Prosperity Bancshares, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The unaudited consolidated results include Prosperity Bancshares, Inc., Prosperity Bank and Prosperity Holdings of Delaware, LLC. The bank operated 218 full-service locations across Texas and Oklahoma. Results reflect the East Texas Financial Services and Coppermark acquisitions completed in 2013.
Financial Performance and Condition
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net interest income | $126.5 million, up 18.4% | $353.4 million, up 29.7% |
| Provision for credit losses | $4.0 million | $9.4 million |
| Noninterest income | $21.6 million, down 9.5% | $70.3 million, up 36.6% |
| Noninterest expense | $61.5 million, up 2.1% | $178.6 million, up 26.2% |
| Net income | $55.3 million, up 19.7% | $158.4 million, up 32.4% |
| Diluted EPS | $0.91 versus $0.82 | $2.67 versus $2.37 |
| Return on average assets | 1.37% versus 1.32% | 1.35% versus 1.35% |
| Return on average common equity | 9.31% versus 9.10% | 9.29% versus 9.08% |
| Efficiency ratio | 41.59% versus 46.07% | 42.16% versus 43.69% |
Margins: Tax-equivalent net interest margin was 3.59% for the quarter, up from 3.52%, but 3.48% for the nine months, down from 3.56%. Purchase-accounting accretion contributed approximately $16.4 million to quarterly net interest income and $42.7 million year to date, increasing the quarterly and year-to-date margins by approximately 46 and 41 basis points, respectively.
Balance sheet: Total assets were $16.05 billion, up 10.1% from December 31, 2012. Total loans were $6.18 billion, up 19.4%; total deposits were $12.46 billion, up 7.0%; and shareholders’ equity was $2.39 billion, up 14.3%. Securities totaled $7.77 billion, or 48.4% of assets.
Asset quality: The allowance for credit losses was $59.9 million, or 0.97% of total loans, compared with $52.6 million, or 1.01%, at year-end 2012. Nonperforming assets were $12.7 million, or 0.20% of loans and other real estate, versus $13.0 million, or 0.25%, at year-end. Nine-month net charge-offs were $2.0 million, compared with $3.2 million in 2012.
Cash flow and liquidity: Nine-month cash provided by operating activities was $248.7 million. Investing activities used $138.5 million and financing activities used $165.3 million, resulting in a $55.2 million decrease in cash and cash equivalents to $271.1 million. The company reported $4.18 billion of available FHLB borrowing capacity, with $606.0 million outstanding.
Debt and capital: Other borrowings were $606.0 million, repurchase agreements were $432.0 million, and junior subordinated debentures were $85.1 million. Consolidated total capital, Tier 1 risk-based capital and Tier 1 leverage ratios were 15.55%, 14.74% and 7.37%, respectively. The bank remained above the regulatory thresholds for “well capitalized” status.
Material Changes Versus Prior Comparable Period
- Net income increased primarily from higher average earning assets following acquisitions and higher purchase-accounting accretion.
- Loan growth was concentrated in commercial and industrial, commercial real estate, residential and construction lending and was substantially influenced by the Coppermark and East Texas acquisitions.
- Noninterest income declined in the third quarter because the Durbin Amendment reduced debit-card interchange income beginning July 1, 2013. Year-to-date noninterest income increased because of acquired accounts and higher NSF fees and service charges.
- Noninterest expense increased year to date because of acquisition-related staffing and administrative costs. The company recorded approximately $300,000 of merger expenses in the quarter and $1.2 million year to date.
- Deposit funding increased overall, while interest-bearing deposit costs declined. The average rate on interest-bearing liabilities fell to 0.37% in the quarter from 0.47%.
- Accumulated other comprehensive income declined to $5.6 million from $9.0 million, primarily because of unrealized losses on available-for-sale securities.
Outlook, Transactions, Risks and Unusual Items
The filing does not provide quantitative earnings or financial guidance. Management describes internal growth, cost control and acquisitions as its principal growth strategies.
- On November 1, 2013, after the reporting date, the company completed its acquisition of FVNB Corp. for approximately $439.1 million, consisting of 5,570,667 shares and $91.3 million in cash. FVNB reported approximately $2.47 billion of assets, $1.65 billion of loans and $2.20 billion of deposits at September 30, 2013.
- The company had announced a pending acquisition of F&M Bancorporation Inc. involving approximately 3,298,246 shares and $47.0 million in cash, subject to shareholder, regulatory and other closing conditions.
- Management reported no goodwill impairment and no other-than-temporary impairment of securities. Securities with unrealized losses were principally affected by higher market interest rates rather than credit deterioration, according to management.
- Key risks include interest-rate changes, margin compression, deposit and liquidity pressures, credit deterioration, real-estate concentration, acquisition integration, goodwill impairment, regulatory changes and changes in economic conditions.
- Off-balance-sheet commitments totaled $1.19 billion, including $1.14 billion of commitments to extend credit and $42.9 million of standby letters of credit. The filing states that these commitments may expire unused.
- The company reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls as of September 30, 2013.
Investor Verification Checklist
- Verify the effect of purchase-accounting accretion on recurring net interest income, margin and earnings.
- Assess the completed FVNB acquisition and the pending F&M transaction, including integration costs, dilution, goodwill and capital effects.
- Monitor debit-card revenue after the Durbin Amendment and the sustainability of NSF fees and other fee income.
- Review loan growth, commercial and real-estate concentrations, classified loans, nonperforming assets and adequacy of the allowance for credit losses.
- Evaluate exposure to rising interest rates, including the large mortgage-backed securities portfolio and variable-rate borrowings.
- Reconcile liquidity resources with $1.19 billion of off-balance-sheet credit commitments and the company’s reliance on deposits and FHLB funding.
- Confirm subsequent-period results, regulatory capital ratios and any final purchase-accounting adjustments for the acquisitions.