Prosperity Bancshares, Inc. — Q1 2022 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 across Texas and Oklahoma through 272 full-service locations. This unaudited Form 10-Q covers the three months ended March 31, 2022, with balance-sheet comparisons to December 31, 2021 and operating comparisons to the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 / March 31, 2022 | Comparable period / December 31, 2021 |
|---|---|---|
| Total assets | $38.27 billion | $37.83 billion |
| Total loans | $18.07 billion | $18.62 billion |
| Total deposits | $31.07 billion | $30.77 billion |
| Shareholders’ equity | $6.50 billion | $6.43 billion |
| Net interest income | $239.9 million | $254.6 million |
| Noninterest income | $35.1 million | $34.0 million |
| Noninterest expense | $119.9 million | $119.1 million |
| Net income | $122.3 million | $133.3 million |
| Diluted EPS | $1.33 | $1.44 |
| Net interest margin, tax-equivalent | 2.88% | 3.41% |
| Return on average assets | 1.29% | 1.54% |
| Return on average common equity | 7.54% | 8.60% |
| Efficiency ratio | 43.68% | 41.25% |
- Interest income declined to $248.9 million from $272.1 million, primarily because of lower loan balances, lower loan yields and a $11.1 million reduction in loan discount accretion. Securities interest income increased 42.2% to $55.0 million.
- Interest expense decreased 49.0% to $8.9 million, reflecting lower rates paid on deposits and other interest-bearing liabilities.
- No provision for credit losses was recorded in either comparable quarter. Net charge-offs were $1.2 million, or 0.03% of average loans, versus $8.9 million, or 0.18%, in Q1 2021.
- The allowance for credit losses on loans was $285.2 million, equal to 1.58% of total loans, compared with $286.4 million, or 1.54%, at year-end 2021. The off-balance-sheet credit exposure allowance was $29.9 million.
- Cash and cash equivalents were $1.56 billion, down from $2.55 billion at year-end. Operating activities generated $235.7 million of cash, while investing activities used $1.46 billion, principally reflecting purchases of investment securities.
- Total securities increased 15.4% to $14.80 billion and represented 38.7% of total assets. Held-to-maturity securities had $719.9 million of unrealized losses, primarily attributable to changes in market interest rates; management reported no material credit-loss concern.
- Borrowings consisted primarily of $440.9 million of securities sold under repurchase agreements. The Company had no FHLB advances or long-term notes payable and reported $14.26 billion of available FHLB capacity.
- The Bank’s regulatory capital ratios exceeded well-capitalized standards, including a 15.26% CET1 ratio, 15.26% Tier 1 risk-based ratio, 15.92% total risk-based ratio and 9.40% Tier 1 leverage ratio.
Material changes versus prior comparable periods
- Net income decreased 8.2%, and diluted EPS decreased 7.6%, primarily due to lower net interest income and margin compression.
- Tax-equivalent net interest margin declined 53 basis points to 2.88%. Average loan balances fell to $17.99 billion from $19.68 billion, while average investment securities increased to $13.77 billion from $9.15 billion.
- Noninterest income increased 3.3%, supported by higher NSF fees and other income, while mortgage income declined materially to $455 thousand from $3.3 million.
- Noninterest expense increased 0.7%, causing the efficiency ratio to worsen from 41.25% to 43.68%.
- Compared with December 31, 2021, total assets increased 1.2%, deposits increased 1.0%, loans decreased 2.9%, and equity increased 1.2%.
- Nonperforming assets decreased to $27.2 million from $28.1 million and remained 0.15% of total loans and other real estate. Nonaccrual loans declined to $21.8 million from $26.3 million.
Guidance, outlook, management commentary, risks and unusual items
- The filing provides no formal earnings, revenue or margin guidance. Management states that quarterly results are not necessarily indicative of full-year results.
- Management continues to emphasize internal growth, operating efficiency, centralized infrastructure and potential acquisitions or strategic merger transactions.
- COVID-19 restrictions in Texas and Oklahoma remained lifted at March 31, 2022, but management continued to identify potential pandemic-related effects on operating income, financial condition and cash flows. Approximately $29.0 million of loans remained subject to deferral or modification agreements.
- The Company had $86.3 million of outstanding PPP loans at quarter-end, consisting of 819 loans and fully guaranteed by the Small Business Administration.
- Loan concentrations are primarily in Texas and Oklahoma and in real estate lending. Commercial real estate, 1-4 family residential and construction/land-development loans represented 79.6% of loans excluding Warehouse Purchase Program loans.
- Interest-rate risk is material: approximately 6.7% of the loan portfolio and the Company’s interest-rate swaps still used LIBOR at March 31, 2022. The Company was transitioning affected instruments to SOFR or other alternative indexes.
- Held-to-maturity securities carried significant unrealized losses due to higher market interest rates. Management stated it had the intent and ability to hold those securities to maturity.
- Off-balance-sheet commitments totaled $6.34 billion, including $4.75 billion of commitments to extend credit, $1.50 billion of unused Warehouse Purchase Program capacity and $95.3 million of standby letters of credit. Actual funding may be lower because commitments may expire unused.
- On January 18, 2022, the Company authorized repurchases of up to approximately 4.6 million shares, or 5% of outstanding shares, through January 18, 2023. No repurchases occurred in Q1 2022. Cash dividends declared were $0.52 per share.
- Management identified general economic conditions, interest-rate volatility, real estate concentration, energy and commodity prices, deposit and loan competition, liquidity, cybersecurity, technology, regulatory changes, acquisitions, goodwill impairment, climate change, COVID-19 and geopolitical events as material risks.
- The filing reports no material changes to previously disclosed risk factors, no material legal proceedings, effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether net interest margin stabilizes or continues to decline as interest rates, securities balances, loan yields and loan discount accretion change.
- The sustainability of deposit growth and the extent to which securities purchases reduce cash liquidity or increase interest-rate sensitivity.
- Credit quality trends in the real estate-heavy portfolio, including nonperforming assets, delinquency levels, charge-offs and the adequacy of the allowance for credit losses.
- The fair-value impact of the large held-to-maturity securities portfolio if securities must be sold or liquidity conditions change.
- The funding requirements associated with $6.34 billion of off-balance-sheet commitments and $1.50 billion of unused Warehouse Purchase Program capacity.
- Progress and costs associated with the LIBOR transition and the effect of future rate changes on loans, swaps, deposits and net interest margin.
- Future use of the share-repurchase authorization relative to capital, liquidity, regulatory requirements and acquisition opportunities.