Prosperity Bancshares, Inc.® Reports First Quarter 2021 Earnings

HOUSTON, April 28, 2021 /PRNewswire/ -- Prosperity Bancshares, Inc.^® (NYSE: PB), the parent company of Prosperity Bank^® (collectively, "Prosperity"), reported net income for the quarter ended March 31, 2021 of  $133.3 million compared with $130.8 million for the same period in 2020. Net income per diluted common share was $1.44 compared with $1.39 for the same period in 2020 and the annualized return on first quarter average assets was 1.54%.  Additionally, deposits increased $1.403 billion or 5.1% (20.5% annualized) during the first quarter 2021 and nonperforming assets remain low at 0.15% of first quarter average interest-earning assets.

"With the hard work of our entire team, the combination of Prosperity and LegacyTexas has continued to bear fruit, as reflected in our positive results for the first quarter of 2021," said David Zalman, Prosperity's Senior Chairman and Chief Executive Officer.

"Prosperity Bank was ranked as the number 2 Best Bank in America for 2021 and in the Top 10 of Forbes' America's Best Banks since 2010.  I want to congratulate and thank all of our customers, associates, directors and shareholders for helping us achieve this great honor," continued Zalman.

"Texas and Oklahoma both have bright futures. According to the Dallas Federal Reserve, Texas now has the fastest growing population in the nation. Further, the Dallas Federal Reserve is projecting over 6% job growth, meaning over 700,000 new jobs, in Texas for 2021 and Texas is expected to outperform most of the other states for the next three years. Companies continue to move to Texas, with HP and Oracle announcing headquarter moves and other companies, such as Tesla, announcing a major expansion into Texas. Oklahoma is also projected to have population growth for 2021 and has seen expansion of many of the large businesses operating in the state, including Boeing, American Airlines, Costco and Amazon. Consumer spending in Oklahoma is above early 2020 levels and retail job additions and new housing permits are higher than the average U.S. rate," added Zalman.

"We are carefully monitoring office building, hospitality and oil and gas loans, but continue to participate in these areas with experienced borrowers that can withstand the volatility of their industries," stated Zalman.

"I want to thank all our associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity, and we will continue to work hard to improve everyone's quality of life and shareholder value," concluded Zalman.

Results of Operations for the Three Months Ended March 31, 2021

Net income was $133.3 million⁽²⁾ for the three months ended March 31, 2021 compared with $130.8 million⁽³⁾ for the same period in 2020, an increase of $2.5 million or 1.9%. Net income per diluted common share was $1.44 for the three months ended March 31, 2021 compared with $1.39 for the same period in 2020, an increase of 3.6%. On a linked quarter basis, net income decreased $3.8 million or 2.8% to $133.3 million⁽²⁾ compared with $137.1 million⁽⁴⁾ for the three months ended December 31, 2020. Net income per diluted common share was $1.44 for the three months ended March 31, 2021 compared with $1.48 for the three months ended December 31, 2020, a decrease of 2.7%. Annualized returns on average assets, average common equity and average tangible common equity for the three months ended March 31, 2021 were 1.54%, 8.60% and 18.43%⁽¹⁾, respectively. Prosperity's efficiency ratio (excluding net gains and losses on the sale or write down of assets and taxes) was 41.25%⁽¹⁾ for the three months ended March 31, 2021.

Net interest income before provision for credit losses for the three months ended March 31, 2021 was $254.6 million compared with $256.0 million for the same period in 2020, a decrease of $1.4 million or 0.6%. The decrease was primarily due to a decrease in the average rate on interest-earning assets and a decrease in loan discount accretion of $12.1 million, partially offset by a decrease in the average rate on interest-bearing liabilities. On a linked quarter basis, net interest income before provision for credit losses was $254.6 million compared with $257.6 million for the three months ended December 31, 2020, a decrease of $3.1 million or 1.2%. The decrease was primarily due to a decrease in the average loan balance, partially offset by a decrease in the average rate on interest-bearing liabilities and an increase in average investment securities balance.

The net interest margin on a tax equivalent basis was 3.41% for the three months ended March 31, 2021 compared with 3.81% for the same period in 2020. The change was primarily due to an increase in lower yielding Warehouse Purchase Program and Paycheck Protection Program ("PPP") loans, a $12.1 million decrease in loan discount accretion, higher net premium amortization on securities and higher cash balances due to excess liquidity, partially offset by a decrease in the average rate on interest-bearing liabilities. On a linked quarter basis, the net interest margin on a tax equivalent basis was 3.41% for the three months ended March 31, 2021 compared with 3.49% for the three months ended December 31, 2020. This change was primarily due to a higher net premium amortization on securities and higher cash balances due to excess liquidity.

Noninterest income was $34.0 million for the three months ended March 31, 2021 compared with $34.4 million for the same period in 2020. On a linked quarter basis, noninterest income decreased $2.5 million or 6.9% to $34.0 million compared with $36.5 million for the three months ended December 31, 2020. This decrease was primarily due to decreases in nonsufficient funds ("NSF") fees and other noninterest income.

Noninterest expense was $119.1 million for the three months ended March 31, 2021 compared with $124.7 million for the same period in 2020, a decrease of $5.7 million or 4.5%, primarily due to decreases in data processing, other noninterest expenses and net occupancy and equipment, partially offset by an increase in salaries and benefits. On a linked quarter basis, noninterest expense decreased $1.1 million or 0.9% to $119.1 million compared with $120.2 million for the three months ended December 31, 2020. This decrease was primarily due to a decrease in other noninterest expense and a net gain on sale of other real estate, partially offset by an increase in salaries and benefits.

Balance Sheet Information

At March 31, 2021, Prosperity had $35.558 billion in total assets, an increase of $3.815 billion or 12.0% compared with $31.743 billion at March 31, 2020.

Loans at March 31, 2021 were $19.639 billion, an increase of $511.7 million or 2.7%, compared with $19.127 billion at March 31, 2020, primarily due to an increase in Warehouse Purchase Program loans. Linked quarter loans decreased $608.1 million or 3.0% from $20.247 billion at December 31, 2020, primarily due to a decrease in Warehouse Purchase Program loans. At March 31, 2021, Prosperity had $1.139 billion of PPP loans.

As part of its lending activities, Prosperity extends credit to oil and gas production and servicing companies. Oil and gas production loans are loans to companies directly involved in the exploration and/or production of oil and gas. Oil and gas servicing loans are loans to companies that provide services for oil and gas production and exploration. At March 31, 2021, oil and gas loans totaled $503.9 million (net of discount and excluding PPP loans totaling $142.6 million) or 2.6% of total loans, of which $289.4 million were production loans and $214.5 million were servicing loans, compared with total oil and gas loans of $718.7 million (net of discount) or 3.8% of total loans at March 31, 2020, of which $435.1 million were production loans and $283.6 million were servicing loans. In addition, as of March 31, 2021, Prosperity had total unfunded commitments to oil and gas companies of $248.1 million compared with total unfunded commitments to oil and gas companies of $389.5 million as of March 31, 2020. Unfunded commitments to producers include letters of credit issued in lieu of oil well plugging bonds.

Additionally, Prosperity extends credit to hotels and restaurants. At March 31, 2021, loans to hotels totaled $401.2 million (excluding PPP loans totaling $13.1 million) or 2.0% of total loans, and loans to restaurants totaled $208.7 million (excluding PPP loans totaling $125.2 million) or 1.1% of total loans.

Deposits at March 31, 2021 were $28.763 billion, an increase of $4.937 billion or 20.7%, compared with $23.826 billion at March 31, 2020. Linked quarter deposits increased $1.403 billion or 5.1% (20.5% annualized) from $27.360 billion at December 31, 2020.

Asset Quality

Nonperforming assets totaled $44.2 million or 0.15% of quarterly average interest-earning assets at March 31, 2021, compared with $67.2 million or 0.25% of quarterly average interest-earning assets at March 31, 2020, and $59.6 million or 0.20% of quarterly average interest-earning assets at December 31, 2020.

The allowance for credit losses on loans was $307.2 million or 1.56% of total loans at March 31, 2021 compared to $316.1 million or 1.56% of total loans at December 31, 2020 and $327.2 million or 1.71% of total loans at March 31, 2020. The allowance for credit losses on loans to total loans, excluding Warehouse Purchase Program and PPP loans, was 1.89%⁽¹⁾ at March 31, 2021 compared with 1.92%⁽¹⁾ at December 31, 2020 and 1.88%⁽¹⁾ at March 31, 2020.

There was no provision for credit losses for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020. 

Net charge-offs were $8.9 million for the three months ended March 31, 2021 compared with net charge-offs of $801 thousand for the three months ended March 31, 2020 and net charge-offs of $7.6 million for the three months ended December 31, 2020. Net charge-offs for the first quarter of 2021 included $7.1 million related to resolved PCD loans, which had specific reserves that were allocated to the charge-offs. Further, an additional $4.2 million of specific reserves on resolved PCD loans without any related charge-offs was released to the general reserve.

Dividend

Prosperity Bancshares declared a second quarter cash dividend of $0.49 per share to be paid on July 1, 2021 to all shareholders of record as of June 15, 2021.

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus disease ("COVID-19") was first reported in Wuhan, Hubei Province, China. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. On March 13, 2020, the U.S. President announced a national emergency relating to the pandemic, which has since been extended. On April 5, 2021, the Governor of Texas further extended the proclamation certifying that COVID-19 poses an imminent threat of disaster in the state and declaring a state of disaster for all counties in Texas while lifting restrictions on all businesses and activities in the state. On April 11, 2021, the Governor of Oklahoma further extended the executive order that declared an emergency caused by the impending threat of COVID-19 to the people of Oklahoma while lifting restrictions on all businesses and activities in the state. Prosperity Bank (the "Bank") continues to monitor the latest developments regarding COVID-19. The COVID-19 pandemic has resulted in significant economic uncertainties that have had, and could continue to have, an adverse impact on Prosperity's operating income, financial condition and cash flows. The extent to which the COVID-19 pandemic will impact Prosperity's operations and financial results during 2021 cannot be reasonably or reliably estimated at this time.

The health and safety of the Bank's associates, customers, and communities are of utmost importance; and Prosperity has taken additional measures in an effort to ensure this safety, including restricting nonessential employee travel, expanding remote access availability, distancing work stations, professional cleaning of its facilities, and signs and distancing reminders for customers in the banking centers. Further, Prosperity remains committed to providing uninterrupted and reliable banking service and has business continuity plans and protocols in place to ensure critical operations are able to continue without disruption.

In response to the COVID-19 pandemic, on March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") into law. The CARES Act provides assistance for American workers, families and small businesses. The Paycheck Protection Program, established by the CARES Act and implemented by the Small Business Administration ("SBA") with support from the Department of the Treasury, provides small businesses with funds to pay payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities and are 100% guaranteed by the SBA. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 ("PPP Flexibility Act"), which modified the covered expense period from eight weeks to 24 weeks, extended the maturity date of the loans out to five years and gave greater flexibility to employers having difficulty hiring workers. PPP loans originated prior to June 5, 2020, have a two-year term and earn interest at 1%. PPP loans originated on and after June 5, 2020, have a minimum five-year term, which can be extended for up to five additional years if the lender and borrower both agree. On December 27, 2020, the Consolidated Appropriations Act of 2021 ("CAA") was signed into law, which extended certain provisions of the CARES Act, provided additional funding and contained new relief provisions. The CAA extended the PPP application period to March 31, 2021 and permits eligible companies to obtain a second PPP loan ("second draw") under terms specified in the CAA, with a maximum amount of $2.0 million and limit of one second draw loan.  Second draw PPP borrowers are eligible for loan forgiveness on the same terms as the first draw PPP borrowers. Lenders that were permitted to approve first draw PPP loans are permitted to approve second draw loans. Additionally, the Bank is entitled to a per loan processing fee based on a tiered schedule ranging from 5% to 1% of the loan balance for the first draw PPP loans and the CAA established pre-determined fees for processing and servicing the second draw PPP loans. On March 11, 2021, the American Rescue Plan Act of 2021 was signed into law, which added an additional $7.25 billion in PPP funding. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extended the PPP application filing deadline from March 31, 2021 to May 31, 2021 and extended the authorization of loans to June 30, 2021.  Since the implementation of the PPP in 2020, Prosperity has obtained SBA approvals on approximately 18,500 loans totaling $1.980 billion and, as of March 31, 2021, had an outstanding balance of 9,621 loans totaling $1.139 billion after remittance.

Also, in response to the COVID-19 pandemic, Prosperity has provided relief to its loan customers through loan extensions and deferrals. Under the CARES Act and the CAA, banks may elect to deem that loan modifications do not result in troubled debt restructurings if they are (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the COVID-19 national emergency declaration by the President of the United States or (B) January 1, 2022. Additionally, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under Accounting Standards Codification ("ASC") Subtopic 310-40 and federal banking agencies' interagency guidance. These modifications include modifications such as principal and interest payment deferrals, temporary interest only payment terms, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Prosperity's troubled debt restructurings do not include loan modifications related to COVID-19. Beginning in mid-March of 2020, Prosperity began offering deferral and modification of principal and/or interest payments to selected borrowers on a case-by-case basis. As of March 31, 2021, Prosperity had approximately $316.7 million in outstanding loans subject to deferral and modification agreements.

Conference Call

Prosperity's management team will host a conference call on Wednesday, April 28, 2021 at 11:30 a.m. Eastern Time (10:30 a.m. Central Time) to discuss Prosperity's first quarter 2021 earnings. Individuals and investment professionals may participate in the call by dialing 877-883-0383 for domestic participants, or 412-902-6506 for international participants. The participant elite entry number is 1669484.

Alternatively, individuals may listen to the live webcast of the presentation by visiting Prosperity's website at www.prosperitybankusa.com. The webcast may be accessed from Prosperity's home page by selecting "Presentations, Webcast & Calls" from the menu on the Investor Relations link and following the instructions.

Non-GAAP Financial Measures

Prosperity's management uses certain non-GAAP financial measures to evaluate its performance. Specifically, Prosperity reviews diluted earnings per share excluding merger related expenses, net of tax, and net operating loss ("NOL") tax benefit; return on average assets excluding merger related expenses, net of tax, and NOL tax benefit; return on average common equity excluding merger related expenses, net of tax, and NOL tax benefit; return on average tangible common equity; return on average tangible common equity excluding merger related expenses, net of tax, and NOL tax benefit; tangible book value per share; the tangible equity to tangible assets ratio; allowance for credit losses to total loans excluding Warehouse Purchase Program and PPP loans; the efficiency ratio, excluding net gains and losses on the sale or write down of assets and securities; and the efficiency ratio, excluding net gains and losses on the sale or write down of assets and securities and merger related expenses, for internal planning and forecasting purposes. Prosperity believes these non-GAAP financial measures provide information useful to investors in understanding Prosperity's financial results and their presentation, together with the accompanying reconciliations, provides a more complete understanding of factors and trends affecting Prosperity's business and allows investors to view performance in a manner similar to management, the entire financial services sector, bank stock analysts and bank regulators. Further, Prosperity believes that these non-GAAP financial measures provide useful information by excluding certain items that may not be indicative of its core operating earnings and business outlook. These non-GAAP financial measures should not be considered a substitute for, nor of greater importance than, GAAP basis financial measures and results; Prosperity strongly encourages investors to review its consolidated financial statements in their entirety and not to rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. Please refer to the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of these non-GAAP financial measures to the nearest respective GAAP financial measures.

Prosperity Bancshares, Inc. ®

As of March 31, 2021, Prosperity Bancshares, Inc.^® is a $35.558 billion Houston, Texas based regional financial holding company providing personal banking services and investments to consumers and businesses throughout Texas and Oklahoma.  Founded in 1983, Prosperity believes in a community banking philosophy, taking care of customers, businesses and communities in the areas it serves by providing financial solutions to simplify everyday financial needs. In addition to offering traditional deposit and loan products, Prosperity offers digital banking solutions, credit and debit cards, mortgage services, retail brokerage services, trust and wealth management, and treasury management.

As of March 31, 2021, Prosperity operated 275 full-service banking locations: 65 in the Houston area, including The Woodlands; 30 in the South Texas area including Corpus Christi and Victoria; 65 in the Dallas/Fort Worth area; 22 in the East Texas area; 29 in the Central Texas area including Austin and San Antonio; 34 in the West Texas area including Lubbock, Midland-Odessa and Abilene; 16 in the Bryan/College Station area; 6 in the Central Oklahoma area; 8 in the Tulsa, Oklahoma area.

Cautionary Notes on Forward-Looking Statements

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release contains, and the remarks by Prosperity's management on the conference call may contain, forward-looking statements within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are typically, but not exclusively, identified by the use in the statements of words or phrases such as "aim," "anticipate," "estimate," "expect," "goal," "guidance," "intend," "is anticipated," "is expected," "is intended," "objective," "plan," "projected," "projection," "will affect," "will be," "will continue," "will decrease," "will grow," "will impact," "will increase," "will incur," "will reduce," "will remain," "will result," "would be," variations of such words or phrases (including where the word "could," "may," or "would" is used rather than the word "will" in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. Forward-looking statements include all statements other than statements of historical fact, including forecasts or trends, and are based on current expectations, assumptions, estimates and projections about Prosperity Bancshares and its subsidiaries. These forward-looking statements may include information about Prosperity's possible or assumed future economic performance or future results of operations, including future revenues, income, expenses, provision for loan losses, provision for taxes, effective tax rate, earnings per share and cash flows and Prosperity's future capital expenditures and dividends, future financial condition and changes therein, including changes in Prosperity's loan portfolio and allowance for loan losses, future capital structure or changes therein, as well as the plans and objectives of management for Prosperity's future operations, future or proposed acquisitions, the future or expected effect of acquisitions on Prosperity's operations, results of operations, financial condition, and future economic performance, statements about the anticipated benefits of the proposed transaction, and statements about the assumptions underlying any such statement, as well as expectations regarding the effects of the COVID-19 pandemic on Prosperity's operating income, financial condition and cash flows.  These forward–looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are outside of Prosperity's control, which may cause actual results to differ materially from those expressed or implied by the forward-looking statements.  These risks and uncertainties include but are not limited to whether Prosperity can: successfully identify acquisition targets and integrate the businesses of acquired companies and banks, including LegacyTexas Financial Group and LegacyTexas Bank (collectively "LegacyTexas"); continue to sustain its current internal growth rate or total growth rate; provide products and services that appeal to its customers; continue to have access to debt and equity capital markets; and achieve its sales objectives.  Other risks include, but are not limited to: the possibility that credit quality could deteriorate; actions of competitors; changes in laws and regulations (including changes in governmental interpretations of regulations and changes in accounting standards); the possibility that the anticipated benefits of an acquisition transaction, including the LegacyTexas transaction, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of two companies or as a result of the strength of the economy and competitive factors generally; a deterioration or downgrade in the credit quality and credit agency ratings of the securities in Prosperity's securities portfolio; customer and consumer demand, including customer and consumer response to marketing; effectiveness of spending, investments or programs; fluctuations in the cost and availability of supply chain resources; economic conditions, including currency rate, interest rate and commodity price fluctuations; the effect, impact potential duration or other implications of the COVID-19 pandemic; and weather.  These and various other factors are discussed in Prosperity Bancshares' Annual Report on Form 10-K for the year ended December 31, 2020 and other reports and statements Prosperity Bancshares has filed with the Securities and Exchange Commission ("SEC"). Copies of the SEC filings for Prosperity Bancshares may be downloaded from the Internet at no charge from http://www.prosperitybankusa.com.