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Prosperity Bancshares, Inc.®<\/sup>, the parent company of Prosperity Bank®<\/sup> (collectively, “Prosperity”), reported net income for the quarter ended June 30, 2020 of $130.9 million compared with $82<\/span>.3 million for the same period in 2019. Net income per diluted common share was $1.41<\/span> compared with $1.18<\/span> for the same period in 2019. The second quarter of 2020 includes a tax benefit for net operating losses (“NOLs”) of $20<\/span>.1 million, or $0.22<\/span>(1)<\/sup> per diluted common share, as a result of the enactment of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act permits a five year carryback period for NOLs, which allowed Prosperity to generate an anticipated tax refund and income tax benefit resulting from the tax rate differential between the current statutory tax rate of 21% and the 35% statutory tax rate in prior years during the carryback period.<\/p>\n During the second quarter of 2020, Prosperity incurred merger related charges of $7.5 million<\/span>, or $0.06<\/span>(1)<\/sup> per diluted common share. Additionally, loans increased 9.9% during the second quarter 2020 and nonperforming assets remain low at 0.28% of second quarter average interest-earning assets. On November 1, 2019, LegacyTexas Financial Group, Inc. (“LegacyTexas”) merged with Prosperity Bancshares and LegacyTexas Bank merged with Prosperity Bank (collectively, the “Merger”). During the second quarter of 2020, Prosperity completed the operational conversion of LegacyTexas Bank.<\/p>\n “We are pleased with our second quarter 2020 results and with completing the operational integration of Legacy on schedule in early June. The team members from Legacy “now Prosperity” have been excellent and we could not have achieved such a smooth integration without their commitment and efforts. I want to thank all of our team members who worked many hours to make this happen,” said David Zalman<\/span>, Prosperity’s Senior Chairman and Chief Executive Officer. Results of Operations for the Three Months Ended June 30, 2020<\/strong><\/p>\n Net income was $130.9 million<\/span>(2)<\/sup> for the three months ended June 30, 2020 compared with $82.3 million<\/span>(3)<\/sup> for the same period in 2019, an increase of $48.6 million<\/span> or 59.1%. Net income per diluted common share was $1.41<\/span> for the three months ended June 30, 2020 compared with $1.18<\/span> for the same period in 2019, an increase of 19.5%. Net income for the second quarter of 2020 includes a tax benefit for NOLs of $20<\/span>.1 million and merger related expenses of $7<\/span>.5 million. Annualized returns on average assets, average common equity and average tangible common equity for the three months ended June 30, 2020 were 1.61%, 8.84% and 19.98%(1)<\/sup>, respectively. Excluding merger related expenses, net of tax, and the NOL tax benefit, annualized returns on average assets, average common equity and average tangible common equity for the three months ended June 30, 2020 were 1.44%(1)<\/sup>, 7.88%(1)<\/sup> and 17.81%(1)<\/sup>, respectively. Prosperity’s efficiency ratio (excluding net gains and losses on the sale or write down of assets and taxes) was 46.56%(1)<\/sup> for the three months ended June 30, 2020. Excluding merger related expenses of $7<\/span>.5 million, the efficiency ratio was 43.97%(1)<\/sup> for the three months ended June 30, 2020.<\/p>\n Net interest income before provision for credit losses for the three months ended June 30, 2020 was $259.0 million<\/span> compared with $154.8 million<\/span> for the same period in 2019, an increase of $104.1 million<\/span> or 67.2%. The increase was primarily due to the Merger and the increase in loan discount accretion of $23.0 million<\/span>. On a linked quarter basis, net interest income before provision for credit losses was $259.0 million<\/span> compared with $256.0 million<\/span> for the three months ended March 31, 2020, an increase of $2.9 million<\/span> or 1.1%. The increase was primarily due to a decrease in interest expense partially offset by a decrease in loan discount accretion of $4<\/span>.2 million and interest income on securities.<\/p>\n The net interest margin on a tax equivalent basis was 3.69% for the three months ended June 30, 2020 compared with 3.16% for the same period in 2019. The change was primarily due to increased interest-earning assets related to the Merger and $23.0 million<\/span> increase in loan discount accretion. On a linked quarter basis, the net interest margin on a tax equivalent basis was 3.69% for the three months ended June 30, 2020<\/span> compared with 3.81% for the three months ended March 31, 2020. The change was primarily due to a $4.2 million<\/span> decrease in loan discount accretion.<\/p>\n Noninterest income was $25.7 million<\/span> for the three months ended June 30, 2020 compared with $30.0 million<\/span> for the same period in 2019, a decrease of $4.3 million<\/span> or 14.3%. This decrease was primarily due to a loss on write-down of assets of $4<\/span>.0 million and a decrease in nonsufficient funds (“NSF”) fees, partially offset by an increase in mortgage income and credit card, debit card and ATM card income primarily due to the Merger. On a linked quarter basis, noninterest income decreased $8.7 million<\/span> or 25.3% to $25.7 million<\/span> compared with $34.4 million<\/span> for the three months ended March 31, 2020. This decrease was primarily due to a loss on write-down of assets of $4<\/span>.0 million and a decrease in NSF fees. NSF fees and credit card, debit card and ATM income were negatively impacted by the pandemic.<\/p>\n Noninterest expense was $134.4 million<\/span> for the three months ended June 30, 2020 compared with $80.8 million<\/span> for the same period in 2019, an increase of $53.5 million<\/span> or 66.3%, primarily due to the Merger and merger related expenses of $7<\/span>.5 million. On a linked quarter basis, noninterest expense increased $9.6 million<\/span> or 7.7% to $134.4 million<\/span> compared with $124.7 million<\/span> for the three months ended March 31, 2020. The increase was primarily due to increases in merger related expenses and salaries and benefits.<\/p>\n Results of Operations for the Six Months Ended June 30, 2020<\/strong><\/p>\n Net income was $261.7 million<\/span>(4)<\/sup> for the six months ended June 30, 2020 compared with $164.7 million<\/span>(5)<\/sup> for the same period in 2019, an increase of $97.1 million<\/span> or 59.0%. Net income per diluted common share was $2.80<\/span> for the six months ended June 30, 2020 compared with $2.36<\/span> for the same period in 2019, an increase of 18.6%. Net income for the six months ended June 30, 2020 includes a tax benefit for NOLs of $20<\/span>.1 million and merger related expenses of $8<\/span>.0 million. Annualized returns on average assets, average common equity and average tangible common equity for the six months ended June 30, 2020 were 1.64%, 8.85% and 20.07%(1)<\/sup>, respectively. Excluding merger related expenses, net of tax, and the NOL tax benefit, annualized returns on average assets, average common equity and average tangible common equity for the six months ended June 30, 2020 were 1.55%(1)<\/sup>, 8.38%(1)<\/sup> and 19.01%(1)<\/sup>, respectively. Prosperity’s efficiency ratio (excluding net gains and losses on the sale of assets and taxes) was 44.72%(1)<\/sup> for the six months ended June 30, 2020. Excluding merger related expenses, the efficiency ratio was 43.34%(1)<\/sup> for the six months ended June 30, 2020.<\/p>\n Net interest income before provision for credit losses for the six months ended June 30, 2020 was $515.0 million<\/span> compared with $309.7 million<\/span> for the same period in 2019, an increase of $205.2 million<\/span> or 66.3%. This change was primarily due to the Merger and the increase in loan discount accretion of $49.7 million<\/span>. <\/p>\n The net interest margin on a tax equivalent basis for the six months ended June 30, 2020 was 3.75% compared with 3.18% for the same period in 2019. This change was primarily due to increased interest-earning assets related to the Merger and the increase in loan discount accretion of $49.7 million<\/span>.<\/p>\n Noninterest income was $60.1 million<\/span> for the six months ended June 30, 2020 compared with $58.1 million<\/span> for the same period in 2019, an increase of $2.0 million<\/span> or 3.4%. This increase was primarily due to an increase in credit card, debit card and ATM card income, mortgage income and service charges on deposit accounts due to the Merger, partially offset by a net loss on write-down of assets of $4<\/span>.0 million.<\/p>\n Noninterest expense was $259.1 million<\/span> for the six months ended June 30, 2020 compared with $159.4 million<\/span> for the same period in 2019, an increase of $99.7 million<\/span> or 62.6%. The change was primarily due to the increase in salaries and benefits, credit and debit card, data processing and software amortization, net occupancy and equipment and other noninterest expense due to the Merger and $8<\/span>.0 million of merger related expenses.<\/p>\n Balance Sheet Information<\/strong><\/p>\n At June 30, 2020, Prosperity had $32.967 billion<\/span> in total assets, an increase of $10.592 billion<\/span> or 47.3% compared with $22.375 billion<\/span> at June 30, 2019.<\/p>\n Loans at June 30, 2020 were $21.025 billion<\/span>, an increase of $10.438 billion<\/span> or 98.6%, compared with $10.587 billion<\/span> at June 30, 2019. Linked quarter loans increased $1.898 billion<\/span> or 9.9% from $19.127 billion<\/span> at March 31, 2020, of which $1<\/span>.392 billion were Paycheck Protection Program (“PPP”) loans.<\/p>\n 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 June 30, 2020, oil and gas loans totaled $639<\/span>.4 million (net of discount and excluding PPP loans totaling $118<\/span>.6 million) or 3.0% of total loans, of which $394<\/span>.4 million were production loans and $245<\/span>.0 million were servicing loans, compared with total oil and gas loans of $367.0 million<\/span> (net of discount) or 3.5% of total loans at June 30, 2019<\/span>, of which $95.0 million<\/span> were production loans and $272.0 million<\/span> were servicing loans. In addition, as of June 30, 2020<\/span>, Prosperity had total unfunded commitments to oil and gas companies of $276.9 million<\/span> compared with total unfunded commitments to oil and gas companies of $220.4 million<\/span> as of June 30, 2019<\/span>. Unfunded commitments to producers include letters of credit issued in lieu of oil well plugging bonds.<\/p>\n Additionally, Prosperity extends credit to hotels and restaurants. At June 30, 2020<\/span>, loans to hotels totaled $384<\/span>.8 million (excluding PPP loans totaling $8<\/span>.8 million) or 1.8% of total loans and loans to restaurants totaled $212<\/span>.3 million (excluding PPP loans totaling $110<\/span>.7 million) or 1.0% of total loans.<\/p>\n Deposits at June 30, 2020 were $26.153 billion<\/span>, an increase of $9.265 billion<\/span> or 54.9%, compared with $16.888 billion<\/span> at June 30, 2019. Linked quarter deposits increased $2.326 billion<\/span> or 9.8% from $23.826 billion<\/span> at March 31, 2020.<\/p>\n Asset Quality<\/strong><\/p>\n Nonperforming assets totaled $77.9 million<\/span> or 0.28% of quarterly average interest-earning assets at June 30, 2020, compared with $41.6 million<\/span> or 0.21% of quarterly average interest-earning assets at June 30, 2019, and $67.2 million<\/span> or 0.25% of quarterly average interest-earning assets at March 31, 2020.<\/p>\n The allowance for credit losses on loans was $324.2 million<\/span> or 1.54% of total loans at June 30, 2020 compared to $327.2 million<\/span> or 1.71% of total loans at March 31, 2020 and $87.0 million<\/span> or 0.82% of total loans at June 30, 2019. The allowance for credit losses on loans to total loans, excluding Warehouse Purchase Program and PPP loans, was 1.90%(1)<\/sup> at June 30, 2020<\/span> compared with 1.88%(1)<\/sup> at March 31, 2020 and 0.82%(1)<\/sup> at June 30, 2019. On January 1, 2020<\/span>, Prosperity adopted the measurement of current expected credit losses (“CECL”). Upon adoption of CECL, Prosperity recognized an increase in allowance for credit losses on loans of $108<\/span>.7 million, of which $102<\/span>.5 million was related to LegacyTexas and an increase in allowance for credit losses on off-balance sheet credit exposures of $24<\/span>.4 million, of which $6<\/span>.3 million was related to LegacyTexas, with a corresponding decrease in retained earnings (pre-tax). Additionally, Prosperity recognized an increase in the allowance for credit losses on loans of $131<\/span>.8 million, of which $130<\/span>.3 million was related to LegacyTexas, due to the reclass of purchased credit deteriorated (“PCD”) discounts as a result of adopting CECL. <\/p>\n The provision for credit losses was $10.0 million<\/span> for the three months ended June 30, 2020 compared with $800 thousand<\/span> for the three months ended June 30, 2019 and no provision for the three months ended March 31, 2020. The provision for credit losses was $10.0 million<\/span> for the six months ended June 30, 2020 compared with $1.5 million<\/span> for the six months ended June 30, 2019.<\/p>\n Net charge-offs were $13.0 million<\/span> for the three months ended June 30, 2020 compared with net recoveries of $115 thousand<\/span> for the three months ended June 30, 2019 and net charge-offs of $801 thousand<\/span> for the three months ended March 31, 2020. Net charge-offs for the second quarter of 2020 were primarily due to $12<\/span>.4 million related to PCD loans. These PCD loans had specific reserves of $28.5 million<\/span>, of which $12.4 million<\/span> was allocated to the charge-offs. Further, $16.1 million<\/span> of PCD specific reserves was moved to the general reserve. Net charge-offs were $13.8 million<\/span> for the six months ended June 30, 2020 compared with $934 thousand<\/span> for the six months ended June 30, 2019.<\/p>\n Dividend<\/strong><\/p>\n Prosperity Bancshares declared a third quarter cash dividend of $0.46<\/span> per share to be paid on October 1, 2020 to all shareholders of record as of September 15, 2020.<\/p>\n Stock Repurchase Program<\/strong><\/p>\n On January 29, 2020<\/span>, Prosperity Bancshares announced a stock repurchase program under which up to 5%, or approximately 4.7 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 28, 2021<\/span>, at the discretion of management. Prosperity Bancshares repurchased zero shares of its common stock during the three months ended June 30, 2020 and 2.1 million shares of its common stock at an average weighted price of $52.59<\/span> per share during the six months ended June 30, 2020.<\/p>\n COVID-19 Pandemic<\/strong><\/p>\n In December 2019<\/span>, a novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan<\/span>, Hubei Province<\/span>, China<\/span>. On March 11, 2020<\/span>, the World Health Organization declared COVID-19 a pandemic. On March 13<\/span>, the U.S. President announced a national emergency relating to the pandemic and has since been extended. On July 10<\/span>, the Texas<\/span> governor 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<\/span>. Prosperity Bank (the “Bank”) is considered an essential business and is closely monitoring the latest developments regarding COVID-19. The health and safety of our associates, customers, and communities are of utmost importance, and the Bank remains committed to providing uninterrupted service. Additionally, the Bank has continuity plans in place to ensure critical operations are able to continue without disruption. The COVID-19 pandemic has resulted in significant economic uncertainties that could negatively impact Prosperity’s operating income, financial condition and cash flows.<\/p>\n In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020<\/span> by the President of the United States<\/span>. The CARES Act provides assistance for American workers, families and small businesses. The Paycheck Protection Program (“PPP”), established by the CARES Act, is implemented by the Small Business Administration (“SBA”) with support from the Department of the Treasury. This program provides small businesses with funds to pay payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. On June 5, 2020<\/span>, 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 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 five year term. On July 4, 2020<\/span>, the President amended the CARES Act to extend the PPP application period for an additional five weeks. The loans are eligible for early forgiveness by the SBA as provided by the CARES Act and the PPP Flexibility Act and related regulations and guidance. 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.<\/em> As of July 7, 2020<\/span>, the Company has obtained SBA approvals on approximately 11,972 loans totaling $1.411 billion<\/span>. The Company has also provided relief to its loan customers through loan extensions and deferrals.<\/p>\n Merger with LegacyTexas Financial Group, Inc.<\/strong><\/p>\n On November 1, 2019, Prosperity completed the merger with LegacyTexas and its wholly-owned subsidiary LegacyTexas Bank headquartered in Plano, Texas<\/span>. LegacyTexas Bank operated 42 locations in 19 North Texas<\/span> cities in and around the Dallas-Fort Worth<\/span> area. <\/p>\n Pursuant to the terms of the merger agreement, Prosperity issued 26,228,148 shares of Prosperity common stock with a closing price of $69.02<\/span> per share plus $318<\/span>.0 million in cash, made up of $308<\/span>.6 million in cash and $9<\/span>.4 million in cash for taxes withheld, for all outstanding shares of LegacyTexas. This resulted in goodwill of $1.331 billion<\/span> as of June 30, 2020, which was subject to subsequent fair value adjustments. During the second quarter of 2020, Prosperity completed the operational conversion of LegacyTexas Bank.<\/p>\n Conference Call<\/strong><\/p>\n Prosperity’s management team will host a conference call on Wednesday, July 29, 2020 at 11:30 a.m. Eastern Time<\/span> (10:30 a.m. Central Time) to discuss Prosperity’s second quarter 2020 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 5164054.<\/p>\n 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.<\/p>\n Non-GAAP Financial Measures<\/strong><\/p>\n 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 NOL carryback; return on average assets excluding merger related expenses, net of tax, and NOL carryback; return on average common equity excluding merger related expenses, net of tax, and NOL carryback; tangible book value per share, return on average tangible common equity, the tangible equity to tangible assets ratio and return on average tangible common equity, all excluding merger related expenses, net of tax, and NOL carryback; allowance for credit losses to total loans excluding Warehouse Purchase Program and PPP loans; 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 that 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.<\/p>\n Prosperity Bancshares, Inc. ®<\/strong><\/p>\n As of June 30, 2020, Prosperity Bancshares, Inc.®<\/sup> is a $32.967 billion<\/span> Houston, Texas<\/span> based regional financial holding company providing personal banking services and investments to consumers and businesses throughout Texas<\/span> 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 cash management.<\/p>\n As of June 30, 2020, Prosperity operated 275 full-service banking locations: 65 in the Houston<\/span> area, including The Woodlands<\/span>; 30 in the South Texas<\/span> area including Corpus Christi<\/span> and Victoria<\/span>; 65 in the Dallas\/Fort Worth<\/span> area; 22 in the East Texas<\/span> area; 29 in the Central Texas<\/span> area including Austin<\/span> and San Antonio<\/span>; 34 in the West Texas<\/span> area including Lubbock<\/span>, Midland<\/span>–
“The second quarter 2020 diluted earnings per share of $1.41<\/span> includes a $0.22<\/span> income tax benefit, a $0.06<\/span> charge for merger related expenses and a $0.03<\/span> charge for the write down of fixed assets related to the Merger and CRA funds,” continued Zalman.
“During the second quarter, we saw a $1.898 billion<\/span>, or 9.9%, increase in loans, mostly related to loans made under the SBA Paycheck Protection Program (PPP). We approved 11,972 PPP loans for a total of $1.411 billion<\/span>. These loans were important to our customers, enabling them to remain in business at a time they were either operating at a reduced capacity or temporarily shut down. Deposits increased $2.326 billion<\/span>, or 9.8%, during the quarter, related to funds from the PPP loans and decreased customer spending,” added Zalman.
“We continue to provide relief to our loan customers through loan extensions and deferrals when possible. For the second quarter of 2020, net charge offs were $13.0 million<\/span>. Of these charge-offs, $12.4 million<\/span> were related to PCD loans with specific reserves of $28.5 million<\/span> that we acquired in the Merger. Further, $16.1 million<\/span> in specific reserves were released to the general reserve in addition to the $10.0 million<\/span> provision for loan losses for the second quarter,” stated Zalman.
“The Blue-Chip Consensus forecast estimates that fourth quarter 2020 GDP will end at (5.6%) compared with fourth quarter 2019, however, they are forecasting a 4.8% GDP for fourth quarter 2021 compared with fourth quarter 2020. They are also forecasting an unemployment rate of 9.4% for the fourth quarter 2020 compared with an unemployment rate of 6.9% for fourth quarter 2021. Based on these estimates, 2021 looks brighter. We are positive about our company’s future. While our operating environment and economy is changing frequently, we remain focused on addressing whatever comes our way and taking care of our customers and associates,” concluded Zalman.<\/p>\n