65 million shares through January 26, 2022, but made no repurchases during the quarter or first six months of 2021.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls.
Important Facts for Investors to Verify
- Whether the reduced net interest margin persists as securities and cash represent a larger share of earning assets and acquired-loan discount accretion declines.
- The sustainability of deposit growth and the adequacy of liquidity after the substantial increase in securities investments.
- Credit performance in commercial real estate, residential real estate, construction, oil and gas and other concentrated portfolios as COVID-19 assistance expires.
- Changes in the $302.9 million loan-loss allowance, $29.9 million off-balance-sheet allowance and $210.4 million of modified or deferred loans.
- The pace of PPP loan forgiveness and its effect on balances, fees and future interest income.
- Future tax rates and comparability with 2020 results after the nonrecurring CARES Act tax benefit.
- Progress on any future acquisitions, integration costs, expected synergies and the risk of goodwill impairment.