UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-35388
PROSPERITY BANCSHARES, INC.®
(Exact name of registrant as specified in its charter)
Texas
74-2331986
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
Prosperity Bank Plaza
4295 San Felipe, Houston, Texas
77027
(Address of principal executive offices)
(Zip Code)
(281) 269-7199
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $1.00 per share
PB
New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 4, 2023, there were 94,279,777 outstanding shares of the registrant’s Common Stock, par value $1.00 per share.
PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
3
Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022
Consolidated Statements of Income for the Three Months Ended March 31, 2023 and 2022 (unaudited)
4
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022 (unaudited)
5
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2023 and 2022 (unaudited)
6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
53
Item 4.
Controls and Procedures
PART II—OTHER INFORMATION
Legal Proceedings
54
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
55
Signatures
56
2
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
March 31,
December 31,
2023
2022
(unaudited)
(Dollars in thousands, except par value)
ASSETS
Cash and due from banks
$
405,331
423,832
Federal funds sold
222
301
Total cash and cash equivalents
405,553
424,133
Available for sale securities, at fair value
469,250
456,502
Held to maturity securities, at cost (fair value of $12,215,665 and $12,387,125, respectively)
13,602,295
14,019,503
Total securities
14,071,545
14,476,005
Loans held for sale
1,603
554
Loans held for investment
18,533,641
18,098,653
Loans held for investment - Warehouse Purchase Program
799,115
740,620
Total loans
19,334,359
18,839,827
Less: allowance for credit losses on loans
(282,191
)
(281,576
Loans, net
19,052,168
18,558,251
Accrued interest receivable
95,010
88,438
Goodwill
3,231,636
Core deposit intangibles, net
48,974
51,348
Bank premises and equipment, net
345,149
339,453
Other real estate owned
1,989
1,963
Bank owned life insurance (BOLI)
326,179
327,439
Federal Home Loan Bank of Dallas stock
160,750
90,025
Other assets
90,279
101,138
TOTAL ASSETS
37,829,232
37,689,829
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing
10,108,348
10,915,448
Interest-bearing
16,895,888
17,618,083
Total deposits
27,004,236
28,533,531
Other borrowings
3,365,000
1,850,000
Securities sold under repurchase agreements
434,261
428,134
Accrued interest payable
8,369
4,495
Allowance for credit losses on off-balance sheet credit exposures
29,947
Other liabilities
248,302
144,348
Total liabilities
31,090,115
30,990,455
COMMITMENTS AND CONTINGENCIES
—
SHAREHOLDERS’ EQUITY:
Preferred stock, $1 par value; 20,000,000 shares authorized; none issued or outstanding
Common stock, $1 par value; 200,000,000 shares authorized; 90,693,102 issued and outstanding at March 31, 2023; 91,313,615 shares issued and outstanding at December 31, 2022
90,694
91,314
Capital surplus
3,507,670
3,541,924
Retained earnings
3,144,229
3,069,609
Accumulated other comprehensive loss —net unrealized loss on available for sale securities, net of tax benefit of $(924) and $(923), respectively
(3,476
(3,473
Total shareholders’ equity
6,739,117
6,699,374
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees
247,118
193,025
Securities
73,185
55,011
Federal funds sold and other earning assets
7,006
847
Total interest income
327,309
248,883
INTEREST EXPENSE:
Deposits
47,343
8,754
34,396
2,103
185
Total interest expense
83,842
8,939
NET INTEREST INCOME
243,467
239,944
PROVISION FOR CREDIT LOSSES
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NONINTEREST INCOME:
Nonsufficient funds (NSF) fees
8,095
8,124
Credit card, debit card and ATM card income
8,666
8,179
Service charges on deposit accounts
5,926
6,211
Trust income
3,225
2,703
Mortgage income
238
455
Brokerage income
1,149
892
Net gain on sale or write-down of assets
121
689
Other
10,846
7,869
Total noninterest income
38,266
35,122
NONINTEREST EXPENSE:
Salaries and employee benefits
77,798
79,411
Net occupancy and equipment
8,025
7,848
Credit and debit card, data processing and software amortization
9,566
8,849
Regulatory assessments and FDIC insurance
4,973
2,850
Core deposit intangibles amortization
2,374
2,620
Depreciation
4,433
4,547
Communications
3,462
2,919
Net other real estate expense (income)
45
(407
Merger related expenses
860
11,464
11,213
Total noninterest expense
123,000
119,850
INCOME BEFORE INCOME TAXES
158,733
155,216
PROVISION FOR INCOME TAXES
34,039
32,890
NET INCOME
124,694
122,326
EARNINGS PER SHARE:
Basic
1.37
1.33
Diluted
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income
Other comprehensive loss, before tax:
Securities available for sale:
Change in unrealized losses during the period
(4
(175
Total other comprehensive loss
Deferred tax benefit related to other comprehensive loss
1
37
Other comprehensive loss, net of tax
(3
(138
Comprehensive income
124,691
122,188
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
Total
Common Stock
Capital
Retained
Comprehensive
Shareholders’
Shares
Amount
Surplus
Earnings
Income (Loss)
Equity
(In thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2021
92,170,480
92,171
3,595,023
2,738,233
1,809
6,427,236
Other comprehensive loss
Common stock issued in connection with the issuance of restricted stock awards, net
(10,750
(11
11
Stock based compensation expense
2,923
Cash dividends declared, $0.52 per share
(47,923
BALANCE AT MARCH 31, 2022
92,159,730
92,160
3,597,957
2,812,636
1,671
6,504,424
BALANCE AT DECEMBER 31, 2022
91,313,615
(9,250
(9
9
Common stock repurchase
(611,263
(611
(37,429
(38,040
3,166
Cash dividends declared, $0.55 per share
(50,074
BALANCE AT MARCH 31, 2023
90,693,102
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization
6,807
7,167
Provision for credit losses
Net amortization of premium on investments
7,384
12,857
Net gain on sale of other real estate and repossessed assets
(13
(621
Net gain on sale or write down of premises and equipment
(121
(689
Net accretion of discount on loans
(872
(5,195
Net amortization of premium on deposits
(53
(100
Net gain on sale of loans
(239
(387
Proceeds from sale of loans held for sale
8,470
20,076
Originations of loans held for sale
(9,280
(15,225
(Increase) decrease in accrued interest receivable and other assets
(66,156
24,688
Increase in accrued interest payable and other liabilities
105,986
67,862
Net cash provided by operating activities
179,773
235,682
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of held to maturity securities
412,524
587,597
Purchase of held to maturity securities
(3,028
(2,633,276
Proceeds from maturities and principal paydowns of available for sale securities
2,515,280
1,553,419
Purchase of available for sale securities
(2,527,704
(1,499,998
Originations of Warehouse Purchase Program loans
(2,468,101
(5,967,528
Proceeds from pay-offs of Warehouse Purchase Program loans
2,409,606
6,398,686
Net (increase) decrease in loans held for investment
(434,029
115,339
Purchase of bank premises and equipment
(10,224
(23,289
Proceeds from sale of bank premises, equipment and other real estate
741
3,894
Proceeds from insurance claims
2,811
572
Net cash used in investing activities
(102,124
(1,464,584
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing deposits
(807,100
26,618
Net (decrease) increase in interest-bearing deposits
(722,142
270,030
Net proceeds from other short-term borrowings
1,515,000
Net increase (decrease) in securities sold under repurchase agreements
6,127
(7,208
Repurchase of common stock
Payments of cash dividends
Net cash (used in) provided by financing activities
(96,229
241,517
NET DECREASE IN CASH AND CASH EQUIVALENTS
(18,580
(987,385
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
2,547,980
CASH AND CASH EQUIVALENTS, END OF PERIOD
1,560,595
NONCASH ACTIVITIES:
Acquisition of real estate through foreclosure of collateral
468
1,614
SUPPLEMENTAL INFORMATION:
Income taxes paid
327
Interest paid
79,968
9,112
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Prosperity Bancshares, Inc.® (“Bancshares”) and its wholly-owned subsidiary, Prosperity Bank® (the “Bank,” and together with Bancshares, the “Company”). All intercompany transactions and balances have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis; and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Operating results for the three month period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any other period.
2. INCOME PER COMMON SHARE
The following table illustrates the computation of basic and diluted earnings per share:
Three Months Ended March 31,
Per Share Amount
(Amounts in thousands, except per share data)
Basic:
Weighted average shares outstanding
91,207
92,161
Diluted:
There were no stock options outstanding at March 31, 2023 or exercisable during the three months ended March 31, 2023 or 2022 that would have had an anti-dilutive effect on the above computation.
3. NEW ACCOUNTING STANDARDS
Accounting Standards Updates (“ASU”)
ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in ASU 2022-02 eliminated the accounting guidance for troubled debt restructurings and enhanced disclosures for certain loan refinancing and restructurings to borrowers experiencing financial difficulty. This guidance was applied on a prospective basis. Additionally, ASU 2022-02 requires entities to disclose current-period gross charge-offs by year of origination. ASU 2022-02 became effective for the Company on January 1, 2023 and did not have a significant impact on the Company’s financial statements.
ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting – ASC Topic 848. ASU 2020-04 became effective for the Company on January 1, 2022 and provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 was effective upon issuance. In addition, the FASB issued ASU 2022-06 - Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the period of time preparers can utilize the reference rate reform relief guidance provided by ASU 2020-04 from December 31, 2022 to December 31, 2024. ASU 2022-06 was effective upon issuance and did not change the core principles in ASU 2020-04. Prior to the end of 2021, the Company began transitioning away from LIBOR to Secured Overnight Financing Rate (“SOFR”) or other alternative variable rate indexes for its interest-rate swaps and loans historically using LIBOR as an index. As of March 31, 2023, LIBOR was used as an index rate for approximately 88.1% of the Company’s interest-rate swaps and approximately 0.39% of the Company’s loan portfolio. As of December 31, 2022, LIBOR was used as an index rate for the Company’s interest-rate swaps and approximately 1.5% of the Company’s loan portfolio. The adoption of ASU 2020-04 did not have a significant impact on the Company’s financial statements.
4. SECURITIES
The amortized cost and fair value of investment securities were as follows:
March 31, 2023
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Available for Sale
Collateralized mortgage obligations
372,869
1,132
(3,287
370,714
Mortgage-backed securities
100,781
137
(2,382
98,536
473,650
1,269
(5,669
Held to Maturity
States and political subdivisions
115,470
1,458
(2,538
114,390
Corporate debt securities
12,000
(3,300
8,700
264,124
893
(16,511
248,506
13,210,701
3,403
(1,370,035
11,844,069
5,754
(1,392,384
12,215,665
December 31, 2022
359,251
1,190
(3,039
357,402
101,647
93
(2,640
99,100
460,898
1,283
(5,679
122,361
868
(3,255
119,974
(2,520
9,480
271,727
377
(22,922
249,182
13,613,415
2,575
(1,607,501
12,008,489
3,820
(1,636,198
12,387,125
The investment securities portfolio is measured for expected credit losses by segregating the portfolio into two general segments and applying the appropriate expected credit losses methodology. Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under Financial Accounting Standards Board (“FASB”): ASC 326, “Financial Instruments – Credit Losses.”
Available for sale securities. For available for sale securities in an unrealized loss position, the amount of the expected credit losses recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the expected credit losses will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the expected credit losses will be separated into the amount representing the credit-related portion of the impairment loss (“credit loss”) and the noncredit portion of the impairment loss (“noncredit portion”). The amount of the total expected credit losses related to the credit loss is determined based on the difference between the present value of cash flows expected to be collected and the amortized cost basis and such difference is recognized in earnings. The amount of the total expected credit losses related to the noncredit portion is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the expected credit losses recognized in earnings will become the new amortized cost basis of the investment.
As of March 31, 2023, management does not have the intent to sell any of the securities classified as available for sale before a recovery of cost. In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost. The unrealized losses are largely due to changes in market interest rates and spread relationships since the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date, or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2023, management believes that there is no potential for credit losses on available for sale securities.
Held to maturity securities. The Company’s held to maturity investments include mortgage-related bonds issued by either the Government National Mortgage Corporation (“Ginnie Mae”), Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”). Ginnie Mae issued securities are explicitly guaranteed by the U.S. government, while Fannie Mae and Freddie Mac issued securities are fully guaranteed by those respective United States government-sponsored agencies and conditionally guaranteed by the full faith and credit of the United States. The Company’s held to maturity securities also include taxable and tax-exempt municipal securities issued primarily by school districts, utility districts and municipalities located in Texas. The Company’s investment in municipal securities is exposed to credit risk. The securities are highly rated by major rating agencies and regularly reviewed by management. A significant portion are guaranteed or insured by either the Texas Permanent School Fund, Assured Guaranty or Build America Mutual. As of March 31, 2023, the Company’s municipal securities represent 0.8% of the securities portfolio. Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Accordingly, as of March 31, 2023, management believes that there is no potential for material credit losses on held to maturity securities.
Securities with unrealized losses, segregated by length of time, that have been in a continuous loss position were as follows:
Less than 12 Months
12 Months or More
Estimated Fair Value
Unrealized Losses
54,844
(1,206
131,626
(2,081
186,470
93,002
(2,369
466
93,468
147,846
(3,575
132,092
(2,094
279,938
9,390
(18
40,308
49,698
36,420
(241
181,525
(16,270
217,945
758,923
(16,542
10,889,321
(1,353,493
11,648,244
813,433
(20,101
11,111,154
(1,372,283
11,924,587
61,559
(3,012
99,179
(27
160,738
95,212
(2,627
291
95,503
156,771
(5,639
99,470
(40
256,241
49,782
(885
16,298
(2,370
66,080
214,538
(22,557
4,358
(365
218,896
5,276,315
(416,053
6,585,470
(1,191,448
11,861,785
5,550,115
(442,015
6,606,126
(1,194,183
12,156,241
10
At March 31, 2023 and December 31, 2022, there were 778 securities and 174 securities, respectively, in an unrealized loss position for 12 months or more.
The table below summarizes the amortized cost and fair value of investment securities at March 31, 2023, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations at any time with or without call or prepayment penalties.
Due in one year or less
13,435
13,441
Due after one year through five years
55,618
56,644
Due after five years through ten years
46,279
42,158
Due after ten years
12,138
10,847
Subtotal
127,470
123,090
Mortgage-backed securities and collateralized mortgage obligations
13,474,825
12,092,575
The Company recorded no gain or loss on the sale of securities for the three months ended March 31, 2023 and 2022. As of March 31, 2023, the Company did not own any non-agency collateralized mortgage obligations.
At March 31, 2023 and December 31, 2022, the Company did not own securities of any one issuer (other than the U.S. government and its agencies) for which aggregate adjusted cost exceeded 10% of the consolidated shareholders’ equity at such respective dates.
Securities with an amortized cost of $11.83 billion and $7.87 billion and a fair value of $10.64 billion and $6.90 billion at March 31, 2023 and December 31, 2022, respectively, were pledged to collateralize public deposits and for other purposes required or permitted by law.
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The loan portfolio consists of various types of loans and is categorized by major type as follows:
Residential mortgage loans held for sale
Commercial and industrial
2,477,220
2,594,742
Real estate:
Construction, land development and other land loans
2,899,980
2,805,438
1-4 family residential (includes home equity)
7,013,053
6,740,670
Commercial real estate (includes multi-family residential)
5,133,693
4,986,211
Farmland
548,252
518,095
Agriculture
173,143
169,938
Consumer and other
288,300
283,559
Total loans held for investment, excluding Warehouse Purchase Program
Warehouse Purchase Program
Total loans, including Warehouse Purchase Program
Concentrations of Credit. Most of the Company’s lending activity occurs within the states of Texas and Oklahoma. Commercial real estate loans, 1-4 family residential loans and construction, land development and other land loans make up 81.2% and 80.3% of the Company’s total loan portfolio, excluding Warehouse Purchase Program loans, at March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, excluding Warehouse Purchase Program loans, there were no concentrations of loans related to any single industry in excess of 10% of total loans.
Related Party Loans. As of March 31, 2023 and December 31, 2022, loans outstanding to directors, officers and their affiliates totaled $538 thousand and $547 thousand, respectively. All transactions between the Company and such related parties are conducted in the ordinary course of business and made on the same terms and conditions as similar transactions with unaffiliated persons.
An analysis of activity with respect to these related party loans is as follows:
As of and for thethree months endedMarch 31, 2023
As of and for theyear endedDecember 31, 2022
Beginning balance on January 1
547
6,524
New loans
Repayments
(6,031
Ending balance
538
Nonperforming Assets and Nonaccrual and Past Due Loans. The Company has several procedures in place to assist it in maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed by its officers, including requiring appraisals on loans collateralized by real estate. The Company also monitors its delinquency levels for any negative or adverse trends. Nevertheless, the Company’s loan portfolio could become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
The Company generally places a loan on nonaccrual status and ceases accruing interest when the payment of principal or interest is delinquent for 90 days, or earlier in some cases; unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
With respect to potential problem loans, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible write-downs or appropriate additions to the allowance for credit losses.
An aging analysis of past due loans, segregated by category of loan, is presented below:
Loans Past Due and Still Accruing
30-89 Days
90 or More Days
Total Past Due Loans
Nonaccrual Loans
Current Loans
Total Loans
5,961
1,804
2,892,215
Warehouse Purchase Program loans
Agriculture and agriculture real estate (includes farmland)
1,491
432
719,472
721,395
1-4 family (includes home equity) (1)
20,125
16,368
6,978,163
7,014,656
3,723
1,051
5,128,919
5,153
2,832
2,469,235
1,300
286,991
37,753
22,496
19,274,110
12
9,976
4,442
14,418
318
2,790,702
1,751
421
685,861
688,033
25,880
25,887
14,762
6,700,575
6,741,224
3,176
1,649
4,981,386
10,575
1,468
12,043
2,453
2,580,246
378
283,170
51,736
5,917
57,653
19,614
18,762,560
The following table presents information regarding nonperforming assets as of the dates indicated:
Nonaccrual loans (1) (3)
(2)
Accruing loans 90 or more days past due
Total nonperforming loans
25,531
Repossessed assets
Other real estate
Total nonperforming assets
24,485
27,494
Nonperforming assets to total loans and other real estate
0.13
%
0.15
Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate
Nonaccrual loans to total loans
0.12
0.10
Nonaccrual loans to total loans, excluding Warehouse Purchase Program loans
0.11
The Company had $24.5 million in nonperforming assets at March 31, 2023 compared with $27.5 million at December 31, 2022. Nonperforming assets were 0.13% of total loans and other real estate at March 31, 2023 and 0.15% of total loans and other real estate at December 31, 2022. The Company had $22.5 million in nonaccrual loans at March 31, 2023 compared with $19.6 million at December 31, 2022.
Acquired Loans. Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, interest rates, projected default rates, loss given default, and recovery rates. During the valuation process, the Company identified purchased credit deteriorated (“PCD”) and Non-PCD loans in the acquired loan portfolios. Loans acquired with evidence of credit quality deterioration at acquisition for which it was probable that the Company would not be able to collect all contractual amounts due were accounted for as PCD. PCD loan identification considers the following factors: payment history and past due status, debt service coverage, loan grading, collateral values and other factors that may indicate deterioration of credit quality as of the acquisition date when compared to the origination date. Non-PCD loan identification considers
13
the following factors: account types, remaining terms, annual interest rates or coupons, current market rates, interest types, past delinquencies, timing of principal and interest payments, loan to value ratios, loss exposures and remaining balances. Accretion of purchased discounts on PCD loans will be based on future cash flows, taking into account contractual maturities. Accretion of purchased discounts on Non-PCD loans will be recognized on a level-yield basis based on contractual maturity of individual loans.
PCD Loans. The recorded investment in PCD loans included in the consolidated balance sheet and the related outstanding balance as of the dates indicated are presented in the table below. The outstanding balance represents the total amount owed as of March 31, 2023 and December 31, 2022.
PCD loans:
Outstanding balance
58,549
63,383
Discount
(3,022
(3,361
Recorded investment
55,527
60,022
Changes in the accretable yield for acquired PCD loans for the three months ended March 31, 2023 and 2022 were as follows:
Balance at beginning of period
3,361
4,838
Accretion charge-offs
Accretion
(339
(521
Balance at March 31,
3,022
4,317
Income recognition on PCD loans is subject to the timing and amount of future cash flows. PCD loans for which the Company is accruing interest income are not considered nonperforming or impaired. The PCD discount reflected above as of March 31, 2023, represents the amount of discount available to be recognized as income.
Non-PCD Loans. The recorded investment in Non-PCD loans included in the consolidated balance sheet and the related outstanding balance as of the dates indicated are presented in the table below. The outstanding balance represents the total amount owed as of March 31, 2023 and December 31, 2022.
Non-PCD loans:
1,249,921
1,319,507
(1,701
(2,233
1,248,220
1,317,274
Changes in the discount accretion for Non-PCD loans for the three months ended March 31, 2023 and 2022 were as follows:
2,233
8,143
(532
(4,674
1,701
3,469
14
Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks loan grades to be used as credit quality indicators. The following is a general description of the loan grades used:
Grade 1—Credits in this category have risk potential that is virtually nonexistent. These loans may be secured by insured certificates of deposit, insured savings accounts, U.S. Government securities and highly rated municipal bonds.
Grade 2—Credits in this category are of the highest quality. These borrowers represent top rated companies and individuals with unquestionable financial standing with excellent global cash flow coverage, net worth, liquidity and collateral coverage.
Grade 3—Credits in this category are not immune from risk but are well protected by the collateral and paying capacity of the borrower. These loans may exhibit a minor unfavorable credit factor, but the overall credit is sufficiently strong to minimize the possibility of loss.
Grade 4—Credits in this category are considered to be of acceptable credit quality with moderately greater risk than Grade 3 and receiving closer monitoring. Loans in this category have sources of repayment that remain sufficient to preclude a larger than normal probability of default and secondary sources are likewise currently of sufficient quantity, quality, and liquidity to protect the Company against loss of principal and interest. These borrowers have specific risk factors, but the overall strength of the credit is acceptable based on other mitigating credit and/or collateral factors and can repay the debt in the normal course of business.
Grade 5—Credits in this category constitute an undue and unwarranted credit risk; however, the factors do not rise to a level of substandard. These credits have potential weaknesses and/or declining trends that, if not corrected, could expose the Company to risk at a future date. These loans are monitored on the Company’s internally-generated watch list and evaluated on a quarterly basis.
Grade 6—Credits in this category are considered “substandard” but “non-impaired” loans in accordance with regulatory guidelines. Loans in this category have well-defined weakness that, if not corrected, could make default of principal and interest possible. Loans in this category are still accruing interest and may be dependent upon secondary sources of repayment and/or collateral liquidation.
Grade 7—Credits in this category are deemed “substandard” and “impaired” pursuant to regulatory guidelines. As such, the Company has determined that it is probable that less than 100% of the contractual principal and interest will be collected. These loans are individually evaluated for a specific reserve and will typically have the accrual of interest stopped.
Grade 8—Credits in this category include “doubtful” loans in accordance with regulatory guidance. Such loans are no longer accruing interest and factors indicate a loss is imminent. These loans are also deemed “impaired.” While a specific reserve may be in place while the loan and collateral are being evaluated, these loans are typically charged down to an amount the Company estimates is collectible.
Grade 9—Credits in this category are deemed a “loss” in accordance with regulatory guidelines and have been charged off or charged down. The Company may continue collection efforts and may have partial recovery in the future.
15
The following tables present loans by risk grade, by category of loan and year of origination/renewal at March 31, 2023.
Term Loans
Amortized Cost Basis by Origination Year
2021
2020
2019
Prior
Revolving Loans
Revolving Loans Converted to Term Loans
Construction, Land Development and Other Land Loans
Grade 1
Grade 2
600
188
88
876
Grade 3
206,905
1,359,836
607,428
193,760
110,516
46,208
168,298
587
2,693,538
Grade 4
8,344
97,618
41,122
10,509
2,307
9,910
3,214
173,024
Grade 5
1,070
18,756
648
1,108
21,582
Grade 6
2,404
6,250
352
9,006
Grade 7
1,493
27
284
Grade 8
Grade 9
PCD Loans
86
64
150
215,849
1,462,609
654,800
204,269
131,665
57,297
172,904
Current-period gross writeoffs
Agriculture and Agriculture Real Estate (includes Farmland)
743
1,953
374
23
9,396
12,489
108
1,115
1,223
56,811
226,186
95,251
60,640
38,329
93,373
73,717
61
644,368
5,538
10,512
20,296
3,292
523
9,410
57,695
1,376
1,079
441
788
3,684
820
18
494
1,332
212
20
179
21
172
63,092
240,847
117,126
64,167
39,313
104,245
92,544
1-4 Family (includes Home Equity) (1)
111
163
244
72
3,327
3,806
342,433
1,795,187
2,078,248
1,115,142
446,763
991,086
97,367
1,364
6,867,590
1,219
21,107
20,476
7,038
8,516
55,515
2,643
60
116,574
65
717
4,397
2,827
8,006
164
230
143
2,201
1,324
2,439
2,641
1,463
8,471
30
343,652
1,817,847
2,101,556
1,125,908
461,354
1,062,875
100,010
1,454
26
25
16
Commercial Real Estate (includes Multi-Family Residential)
7,067
348
119
997
8,531
169,603
904,822
678,302
489,953
303,776
1,054,343
78,823
1,189
3,680,811
9,555
151,546
208,075
162,043
72,494
533,572
19,915
739
1,157,939
1,113
3,866
13,423
55,064
900
74,366
32,678
7,021
25,537
16,007
86,175
167,418
18,296
20,212
4,918
151
43,577
197,454
1,097,226
893,398
701,959
410,737
1,731,353
99,638
1,928
Commercial and Industrial
12,680
17,342
7,352
1,703
1,011
331
23,510
63,929
46
8,486
2,360
253
1,977
1,580
14,702
125,364
355,477
203,060
89,263
47,128
136,337
1,029,380
304
1,986,313
28,980
44,114
14,009
13,128
22,971
86,593
111,147
1,028
321,970
8,729
11,072
1,833
236
231
18,611
250
40,962
450
574
3,600
1,401
28,855
34,884
168
1,183
405
125
95
856
101
81
202
11,076
11,628
167,238
435,781
238,933
109,861
73,074
225,736
1,225,015
1,582
313
24
529
901
Consumer and Other
6,237
15,713
5,021
2,006
728
671
1,670
32,046
98
14,099
2,825
5,007
22,029
33,506
52,189
26,534
27,926
10,897
12,756
61,765
225,587
1,241
2,586
416
4,188
128
8,613
39,841
82,028
32,796
32,523
11,656
16,668
72,641
147
1,179
1,225
17
19,660
35,008
12,747
3,843
1,739
1,002
34,576
108,575
744
29,840
2,631
845
191
10,329
6,587
51,167
1,733,737
4,693,697
3,688,823
1,976,684
957,409
2,334,103
1,509,350
3,519
16,897,322
53,636
324,924
305,219
198,596
106,838
694,130
150,517
1,955
1,835,815
12,353
12,151
6,416
37,253
59,558
20,630
148,611
36,516
14,093
29,152
17,551
88,674
214,846
4,000
2,844
2,858
1,612
9,823
1,161
20,293
5,206
555
1,826,241
5,136,338
4,038,609
2,238,687
1,127,799
3,198,174
1,762,752
5,759
320
34
50
543
2,191
Allowance for Credit Losses on Loans. The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses which it believes is adequate as of March 31, 2023 for estimated losses in the Company’s loan portfolio. The amount of the allowance for credit losses on loans is affected by the following: (1) charge-offs of loans that occur when loans are deemed uncollectible and decrease the allowance, (2) recoveries on loans previously charged off that increase the allowance, (3) provisions for credit losses charged to earnings that increase the allowance, and (4) provision releases returned to earnings that decrease the allowance. Based on an evaluation of the loan portfolio and consideration of the factors listed below, management presents a quarterly review of the allowance for credit losses to the Bank’s Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. Although management believes it uses the best information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if economic conditions or borrower performance differ from the assumptions used in making the initial determinations.
The Company’s allowance for credit losses on loans consists of two components: (1) a specific valuation allowance based on expected losses on specifically identified loans and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company.
In setting the specific valuation allowance, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the Company maintains an internal list of impaired loans, which along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. For certain impaired loans, the Company allocates a specific loan loss reserve primarily based on the value of the collateral securing the impaired loan in accordance with ASC Topic 326-20, “Financial Instruments – Credit Losses.” The specific reserves are determined on an individual loan basis. Loans for which specific reserves are provided are excluded from the general valuation allowance described below.
In connection with this review of the loan portfolio, the Company considers risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements include:
In addition, for each category, the Company considers secondary sources of income and the financial strength and credit history of the borrower and any guarantors.
In determining the amount of the general valuation allowance, management considers factors such as historical lifetime loan loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, other qualitative risk factors both internal and external to the Company and other relevant factors in accordance with ASC Topic 326, “Financial Instruments – Credit Losses.” Historical lifetime loan loss experience is determined by utilizing an open-pool (“cumulative loss rate”) methodology. Adjustments to the historical lifetime loan loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type, excluding any loan that has a specific reserve. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
19
The following table details activity in the allowance for credit losses on loans by category of loan for the three months ended March 31, 2023 and 2022.
1-4 Family (includes Home Equity)
Allowance for credit losses on loans:
Balance December 31, 2022
78,853
7,699
60,795
66,272
62,319
5,638
281,576
1,695
356
1,699
(6,495
1,142
Charge-offs
(65
(901
(1,225
(2,191
Recoveries
205
2,373
208
2,806
Net (charge-offs) recoveries
140
1,472
(1,017
615
Balance March 31, 2023
80,561
8,061
62,538
67,972
57,296
5,763
282,191
Balance December 31, 2021
58,897
7,759
56,710
75,005
80,412
7,597
286,380
2,540
41
2,745
(1,268
(4,095
(435
(155
(39
(472
(1,407
(2,608
258
458
252
1,391
(430
103
(87
366
(14
(1,155
(1,217
Balance March 31, 2022
61,007
7,903
59,368
74,103
76,303
6,479
285,163
The allowance for credit losses on loans as of March 31, 2023 totaled $282.2 million or 1.46% of total loans, including acquired loans with discounts, an increase of $615 thousand compared to the allowance for credit losses on loans totaling $281.6 million or 1.49% of total loans, including acquired loans with discounts, as of December 31, 2022. Net recoveries were $615 thousand for the three months ended March 31, 2023. Net recoveries for the first quarter of 2023 did not include any PCD loans and $241 thousand of specific reserves on resolved PCD loans was released to the general reserve.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancellable by the Company. The allowance is adjusted by provisions for credit losses charged to earnings that increase the allowance, or by provision releases returned to earnings that decrease the allowance. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis of utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. As of March 31, 2023 and December 31, 2022, the Company had $29.9 million in allowance for credit losses on off-balance sheet credit exposures. The allowance for credit losses on off-balance sheet credit exposures is a separate line item on the Company’s consolidated balance sheet. As of March 31, 2023, the Company had $2.42 billion in commitments expected to fund.
Loan Modifications Made to Borrowers Experiencing Financial Difficulty. On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings and enhanced disclosures for certain loan refinancing and restructurings to borrowers experiencing financial difficulty. This guidance was applied on a prospective basis. As of the adoption date, all restructurings, including restructurings for borrowers experiencing financial difficulty, are evaluated to determine whether they result in a new loan or a continuation of an existing loan. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. The effect of most modifications of loans made to borrowers who are experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance. The Company adjusts the terms of loans for certain borrowers when it believes such changes will help its customers manage their loan obligations and increase the collectability of the loans.
Modifications to borrowers experiencing financial difficulty may include but are not limited to changes in committed loan amount, interest rate, amortization, note maturity, borrower, guarantor, collateral, forbearance, forgiveness of principal or interest, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. The approval of modifications of loans for borrowers experiencing financial difficulty are handled on a case-by-case basis. The following table displays the amortized cost of loans that were restructured during the three months ended March 31, 2023, presented by category of loan.
Term Extension
Amortized Cost Basis at March 31, 2023
Percentage of Total Loans Held for Investment
Loan Type
4,233
0.02
0.00
1-4 Family (includes home equity)
The following tables describes the financial effect of the modifications made to loans whose borrowers are experiencing financial difficulty:
Financial Effect
Less than 12-month extension
As of March 31, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first quarter of 2023 that subsequently defaulted. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.
Prior to the adoption of ASU 2022-02, the restructuring of a loan was considered a “troubled debt restructuring” if both (1) the borrower was experiencing financial difficulties and (2) the creditor had granted a concession. Concessions may have included interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans that were restructured in a troubled debt restructuring loan prior to the adoption of ASU 2022-02 will continue to be accounted for under the historical troubled debt restructuring accounting until the loan is paid off, liquidated or subsequently modified. As of March 31, 2022, the Company had $1.1 million in outstanding troubled debt restructurings. For the three months ended March 31, 2022, the Company did not add any loans as new troubled debt restructurings. There were no charge-offs related to restructured loans for the three months ended March 31, 2022.
6. FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair values represent the estimated price that would be received from selling an asset or paid to transfer a liability, otherwise known as an “exit price.” Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. ASC Topic 820, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Fair Value Hierarchy
The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.
The fair value disclosures below represent the Company’s estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding current economic conditions, risk characteristics of the various instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.
22
The following tables present fair values for assets and liabilities measured at fair value on a recurring basis:
As of March 31, 2023
Level 1
Level 2
Level 3
Assets:
Available for sale securities:
Derivative financial instruments:
Interest rate lock commitments
118
Forward mortgage-backed securities trades
Loan customer counterparty
Financial institution counterparty
4,496
Liabilities:
62
As of December 31, 2022
Total available for sale securities
94
5,522
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These instruments include other real estate owned, repossessed assets, held to maturity debt securities, loans held for sale and impaired loans, which are included as loans held for investment. For the three months ended March 31, 2023, the Company had additions to other real estate owned of $468 thousand, of which $468 thousand was outstanding as of March 31, 2023. For the three months ended March 31, 2023, the Company had additions to impaired loans of $5.5 million, of which $5.5 million was outstanding as of March 31, 2023. The remaining financial assets and liabilities measured at fair value on a non-recurring basis that were recorded in 2023 and remained outstanding at March 31, 2023 were not significant.
The following tables present carrying and fair value information of financial instruments as of the dates indicated:
Carrying
Assets
Held to maturity securities
Loans held for investment, net of allowance
18,251,450
17,723,922
Liabilities
16,843,050
434,197
17,817,077
17,550,309
17,563,711
428,061
The following is a description of the fair value estimates, methods and assumptions that are used by the Company in estimating the fair values of financial instruments.
Loans held for sale— Loans held for sale are carried at the lower of cost or estimated fair value. Fair value for consumer mortgages held for sale is based on commitments on hand from investors or prevailing market prices. As such, the Company classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Loans held for investment— The Company does not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value disclosures. The Company refined the calculation to estimate fair value for loans held for investment to be in accordance with ASU 2016-01. The refined discounted cash flow calculation to determine fair value considers internal and market-based information such as prepayment risk, cost of funds and liquidity. From time to time, the Company records nonrecurring fair value adjustments to impaired loans to reflect (1) partial write-downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value. Where appraisals are not available, estimated cash flows are discounted using a rate commensurate with the credit risk associated with
those cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.
The Company classifies the estimated fair value of loans held for investment as Level 3.
Other real estate owned— Other real estate owned is primarily foreclosed properties securing residential loans and commercial real estate. Foreclosed assets are adjusted to fair value less estimated costs to sell upon transfer of the loans to other real estate owned. Subsequently, these assets are carried at the lower of carrying value or fair value less estimated costs to sell. Other real estate carried at fair value based on an observable market price or a current appraised value is classified by the Company as Level 2. When management determines that the fair value of other real estate requires additional adjustments, either as a result of a non-current appraisal or when there is no observable market price, the Company classifies the other real estate as Level 3.
The fair value estimates presented herein are based on pertinent information available to management at March 31, 2023. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
7. GOODWILL AND CORE DEPOSIT INTANGIBLES
Changes in the carrying amount of the Company’s goodwill and core deposit intangibles for the three months ended March 31, 2023 and the year ended December 31, 2022 were as follows:
Core Deposit Intangibles
Balance as of December 31, 2021
61,684
Less:
Amortization
(10,336
Balance as of December 31, 2022
(2,374
Balance as of March 31, 2023
Goodwill is recorded as of the acquisition date of each entity. The Company may record subsequent adjustments to goodwill for amounts undeterminable at acquisition date, such as deferred taxes and real estate valuations, and therefore the goodwill amounts may change accordingly. The Company initially records the total premium paid on acquisitions as goodwill. After finalizing the valuation, core deposit intangibles are identified and reclassified from goodwill to core deposit intangibles on the balance sheet. This reclassification has no effect on total assets, liabilities, shareholders’ equity, net income or cash flows. Management performs an evaluation annually, and more frequently if a triggering event occurs, of whether any impairment of the goodwill or core deposit intangibles has occurred. If any such impairment is determined, a write-down is recorded. As of March 31, 2023, there was no impairment recorded on goodwill and core deposit intangibles.
The measurement period for the Company to determine the fair value of acquired identifiable assets and assumed liabilities will be at the end of the earlier of (1) twelve months from the date of acquisition or (2) as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the date of acquisition.
Core deposit intangibles are being amortized on a non-pro rata basis over their estimated lives, which the Company believes is between 10 and 15 years. Amortization expense related to intangible assets totaled $2.4 million and $2.6 million for the three months ended March 31, 2023 and 2022, respectively. The estimated aggregate future amortization expense for core deposit intangibles remaining as of March 31, 2023 is as follows (dollars in thousands):
Remaining 2023
6,986
2024
8,699
2025
8,174
2026
7,684
2027
6,929
Thereafter
10,502
8. STOCK–BASED COMPENSATION
At March 31, 2023, Bancshares had one active stock-based incentive compensation plan with awards outstanding.
On March 3, 2020, Bancshares’ Board of Directors established the Prosperity Bancshares, Inc. 2020 Stock Incentive Plan (the “2020 Plan”), which was approved by Bancshares' shareholders on April 21, 2020. The 2020 Plan authorizes the issuance of up to 2,500,000 shares of common stock upon the exercise of options or pursuant to the grant or exercise, as the case may be, of other awards granted under the 2020 Plan, including incentive stock options, nonqualified stock options, stock appreciation rights, shares of restricted stock and restricted stock units. As of March 31, 2023, 55,032 shares of common stock had been issued pursuant to vested restricted stock awards and 480,043 shares of unvested restricted stock have been granted under the 2020 Plan.
As of March 31, 2023, the Company had no stock options outstanding. Stock-based compensation expense related to restricted stock was $3.2 million and $2.9 million during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, there was $13.7 million of total unrecognized compensation expense related to stock-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 1.53 years.
9. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ITEMS
Contractual Obligations
The Company’s contractual obligations and other commitments to make future payments (other than deposit obligations and securities sold under repurchase agreements) as of March 31, 2023 are summarized below.
Federal Home Loan Bank Borrowings
The Company’s future cash payments associated with its contractual obligations pursuant to its Federal Home Loan Bank (“FHLB”) advances as of March 31, 2023 are summarized below.
1 year or less
More than 1 year but less than 3 years
3 years or more but less than 5 years
5 years or more
Federal Home Loan Bank advances
Leases
The Company’s leases relate primarily to operating leases for office space and banking centers. The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of 1 to 17 years, which may include the option to extend the lease when it is reasonably certain for the Company to exercise that option. Operating lease right-of-use (ROU) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental collateralized borrowing rate to determine the present value of lease payments. Short-term leases and leases with variable lease costs are immaterial and the Company has one sublease arrangement. Sublease income was $806 thousand and $798 thousand for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023,
operating lease ROU assets and lease liabilities were approximately $39.9 million. ROU assets and lease liabilities were classified as other assets and other liabilities, respectively.
As of March 31, 2023, the weighted average of remaining lease terms of the Company’s operating leases was 5.3 years. The weighted average discount rate used to determine the lease liabilities as of March 31, 2023 for the Company’s operating leases was 2.53%. Cash paid for the Company’s operating leases was $2.8 million for the three months ended March 31, 2023 and 2022. The Company obtained $258 thousand in ROU assets in exchange for lease liabilities for one operating lease during the three months ended March 31, 2023.
The Company’s future undiscounted cash payments associated with its operating leases as of March 31, 2023 are summarized below (dollars in thousands).
7,780
9,599
9,031
7,916
5,028
2028
2,183
4,686
Total undiscounted lease payments
46,223
Off-Balance Sheet Items
In the normal course of business, the Company enters into various transactions that, in accordance with GAAP, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s commitments associated with outstanding standby letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit expiring by period as of March 31, 2023 are summarized below. Since commitments associated with letters of credit, unused capacity of Warehouse Purchase Program loans and commitments to extend credit may expire unused, the amounts shown may not necessarily reflect the actual future cash funding requirements.
Standby letters of credit
51,669
5,840
2,815
60,324
Unused capacity on Warehouse Purchase Program loans
1,321,869
Commitments to extend credit
1,465,385
1,336,655
278,784
1,893,646
4,974,470
2,838,923
1,342,495
281,599
6,356,663
The Company records an allowance for credit losses on off-balance sheet credit exposure that is adjusted through a charge to provision for credit losses on the Company’s consolidated statement of income. At March 31, 2023 and December 31, 2022, this allowance, reported as a separate line item on the Company’s consolidated balance sheet, totaled $29.9 million.
10. OTHER COMPREHENSIVE INCOME
The tax effects allocated to each component of other comprehensive (loss) income were as follows:
Before Tax Amount
Tax Effect
Net of Tax Amount
Other comprehensive loss:
Change in unrealized loss during period
Total securities available for sale
Activity in accumulated other comprehensive (loss) income associated with securities available for sale, net of tax, was as follows:
Securities Availablefor Sale
Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2022
Balance at March 31, 2023
Balance at December 31, 2021
Balance at March 31, 2022
11. DERIVATIVE FINANCIAL INSTRUMENTS
The following table provides the outstanding notional balances and fair values of outstanding derivative positions at March 31, 2023 and December 31, 2022.
OutstandingNotionalBalance
AssetDerivativeFair Value
Liability DerivativeFair Value
4,415
4,599
7,750
5,250
Commercial loan interest rate swaps and caps:
92,777
93,214
These financial instruments are not designated as hedging instruments and are used for asset and liability management and commercial customers’ financing needs. All derivatives are carried at fair value in either other assets or other liabilities.
Interest rate lock commitments (“IRLCs”) — In the normal course of business, the Company enters into interest rate lock commitments with consumers to originate mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.
28
Forward mortgage-backed securities trades — The Company manages the changes in fair value associated with changes in interest rates related to IRLCs by using forward sold commitments known as forward mortgage-backed securities trades. These instruments are typically entered into at the time the interest rate lock commitment is made.
Interest rate swaps and caps — These derivative positions relate to transactions in which the Company enters into an interest rate swap or cap with a customer, while at the same time entering into an offsetting interest rate swap or cap with another financial institution. An interest rate swap transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. In connection with each swap, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. In connection with each interest rate cap, the Company sells a cap to the customer and agrees to pay interest if the underlying index exceeds the strike price defined in the cap agreement. Simultaneously the Company purchases a cap with matching terms from another financial institution that agrees to pay the Company if the underlying index exceeds the strike price.
The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps outstanding at March 31, 2023 and December 31, 2022 are presented in the following table.
Weighted-Average Interest Rate
Received
Paid
3.04
5.69
3.05
5.18
The Company’s credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $4.5 million at March 31, 2023 and $5.5 million at December 31, 2022. This credit exposure is partly mitigated as transactions with customers are secured by the collateral, if any, securing the underlying transaction being hedged. The Company’s credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counter-parties was $236 thousand at March 31, 2023. A credit support annex is in place and allows the Company to call collateral from upstream financial institution counter-parties. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. The Company’s cash collateral pledged for interest rate swaps was zero at March 31, 2023 and December 31, 2022.
The initial and subsequent changes in the fair value of IRLCs and the forward sales of mortgage-backed securities are recorded in net gain on sale of mortgage loans. These gains and losses were not attributable to instrument-specific credit risk. For interest rate swaps and caps, because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on its results of operations. Income (loss) for the three months ended March 31, 2023 and 2022 was as follows:
Derivatives not designated as hedging instruments
(178
(50
316
12. ACQUISITIONS
Pending Acquisition of Lone Star State Bancshares, Inc. — On October 11, 2022, Prosperity Bancshares and Lone Star State Bancshares, Inc. (“Lone Star”) jointly announced the signing of a definitive merger agreement whereby Lone Star, the parent company of Lone Star State Bank of West Texas (“Lone Star Bank”), will merge with and into Bancshares. Lone Star Bank operates five banking offices in the West Texas area, including its main office in Lubbock, and 1 banking center in each of Brownfield, Midland, Odessa and Big Spring, Texas. As of March 31, 2023, Lone Star, on a consolidated basis, reported total assets of $1.38 billion, total loans of $1.03 billion and total deposits of $1.23 billion.
Under the terms of the merger agreement, Bancshares will issue 2,376,182 shares of its common stock plus $64.1 million in cash for all outstanding shares of Lone Star capital stock, subject to certain conditions and potential adjustments. Based on the closing price of Bancshares’ common stock of $69.27 on October 7, 2022, the total consideration was valued at approximately $228.7 million. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals. The shareholders of Lone
29
Star approved the transaction on March 28, 2023. The transaction is expected to close during the second quarter of 2023, although delays could occur.
13. SUBSEQUENT EVENTS
Merger with First Bancshares of Texas, Inc. — Effective May 1, 2023, the Company completed the merger of First Bancshares of Texas, Inc. (“First Bancshares”) into Bancshares and the subsequent merger of its wholly owned subsidiary FirstCapital Bank of Texas, N.A. (“FirstCapital Bank”), into the Bank. Under the terms of the definitive agreement, the Company issued 3,583,370 shares of Prosperity common stock plus approximately $91.5 million in cash for all outstanding shares of First Bancshares. FirstCapital Bank operated 16 full-service banking offices in six different markets in West, North and Central Texas areas, including its main office in Midland, and banking offices in Midland, Lubbock, Amarillo, Wichita Falls, Burkburnett, Byers, Henrietta, Dallas, Horseshoe Bay, Marble Falls and Fredericksburg, Texas. As of March 31, 2023, First Bancshares, on a consolidated basis, reported total assets of $2.14 billion, total loans of $1.65 billion and total deposits of $1.71 billion.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Cautionary Notice Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in this quarterly report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond the Company’s control. Forward-looking statements can be identified by words such as “believes,” “intends,” “expects,” “plans,” “will” and similar references to future periods. Many possible events or factors could affect the future financial results and performance of the Company and could cause such results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to:
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. However, the Company cautions that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. Therefore, the Company cautions against placing undue reliance on its forward-looking statements. The forward-looking statements speak only as of the date the statements are made. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company’s balance sheets and statements of income. This section should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in Part I, Item 1 of this report and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
OVERVIEW
Prosperity Bancshares, Inc., a Texas corporation (“Bancshares”), is a registered financial holding company that derives substantially all of its revenues and income from the operation of its bank subsidiary, Prosperity Bank (the “Bank,” and together with Bancshares, the “Company”). The Bank provides a wide array of financial products and services to businesses and consumers throughout Texas and Oklahoma. As of March 31, 2023, the Bank operated 272 full-service banking locations; with 65 in the Houston area including The Woodlands; 30 in the South Texas area including Corpus Christi and Victoria; 62 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; and 8 in the Tulsa, Oklahoma area. The Company’s principal executive office is located at Prosperity Bank Plaza, 4295 San Felipe in Houston, Texas, and its telephone number is (281) 269-7199. The Company’s website address is www.prosperitybankusa.com. Information contained on the Company’s website is not incorporated by reference into this quarterly report on Form 10-Q and is not part of this or any other report.
The Company generates the majority of its revenues from interest income on loans, service charges and fees on customer accounts and income from investment in securities. The revenues are partially offset by interest expense paid on deposits and other borrowings and noninterest expenses such as administrative and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings which are used to fund those assets. Net interest income is the Company’s largest source of revenue. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and margin.
Three principal components of the Company’s growth strategy are internal growth, efficient operations and acquisitions, including strategic merger transactions. The Company focuses on continual internal growth. The Company maintains separate data
32
with respect to each banking center’s net interest income, efficiency ratio, deposit growth and loan growth for purposes of measuring its overall profitability. The Company also focuses on maintaining efficiency and stringent cost control practices and policies. The Company has centralized many of its critical operations, such as data processing and loan processing. Management believes that this centralized infrastructure can accommodate substantial additional growth and achieve necessary controls while enabling the Company to minimize operational costs through certain economies of scale. The Company also intends to continue to seek expansion opportunities. On May 1, 2023, the Company acquired First Bancshares of Texas, Inc. (“First Bancshares”) headquartered in Midland, Texas. On October 11, 2022, Bancshares announced the signing of a definitive merger agreement with Lone Star State Bancshares, Inc. (“Lone Star”) headquartered in Lubbock, Texas.
Total assets were $37.83 billion at March 31, 2023 compared with $37.69 billion at December 31, 2022, an increase of $139.4 million or 0.4%. Total loans were $19.33 billion at March 31, 2023 compared with $18.84 billion at December 31, 2022, an increase of $494.5 million or 2.6% . Total deposits were $27.00 billion at March 31, 2023 compared with $28.53 billion at December 31, 2022, a decrease of $1.53 billion or 5.4%. Total shareholders’ equity was $6.74 billion at March 31, 2023 compared with $6.70 billion at December 31, 2022, an increase of $39.7 million or 0.6%.
PENDING ACQUISITION
Pending Acquisition of Lone Star State Bancshares, Inc. — On October 11, 2022, the Company and Lone Star jointly announced the signing of a definitive merger agreement whereby Lone Star, the parent company of Lone Star State Bank of West Texas (“Lone Star Bank”), will merge with and into the Company. Lone Star Bank operates 5 banking offices in the West Texas area, including its main office in Lubbock, and 1 banking center in each of Brownfield, Midland, Odessa and Big Spring, Texas. As of March 31, 2023, Lone Star, on a consolidated basis, reported total assets of $1.38 billion, total loans of $1.03 billion and total deposits of $1.23 billion.
Under the terms of the merger agreement, the Company will issue 2,376,182 shares of its common stock plus $64.1 million in cash for all outstanding shares of Lone Star capital stock, subject to certain conditions and potential adjustments. Based on the closing price of the Company's common stock of $69.27 on October 7, 2022, the total consideration was valued at approximately $228.7 million. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals. The shareholders of Lone Star approved the transaction on March 28, 2023. The transaction is expected to close during the second quarter of 2023, although delays could occur.
RECENT DEVELOPMENTS
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires the Company to establish accounting policies and make estimates that affect amounts reported in the consolidated financial statements. An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on the consolidated financial statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. The Company’s accounting policies are described in detail in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity:
Business Combinations—Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business and obtains control over that business. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values at the acquisition date. Determining the fair value of assets and liabilities, especially the loan portfolio, is a process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement
33
for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in the Company’s consolidated results from acquisition date, and prior periods are not restated.
Allowance for Credit Losses— The allowance for credit losses is accounted for in accordance with FASB ASC 326, Measurement of Credit Losses on Financial Instruments which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is an allowance available for losses on loans and held-to-maturity securities. The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. All losses are charged to the allowance when the loss actually occurs or when a determination is made that such a loss is likely and can be reasonably estimated. Recoveries are credited to the allowance at the time of recovery.
The Company’s allowance for credit losses consists of two elements: (1) specific valuation allowances based on expected losses on impaired loans and purchased credit-deteriorated loans (“PCD”) loans; and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company. Management has established an allowance for credit losses which it believes is adequate for estimated losses in the Company’s loan portfolio. Based on an evaluation of the portfolio, management presents a quarterly review of the allowance for credit losses to the Bank’s Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. In making its evaluation, management considers factors such as historical lifetime loan loss experience, the amount of nonperforming assets and related collateral, the volume, growth and composition of the portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the portfolio through its internal loan review process and other relevant factors. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. Charge-offs occur when loans are deemed to be uncollectible. Pursuant to the Company's adoption of ASU 2022-02 effective January 1, 2023, the Company prospectively discontinued troubled debt restructurings accounting and no longer measures the economic concession for loan modifications occurring on or after the adoption date. In addition, modifications to loans previously designated as troubled debt restructurings that occur on or after January 1, 2023, are accounted for under the newly adopted ASU and result in the elimination of any prior economic concession recorded in the allowance related to such loans. For further discussion of the methodology used in the determination of the allowance for credit losses on loans, see “Accounting for Acquired Loans and the Allowance for Acquired Credit Losses” below and “Financial Condition—Allowance for Credit Losses on Loans” below.
Accounting for Acquired Loans and the Allowance for Acquired Credit Losses — The Company accounts for its acquisitions using the acquisition method of accounting. Accordingly, the assets, including loans, and liabilities of the acquired entity are recorded at their fair values at the acquisition date. The fair value estimates associated with acquired loans, and based on a discounted cash flow model, include estimates related to market interest rates and undiscounted projections of future cash flows that incorporate expectations of prepayments and the amount and timing of principal, interest and other cash flows, as well as any shortfalls thereof. For further discussion of the methodology used in the determination of the allowance for credit losses for acquired loans, see “Financial Condition—Allowance for Credit Losses on Loans” below. For further discussion of the Company’s acquisition and loan accounting, see Note 5 to the consolidated financial statements.
RESULTS OF OPERATIONS
Net income available to common shareholders was $124.7 million for the quarter ended March 31, 2023 compared with $122.3 million for the same period in 2022, an increase of $2.4 million or 1.9%. Net income per diluted common share was $1.37 for the quarter ended March 31, 2023 compared with $1.33 for the same period in 2022, an increase of 3.0%. The Company posted annualized returns on average common equity of 7.38% and 7.54%, annualized returns on average assets of 1.31% and 1.29% and efficiency ratios of 43.68% and 43.68% for the quarters ended March 31, 2023 and 2022, respectively. The efficiency ratio is calculated by dividing total noninterest expense (excluding net gains and losses on the sale or write down of assets and securities) by the sum of net interest income and noninterest income. Because the ratio is a measure of revenues and expenses resulting from the Company’s lending activities and fee-based banking services, net gains and losses on the sale or write-down of assets and securities are not included. Additionally, taxes are not part of this calculation.
Net Interest Income
The Company’s net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “rate change.”
For the Three Months Ended March 31, 2023
Net interest income before the provision for credit losses was $243.5 million for the quarter ended March 31, 2023, an increase of $3.5 million or 1.5%, compared with $239.9 million for the same period in 2022. The change was primarily due to an increase in the average balances and average rates on loans held for investment and investment securities, partially offset by a decrease in Paycheck Protection Program (“PPP”) fees and interest income of $3.6 million, a decrease in loan discount accretion of $4.3 million, an increase in average borrowings and an increase in the average rates on interest-bearing deposits.
Interest income on loans was $247.1 million for the quarter ended March 31, 2023, an increase of $54.1 million or 28.0%, compared with $193.0 million for the same period in 2022. The change was primarily due to an increase in the average balances and average rates on loans held for investment, partially offset by a decrease in PPP fees and interest income of $3.6 million and a decrease in loan discount accretion of $4.3 million.
Interest income on securities was $73.2 million for the quarter ended March 31, 2023, an increase of $18.2 million or 33.0%, compared with $55.0 million for the same period in 2022, primarily due to an increase in the average balances and average rates on investment securities.
Average interest-bearing liabilities were $20.82 billion for the quarter ended March 31, 2023, an increase of $82.6 million or 0.4%, compared with $20.74 billion for the same period in 2022, primarily due to an increase in other borrowings, partially offset by a decrease in interest-bearing deposits. The average rate on interest-bearing liabilities was 1.63% for the quarter ended March 31, 2023, an increase of 146 basis points, compared with 0.17% for the same period in 2022.
The net interest margin on a tax-equivalent basis was 2.93% for the quarter ended March 31, 2023, an increase of 5 basis points compared with 2.88% for the same period in 2022.
35
The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities and the resultant rates. Except as indicated in the footnotes, no tax-equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the table as loans carrying a zero yield.
Average Outstanding Balance
Interest Earned/Paid
Average Yield/Rate (1)
Interest-Earning Assets:
2,343
38
6.58
4,611
40
3.52
18,317,712
236,606
5.24
16,712,690
183,033
4.44
617,822
10,474
6.88
1,268,715
9,952
3.18
18,937,877
5.29
17,986,016
4.35
Investment securities
14,332,509
2.07
13,772,974
1.62
600,048
4.74
2,135,503
0.16
Total interest-earning assets
33,870,434
3.92
33,894,493
2.98
Allowance for credit losses on loans
(282,316
(285,692
Noninterest-earning assets
4,589,735
4,458,669
Total assets
38,177,853
38,067,470
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits
5,877,641
3,792
0.26
6,775,114
2,452
Savings and money market deposits
9,579,679
35,521
1.50
10,870,461
4,026
Certificates and other time deposits
2,045,580
8,030
1.59
2,637,529
2,276
0.35
2,887,011
4.83
427,887
1.99
452,054
0.17
Total interest-bearing liabilities
20,817,798
1.63
20,735,158
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits
10,389,980
10,636,624
180,685
176,360
31,418,410
31,578,089
Shareholders' equity
6,759,443
6,489,381
Total liabilities and shareholders' equity
Net interest rate spread
2.29
2.81
Net interest income and margin (2) (3)
2.92
2.87
Net interest income and margin (tax equivalent) (4)
244,300
2.93
240,416
2.88
36
The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes in interest income and interest expense related to purchase accounting adjustments and changes attributable to both rate and volume which cannot be segregated have been allocated to rate.
2023 vs. 2022
Increase
(Decrease)
Due to Change in
Volume
Rate
(20
(2
Loans held for investment (1)
17,578
35,995
53,573
(5,106
5,628
522
Investment securities (1)
2,235
15,939
18,174
(609
6,768
6,159
Total increase in interest income
14,078
64,348
78,426
(325
1,665
1,340
(478
31,973
31,495
Certificates and other time deposits (1)
(511
6,265
(10
1,918
Total increase in interest expense
33,072
41,831
74,903
(Decrease) increase in net interest income
(18,994
22,517
3,523
Provision for Credit Losses
Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for credit losses are charged to income to bring the total allowance for credit losses on loans and off-balance sheet credit exposures to a level deemed appropriate by management of the Company based on such factors as historical lifetime credit loss experience, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review process and other relevant factors.
Loans are charged off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.
The Company had no provision for credit losses for the three months ended March 31, 2023 and 2022.
Net recoveries were $615 thousand for the quarter ended March 31, 2023 compared with net charge-offs of $1.2 million for the quarter ended March 31, 2022. Net recoveries for the three months ended March 31, 2023 did not include any PCD loans and $241 thousand of specific reserves on resolved PCD loans was released to the general reserve.
Noninterest Income
The Company’s primary sources of recurring noninterest income are credit, debit and ATM card income, nonsufficient funds fees and service charges on deposit accounts. Additionally, the Company generates recurring noninterest income from its various additional products and services, including trust services, mortgage lending, brokerage and independent sales organization sponsorship operations. Noninterest income does not include loan origination fees, which are recognized over the life of the related loan as an adjustment to yield using the interest method.
Noninterest income totaled $38.3 million for the three months ended March 31, 2023 compared with $35.1 million for the same period in 2022. This change was primarily due to an increase in trust income and an increase in other noninterest income.
The following table presents, for the periods indicated, the major categories of noninterest income:
Nonsufficient funds fees
Bank owned life insurance income
1,354
9,492
6,586
Noninterest Expense
Noninterest expense totaled $123.0 million for the quarter ended March 31, 2023 compared with $119.9 million for the quarter ended March 31, 2022, an increase of $3.2 million or 2.6%, primarily due to increases in regulatory assessments and FDIC insurance and merger related expenses, partially offset by a decrease in salaries and benefits.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Salaries and employee benefits (1)
Non-staff expenses:
Communications (2)
Net other real estate expense (income) (3)
Income Taxes
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses. Income tax expense totaled $34.0 million for the quarter ended March 31, 2023 compared with $32.9 million for the same period in 2022, an increase of $1.1 million or 3.5%. The Company’s effective tax rate for the three months ended March 31, 2023 and 2022 was 21.4% and 21.2%, respectively.
FINANCIAL CONDITION
Loan Portfolio
The Company separates its loan portfolio into two general categories of loans: (1) “originated loans,” which are loans originated by Prosperity Bank and made pursuant to the Company’s loan policy and procedures in effect at the time the loan was made, and (2) “acquired loans,” which are loans acquired in a business combination and recorded at fair value at acquisition date. Those acquired loans that are renewed or substantially modified after the date of the business combination are referred to as “re-underwritten acquired loans.” If a renewal or substantial modification of an acquired loan is underwritten by the Company with a new credit analysis, the loan may no longer be categorized as an acquired loan. For example, acquired loans to one borrower may be combined into a new loan with a new loan number and categorized as an originated loan. Acquired loans with a fair value discount or premium at the date of the business combination that remained at the reporting date are referred to as “fair-valued acquired loans.” All fair-valued acquired loans are further categorized into PCD loans and “Non-PCD loans.” Acquired loans with evidence of credit quality deterioration as of the acquisition date when compared to the origination date are classified as PCD loans.
The following tables summarize the Company’s originated and acquired loan portfolios broken out into originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans, as of the dates indicated.
Acquired Loans
Originated Loans
Re-Underwritten Acquired Loans
Non-PCD Loans
1,713,157
626,517
125,918
Warehouse purchase program
2,772,865
121,977
4,988
6,226,211
221,510
565,332
4,154,390
404,005
531,721
530,124
5,351
12,605
148,917
24,172
249,759
30,939
7,602
Total loans held for investment
16,594,538
1,434,471
19,332,756
16,596,141
1,711,433
730,969
137,272
15,068
2,672,903
126,607
169
5,918,995
232,975
588,700
3,967,943
410,834
562,834
44,600
498,512
5,740
13,658
140,838
29,041
59
245,131
29,436
8,992
15,896,375
1,565,602
18,839,273
15,896,929
39
At March 31, 2023, total loans were $19.33 billion, an increase of $494.5 million or 2.6%, compared with $18.84 billion at December 31, 2022. Loans at March 31, 2023 included $1.6 million of loans held for sale and $799.1 million of Warehouse Purchase Program loans compared with $554 thousand of loans held for sale and $740.6 million of Warehouse Purchase Program loans at December 31, 2022. At March 31, 2023, loans represented 51.1% of total assets compared with 50.0% of total assets at December 31, 2022.
The loan portfolio consists of various types of loans categorized by major type as follows:
(i) Commercial and Industrial Loans. In nearly all cases, the Company’s commercial loans are made in the Company’s market areas and are underwritten based on the borrower’s ability to service the debt from income. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. As a general practice, term loans are secured by any available real estate, equipment or other assets owned by the borrower. Both working capital and term loans are typically supported by a personal guaranty of a principal. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans is due to the type of collateral securing these loans as well as the expectation that commercial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and servicing than other types of loans.
Included in commercial and industrial loans are (1) commitments to oil and gas producers largely secured by proven, developed and producing reserves and (2) commitments to service, equipment and midstream companies secured mainly by accounts receivable, inventory and equipment. Mineral reserve values supporting commitments to producers are normally re-determined semi-annually using reserve studies prepared by a third-party or the Company’s oil and gas engineer. Accounts receivable and inventory borrowing bases for service companies are typically re-determined monthly. Funding requests by both producers and service companies are monitored relative to the most recently determined borrowing base.
(ii) Commercial Real Estate. The Company makes commercial real estate loans collateralized by owner-occupied and nonowner-occupied real estate to finance the purchase of real estate. The Company’s commercial real estate loans are collateralized by first liens on real estate, typically have variable interest rates (or five year or less fixed rates) and amortize over a 15- to 25-year period. Payments on loans secured by nonowner-occupied properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. The Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition, in connection with underwriting these loans. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower and guarantor. Loans to hotels and restaurants are included in commercial real estate loans.
(iii) 1-4 Family Residential Loans. The Company’s lending activities also include the origination of 1-4 family residential mortgage loans (including home equity loans) collateralized by owner-occupied and nonowner-occupied residential properties located in the Company’s market areas. The Company offers a variety of mortgage loan portfolio products which generally are amortized over five to 30 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 89% of appraised value. The Company requires mortgage title insurance, as well as hazard, wind and/or flood insurance as appropriate. The Company prefers to retain residential mortgage loans for its own account rather than selling them into the secondary market. By doing so, the Company incurs interest rate risk as well as the risks associated with non-payments on such loans. The Company’s mortgage department also offers a variety of mortgage loan products which are generally amortized over 30 years, including FHA and VA loans, which are sold to secondary market investors.
(iv) Construction, Land Development and Other Land Loans. The Company makes loans to finance the construction of residential and nonresidential properties. Construction loans generally are collateralized by first liens on real estate and have variable interest rates. The Company conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above are also used in the Company’s construction lending activities, with heightened analysis of construction and/or development costs. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, the Company may not be able to recover all of the unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a
project and may have to hold the property for an indeterminate period of time. Although the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above.
(v) Warehouse Purchase Program. The Warehouse Purchase Program allows unaffiliated mortgage originators (“Clients”) to close 1-4 family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors. The Company's Clients are strategically targeted for their experienced management teams and analyzed for the expected profitability of each Client’s business model over the long term. The Clients are located across the U.S. and originate mortgage loans primarily through traditional retail and/or wholesale business models using underwriting standards as required by United States government-sponsored enterprise agencies, “Agencies” such as Fannie Mae, private investors to which the mortgage loans are ultimately sold and/or mortgage insurers.
Although not subject to any legally binding commitment, when the Company makes a purchase decision, it acquires a 100% participation interest in the mortgage loans originated by its Clients. Individual mortgage loans are warehoused in the Company’s portfolio only for a short duration, averaging less than 30 days. When instructed by a Client that a warehoused loan has been sold to an investor, the Company delivers the note to the investor that pays the Company, which in turn remits the net sales proceeds to the Client.
(vi) Agriculture Loans. The Company provides agriculture loans for short-term livestock and crop production, including rice, cotton, milo and corn, farm equipment financing and agriculture real estate financing. The Company evaluates agriculture borrowers primarily based on their historical profitability, level of experience in their particular industry segment, overall financial capacity and the availability of secondary collateral to withstand economic and natural variations common to the industry. Because agriculture loans present a higher level of risk associated with events caused by nature, the Company routinely makes on-site visits and inspections in order to identify and monitor such risks.
(vii) Consumer Loans. Consumer loans made by the Company include direct “A”-credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 180 months and vary based upon the nature of collateral and size of loan. Generally, consumer loans entail greater risk than do real estate secured loans, particularly in the case of consumer loans that are unsecured or collateralized by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, personal bankruptcy or death. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans.
The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
Nonperforming Assets
Nonperforming assets include loans on nonaccrual status, accruing loans 90 days or more past due, repossessed assets and real estate which has been acquired through foreclosure and is awaiting disposition. Nonperforming assets do not include PCD loans unless the loan has deteriorated since the acquisition date. PCD loans are reported as nonperforming assets when a deterioration in projected cash flows is identified.
The Company generally places a loan on nonaccrual status and ceases accruing interest when the payment of principal or interest is delinquent for 90 days, or earlier in some cases, unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
Nonperforming assets decreased $3.0 million, or 10.9%, to $24.5 million at March 31, 2023 compared with $27.5 million at December 31, 2022, of which $9.0 million and $9.1 million, respectively, were attributable to acquired loans. The decrease in nonperforming assets was primarily due to a $5.9 million decrease in accruing loans 90 or more days past due, partially offset by a $2.9 million increase in nonaccrual loans in the 1-4 family residential and construction loans portfolio.
The following tables present information regarding nonperforming assets differentiated among originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans, as of the dates indicated:
Nonaccrual loans (1)(3)
13,512
1,815
7,001
15,501
0.09
0.56
0.30
0.08
Nonaccrual loans (2)(3)
10,544
2,138
6,764
16,461
-
18,424
0.14
0.51
0.28
0.07
Nonperforming assets were 0.13% of total loans and other real estate at March 31, 2023 and 0.15% of total loans and other real estate at December 31, 2022. The allowance for credit losses as a percentage of total nonperforming loans was 1254.4% at March 31, 2023 and 1102.9% at December 31, 2022.
42
Allowance for Credit Losses on Loans
The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses on loans which it believes is adequate as of March 31, 2023 for estimated losses in the Company’s loan portfolio. The amount of the allowance for credit losses on loans is affected by the following: (1) charge-offs of loans that occur when loans are deemed uncollectible and decrease the allowance, (2) recoveries on loans previously charged off that increase the allowance, (3) provisions for credit losses charged to earnings that increase the allowance, and (4) provision releases returned to earnings that decrease the allowance. Based on an evaluation of the loan portfolio and consideration of the factors listed below, management presents a quarterly review of the allowance for credit losses to the Bank’s Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. Although management believes it uses the best information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if economic conditions or borrower performance differ from the assumptions used in making the initial determinations.
The Company’s allowance for credit losses on loans consists of two components: (1) a specific valuation allowance based on expected lifetime losses on specifically identified loans and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company.
In setting the specific valuation allowance, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the Company maintains an internal list of impaired loans which, along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. For certain impaired loans, the Company allocates a specific loan loss reserve primarily based on the value of the collateral securing the impaired loan. The specific reserves are determined on an individual loan basis. Loans for which specific reserves are provided are excluded from the general valuation allowance described below.
In determining the amount of the general valuation allowance, management considers factors such as historical lifetime loan loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, other qualitative risk factors both internal and external to the Company and other relevant factors. Historical lifetime loan loss experience is determined by utilizing an open-pool (“cumulative loss rate”) methodology. Adjustments to the historical lifetime loan loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type, excluding any loan that has a specific reserve. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific reserves identified for impaired loans, (2) historical lifetime credit loss information, (3) changes in current and forecasted environmental factors and (4) growth in the balance of loans.
Changes in the Company’s asset quality are reflected in the allowance in several ways. Specific reserves that are calculated on a loan-by-loan basis and the qualitative assessment of all other loans reflect current changes in the credit quality of the loan portfolio. Historical lifetime credit losses, on the other hand, are based on an open-pool (“cumulative loss rate”) methodology, which is then applied to estimate lifetime credit losses in the loan portfolio. A deterioration in the credit quality of the loan portfolio in the current period would increase the historical lifetime loss rate to be applied in future periods, just as an improvement in credit quality would decrease the historical lifetime loss rate.
43
The allowance for credit losses is further determined by the size of the loan portfolio subject to the allowance methodology and environmental factors that include Company-specific risk indicators and general economic conditions, both of which are constantly changing. The Company evaluates the economic and portfolio-specific factors on a quarterly basis to determine a qualitative component of the general valuation allowance. The factors include current economic metrics, reasonable and supportable forecasted economic metrics, business conditions, delinquency trends, credit concentrations, nature and volume of the portfolio and other adjustments for items not covered by specific reserves and historical lifetime loss experience. Management’s assessment of qualitative factors is a statistically based approach to determine the loss rate adjustment associated with such factors. Based on the Company’s actual historical lifetime loan loss experience relative to economic and loan portfolio-specific factors at the time the losses occurred, management is able to identify the expected level of lifetime losses as of the date of measurement. The correlation of historical loss experience with current and forecasted economic conditions provides an estimate of lifetime losses that has not been previously factored into the general valuation allowance by the determination of specific reserves and lifetime historical losses. Additionally, the Company considers qualitative factors not easily quantified and the possibility of model imprecision.
Utilizing the aggregation of specific reserves, historical loss experience and a qualitative component, management is able to determine the valuation allowance to reflect the full lifetime loss.
The Company accounts for its acquisitions using the acquisition method of accounting. Accordingly, the assets, including loans, and liabilities of the acquired entity are recorded at their fair values at the acquisition date. These fair value estimates associated with acquired loans, and based on a discounted cash flow model, include estimates related to market interest rates and undiscounted projections of future cash flows that incorporate expectations of prepayments and the amount and timing of principal, interest and other cash flows, as well as any shortfalls thereof.
Non-PCD loans that were not deemed impaired subsequent to the acquisition date are considered non-impaired and are evaluated as part of the general valuation allowance.
Non-PCD loans that have deteriorated to an impaired status subsequent to acquisition are evaluated for a specific reserve on a quarterly basis which, when identified, is added to the allowance for credit losses. The Company reviews impaired Non-PCD loans on a loan-by-loan basis and determines the specific reserve based on the difference between the recorded investment in the loan and one of three factors: expected future cash flows, observable market price or fair value of the collateral. Because essentially all of the Company’s impaired Non-PCD loans have been collateral-dependent, the amount of the specific reserve historically has been determined by comparing the fair value of the collateral securing the Non-PCD loan with the recorded investment in such loan. In the future, the Company will continue to analyze impaired Non-PCD loans on a loan-by-loan basis and may use an alternative measurement method to determine the specific reserve, as appropriate and in accordance with applicable accounting standards.
PCD loans are individually monitored on a quarterly basis to assess for changes in expected cash flows subsequent to acquisition. If a deterioration in cash flows is identified, an increase to the specific reserve for that loan is made. PCD loans were recorded at their acquisition date fair values, which were based on expected cash flows and considers estimates of expected future credit losses. The Company’s estimates of loan fair values at the acquisition date may be adjusted for a period of up to one year as the Company continues to evaluate its estimate of expected future cash flows at the acquisition date. If the Company determines that losses arose after the acquisition date, the additional losses will be reflected as a provision for credit losses. See “Critical Accounting Estimates” above for more information.
As described in the section captioned “Critical Accounting Estimates” above, the Company’s determination of the allowance for credit losses involves a high degree of judgment and complexity. The Company’s analysis of qualitative, or environmental, factors on pools of loans with common risk characteristics, in combination with the quantitative historical lifetime loss information and specific reserves, provides the Company with an estimate of lifetime losses. The allowance must reflect changes in the balance of loans subject to the allowance methodology, as well as the estimated lifetime losses associated with those loans.
44
The following tables present, as of and for the periods indicated, information regarding the allowance for credit losses on loans differentiated between originated loans and acquired loans. Reported net charge-offs may include those from Non-PCD loans and PCD loans, but only if the total charge-off required is greater than the remaining discount.
As of and for the Three Months Ended March 31, 2023
Average loans outstanding
16,097,319
2,840,558
Gross loans outstanding at end of period
2,738,218
Allowance for credit losses on loans at beginning of period
209,467
72,109
6,737
(6,737
Charge-offs:
(394
(507
Real estate and agriculture
(1,192
(33
Recoveries:
1,177
1,196
194
225
204
Net (charge-offs) recoveries(1)
854
Allowance for credit losses on loans at end of period
215,965
66,226
Ratio of allowance to end of period loans
1.30
2.42
1.46
Ratio of allowance to end of period loans, excluding Warehouse Purchase Program
1.52
Ratio of net charge-offs (recoveries) to average loans (annualized)
0.01
(0.12
%)
(0.01
Ratio of allowance to end of period nonperforming loans
1,598.3
737.2
1,254.4
Ratio of allowance to end of period nonaccrual loans
As of and for the Three Months Ended March 31, 2022
13,356,719
4,629,297
14,447,778
3,619,746
18,067,524
186,736
99,644
3,984
(3,984
(453
(19
(686
(43
(729
(1,337
(70
370
278
403
681
(1,598
381
189,122
96,041
1.31
2.65
1.58
1.44
1.71
0.05
(0.03
0.03
1,202.3
987.1
1,120.0
1,301.1
1,328.4
1,310.2
The Company had gross charge-offs on originated loans of $1.7 million during the three months ended March 31, 2023. Partially offsetting these charge-offs were recoveries on originated loans of $1.4 million. Gross charge-offs on acquired loans were $540 thousand during the three months ended March 31, 2023. Partially offsetting these charge-offs were recoveries on acquired loans of $1.4 million. Total charge-offs for the three months ended March 31, 2023 were $2.2 million, partially offset by total recoveries of $2.8 million.
The following table shows the allocation of the net charge-offs among various categories of loans as of the dates indicated.
March 31, 2022
Ratio of Net Charge-offs (Recoveries) to Average Loans (Annualized)
Ratio ofNet Charge-offs (Recoveries) to Average Loans (Annualized)
Balance of net recoveries (charge-offs) applicable to:
1-4 family residential (including home equity)
Commercial real estate (including multi-family residential)
Agriculture (includes farmland)
Total net recoveries (charge-offs)
The following tables show the allocation of the allowance for credit losses on loans among various categories of loans disaggregated between originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans at the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any loan category, regardless of whether allocated to an originated loan or an acquired loan.
TotalAllowance
Percent of Loans to Total Loans(1)
Balance of allowance for credit losses on loans applicable to:
30,450
21,738
4,613
495
13.4
Real estate
173,521
9,887
11,298
16,365
211,071
81.2
Agriculture and agriculture real estate
7,339
604
106
3.9
4,655
939
1.5
Total allowance for credit losses on loans
33,168
16,186
16,872
100.0
30,837
25,736
5,091
655
14.3
167,270
10,225
11,978
16,447
205,920
80.3
6,845
731
3.8
4,515
917
206
1.6
37,609
17,386
17,114
The allowance for credit losses totaled $282.2 million at March 31, 2023 and $281.6 million at December 31, 2022. The allowance for credit losses totaled 1.46% of total loans at March 31, 2023 and 1.49% of total loans at December 31, 2022.
At March 31, 2023, $216.0 million of the allowance for credit losses was attributable to originated loans, an increase of $6.5 million or 3.1% compared with $209.5 million of the allowance at December 31, 2022. At March 31, 2023, $33.2 million of the allowance for credit losses was attributable to re-underwritten acquired loans compared with $37.6 million of the allowance at December 31, 2022, a decrease of $4.4 million or 11.8%. At March 31, 2023, $16.2 million of the allowance for credit losses was attributable to Non-PCD loans compared with $17.4 million of the allowance at December 31, 2022, a decrease of $1.2 million or 6.9%. At March 31, 2023, $16.9 million of the allowance for credit losses was attributable to PCD loans compared with $17.1 million of the allowance at December 31, 2022, a decrease of $242 thousand or 1.4%.
At March 31, 2023, the Company had $4.7 million of total outstanding accretable discounts on Non-PCD loans and PCD loans.
The Company believes that the allowance for credit losses on loans at March 31, 2023 is adequate to absorb expected lifetime losses that may be realized from the loan portfolio as of such date. Nevertheless, the Company could sustain losses in future periods which could be substantial in relation to the size of the allowance at March 31, 2023.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancellable by the Company. The allowance is adjusted by provisions for credit losses charged to earnings that increase the allowance, or by provision releases returned to earnings that decrease the allowance. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis of utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. As of March 31, 2023 and December 31, 2022, the Company had $29.9 million in allowance for credit losses on off-balance sheet credit exposures. The allowance for credit losses on off-balance sheet credit exposures is a separate line item on the Company’s consolidated balance sheet.
The carrying cost of securities totaled $14.07 billion at March 31, 2023 compared with $14.48 billion at December 31, 2022, a decrease of $404.5 million or 2.8%. At March 31, 2023, securities represented 37.2% of total assets compared with 38.4% of total assets at December 31, 2022.
47
The investment securities portfolio is measured for expected credit losses by segregating the portfolio into two general segments and applying the appropriate expected credit losses methodology. Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under FASB ASC 326, “Financial Instruments – Credit Losses.”
Available for sale securities. For available for sale securities in an unrealized loss position, the amount of the expected credit losses recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the expected credit losses will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the expected credit losses will be separated into the amount representing the credit-related portion of the impairment loss (“credit loss”) and the noncredit portion of the impairment loss (“noncredit portion”). The amount of the total expected credit losses related to the credit loss is determined based on the difference between the present value of cash flows expected to be collected and the amortized cost basis, and such difference is recognized in earnings. The amount of the total expected credit losses related to the noncredit portion is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the expected credit losses recognized in earnings will become the new amortized cost basis of the investment.
As of March 31, 2023, management does not have the intent to sell any of the securities classified as available for sale before a recovery of cost. In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost. The unrealized losses are largely due to changes in market interest rates and spread relationships since the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2023, management believes that there is no potential for credit losses on available for sale securities.
Held to maturity securities. The Company’s held to maturity investments include mortgage-related bonds issued by either the Government National Mortgage Corporation (“Ginnie Mae”), Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”). Ginnie Mae issued securities are explicitly guaranteed by the U.S. government, while Fannie Mae and Freddie Mac issued securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally guaranteed by the full faith and credit of the United States. The Company’s held to maturity securities also include taxable and tax-exempt municipal securities issued primarily by school districts, utility districts and municipalities located in Texas. The Company’s investment in municipal securities is exposed to credit risk. The securities are highly rated by major rating agencies and regularly reviewed by management. A significant portion are guaranteed or insured by either the Texas Permanent School Fund, Assured Guaranty or Build America Mutual. As of March 31, 2023, the Company’s municipal securities represent 0.8% of the securities portfolio. Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Accordingly, as of March 31, 2023, management believes that there is no potential for material credit losses on held to maturity securities.
48
Total deposits were $27.00 billion at March 31, 2023 compared with $28.53 billion at December 31, 2022, a decrease of $1.53 billion or 5.4%. At March 31, 2023, noninterest-bearing deposits totaled $10.11 billion, a decrease of $807.1 million or 7.4% compared with $10.92 billion at December 31, 2022. Interest-bearing deposits totaled $16.90 billion at March 31, 2023 compared with $17.62 billion at December 31, 2022, a decrease of $722.2 million or 4.1%, primarily due to a decrease in business demand deposits and public fund deposits.
Average deposits for the three months ended March 31, 2023 were $27.89 billion, a decrease of $3.03 billion or 9.8%, compared with $30.92 billion for the three months ended March 31, 2022. The ratio of average interest-bearing deposits to total average deposits was 62.8% and 65.6% during the first three months of 2023 and 2022, respectively.
The following table summarizes the daily average balances and weighted average rates paid on deposits for the periods indicated below:
Average Balance
Average Rate (1)
Regular savings
3,396,252
0.70
3,445,108
Money market savings
6,183,427
1.95
7,425,353
Certificates, IRAs and other time deposits
Total interest-bearing deposits
17,502,900
1.10
20,283,104
0.18
27,892,880
0.69
30,919,728
Other Borrowings
The following table presents the Company’s borrowings as of the dates indicated:
FHLB advances
3,799,261
2,278,134
FHLB advances and long-term notes payable— The Company has an available line of credit with the FHLB of Dallas, which allows the Company to borrow on a collateralized basis. The Company’s FHLB advances are typically considered short-term borrowings and are used to manage liquidity as needed. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At March 31, 2023, the Company had total funds of $11.29 billion available under this line. FHLB advances of $3.37 billion were outstanding at March 31, 2023, at a weighted average interest rate of 5.01%. At March 31, 2023, the Company had no FHLB long-term notes payable balance.
Securities sold under repurchase agreements— At March 31, 2023, the Company had $434.3 million in securities sold under repurchase agreements with banking customers compared with $428.1 million at December 31, 2022, an increase of $6.1 million or 1.4%. Repurchase agreements are generally settled on the following business day; however, approximately $4.2 million of the repurchase agreements outstanding at March 31, 2023 have maturity dates ranging from 1 to 12 months. All securities sold under repurchase agreements are collateralized by certain pledged securities.
LIBOR Transition
As of March 31, 2023, LIBOR was used as an index rate for approximately 88.1% of the Company’s interest-rate swaps and approximately 0.39% of the Company’s loan portfolio. As of December 31, 2022, LIBOR was used as an index rate for the Company’s interest-rate swaps and approximately 1.5% of the Company’s loan portfolio. On September 30, 2021, the Company began transitioning away from LIBOR to Secured Overnight Financing Rate (“SOFR”) or other alternative variable rate indexes for its interest-rate swaps and loans historically using LIBOR as an index.
49
Liquidity
Liquidity involves the Company’s ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing basis and manage unexpected events. The Company’s largest source of funds is deposits and its largest use of funds is loans. The Company does not expect a change in the source or use of its funds in the future. Although access to purchased funds from correspondent banks is available and has been utilized on occasion to take advantage of investment opportunities, the Company does not generally rely on this external funding source. The cash and federal funds sold position, supplemented by amortizing investment and loan portfolios, has generally created an adequate liquidity position.
As of March 31, 2023, the Company had outstanding $4.97 billion in commitments to extend credit, $60.3 million in commitments associated with outstanding standby letters of credit and $1.32 billion in commitments associated with unused capacity on Warehouse Purchase Program loans. Since commitments associated with letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
The Company has no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. As of March 31, 2023, the Company had cash and cash equivalents of $405.6 million compared with $424.1 million at December 31, 2022, a decrease of $18.6 million or 4.4%. The decrease was primarily due to the increase in loans held for investment of $434.0 million, payment of cash dividends of $50.1 million, repurchase of common stock of $38.0 million and a decrease in deposits of $1.53 billion, partially offset by proceeds from short-term borrowings of $1.52 billion, net proceeds from investment securities of $397.1 million and net cash provided by operating activities of $179.8 million.
Share Repurchases
On January 17, 2023, the Company announced a stock repurchase program under which up to 5%, or approximately 4.6 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 17, 2024, at the discretion of management. Under the stock repurchase program, Bancshares may repurchase shares from time to time at prevailing market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions. Repurchases under this program may also be made in transactions outside the safe harbor during a pending merger, acquisition or similar transaction. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. Shares of stock repurchased are held as authorized but unissued shares. Bancshares is not obligated to purchase any particular number of shares, and Bancshares may suspend, modify or terminate the program at any time and for any reason without prior notice. Bancshares repurchased 611,263 shares of its common stock at an average weighted price of $62.20 per share during the three months ended March 31, 2023.
The Company’s leases relate primarily to operating leases for office space and banking centers. The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of 1 to 17 years, which may include the option to extend the lease when it is reasonably certain for the Company to exercise that option. Operating lease right-of-use (ROU) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental collateralized borrowing rate to determine the present value of lease payments. Short-term leases and leases with variable lease costs are immaterial, and the Company has one sublease arrangement. Sublease income was $806 thousand and $798 thousand for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, operating lease ROU assets and lease liabilities were approximately $39.9 million. ROU assets and lease liabilities were classified as other assets and other liabilities, respectively.
The Company’s commitments associated with outstanding standby letters of credit, unused capacity of Warehouse Purchase Program loans and commitments to extend credit expiring by period as of March 31, 2023 are summarized below. Since commitments associated with letters of credit, unused capacity of Warehouse Purchase Program loans and commitments to extend credit may expire unused, the amounts shown may not necessarily reflect the actual future cash funding requirements.
Allowance for Credit Losses on Off-balance Sheet Credit Exposures. The Company records an allowance for credit losses on off-balance sheet credit exposure that is adjusted through a charge to provision for credit losses on the Company’s consolidated statement of income. At March 31, 2023 and December 31, 2022, this allowance, reported as a separate line item on the Company’s consolidated balance sheet, totaled $29.9 million.
51
Capital Resources
Total shareholders’ equity was $6.74 billion at March 31, 2023 compared with $6.70 billion at December 31, 2022, an increase of $39.7 million or 0.6%. The increase was primarily the result of net income of $124.7 million partially offset by dividend payments of $50.1 million and common stock repurchases of $38.0 million.
The Basel III Capital Rules adopted by the federal regulatory authorities in 2013 substantially revised the risk-based capital requirements applicable to the Company and the Bank. The Basel III Capital Rules became effective for the Company on January 1, 2015, subject to a phase-in period for certain provisions. The Basel III Capital Rules require a capital conservation buffer with respect to each of the Common Equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The capital conservation buffer of 2.5% was fully phased-in on January 1, 2019. A financial institution with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.
In response to the COVID-19 pandemic, in March 2020 the joint federal bank regulatory agencies issued an interim final rule that allowed banking organizations that implemented CECL in 2020 to mitigate the effects of the CECL accounting standard in their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. The Company adopted the option provided by the interim final rule, which delayed the effects of CECL on its regulatory capital through 2021, after which the effects will be phased in over a three-year period from January 1, 2022 through December 31, 2024. Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period include both the initial impact of the Company’s adoption of CECL on January 1, 2020 and 25% of subsequent changes in the Company’s allowance for credit losses during each quarter of the two-year period ending December 31, 2021. The cumulative amount of the transition adjustments is being phased in over the three-year transition period that began on January 1, 2022, with 75% recognized in 2022, 50% recognized in 2023, and 25% recognized in 2024.
Financial institutions are categorized by the FDIC based on minimum Common Equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios. As of March 31, 2023, the Bank’s capital ratios were above the levels required for the Bank to be designated as “well capitalized.”
The following table provides a comparison of the Company’s and the Bank’s risk-weighted and leverage capital ratios to the minimum and well-capitalized regulatory standards as of March 31, 2023:
Minimum Required For Capital Adequacy Purposes
Minimum Required Plus Capital Conservation Buffer
To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions
Actual Ratio as of March 31, 2023
The Company
CET1 capital (to risk weighted assets)
4.50
7.00
N/A
15.59
Tier 1 capital (to risk weighted assets)
6.00
8.50
Total capital (to risk weighted assets)
8.00
10.50
16.41
Tier 1 capital (to average assets)
4.00
(1)
10.06
The Bank
6.50
15.53
10.00
16.35
5.00
10.03
52
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manages market risk, which for the Company is primarily interest rate risk, through its Asset Liability Committee consisting of senior officers of the Company, in accordance with policies approved by the Company’s Board of Directors.
The Company uses simulation analysis to examine the potential effects of market changes on net interest income and market value. The Company considers macroeconomic variables, Company strategy, liquidity and other factors as it quantifies market risk. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Liquidity” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed on February 24, 2023 (the “2022 Form 10-K”), for further discussion. There have been no material changes in the Company’s market risk exposures that would affect the quantitative and qualitative disclosures from those disclosed in the 2022 Form 10-K and presented as of December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this report.
Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
The Company and the Bank are defendants, from time to time, in legal actions arising from transactions conducted in the ordinary course of business. After consultations with legal counsel, the Company and the Bank believe that the ultimate liability, if any, arising from such actions will not have a material adverse effect on their financial statements.
ITEM 1A. RISK FACTORS
There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a. None.
b. None.
c. The following table details the Company’s repurchases of shares of its common stock during the three months ended March 31, 2023:
Period
Total Number of Shares Purchased
Weighted Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Program
Maximum Number of Shares That May Yet Be Purchased Under the Plan at the End of the Period (1)
January 1 - January 31, 2023
4,565,531
February 1 - February 29, 2023
March 1 - March 31, 2023
611,263
62.20
3,954,268
(1) On January 17, 2023, Bancshares announced a stock repurchase program under which up to 5%, or approximately 4.6 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 17, 2024, at the discretion of management. Under the stock repurchase program, Bancshares could repurchase shares from time to time at prevailing market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Share Repurchases” for additional information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number
Description of Exhibit
3.1
Amended and Restated Articles of Incorporation of Prosperity Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-63267) (the “Registration Statement”))
3.2
Articles of Amendment to Amended and Restated Articles of Incorporation of Prosperity Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 001-35388))
3.3
Amended and Restated Bylaws of Prosperity Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 20, 2019 (File No. 001-35388))
4.1
Form of certificate representing shares of the Company’s common stock (incorporated herein by reference to Exhibit 4 to the Registration Statement)
31.1*
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2*
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1**
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (formatted as Inline XBRL and contained in Exhibits 101)
* Filed with this Quarterly Report on Form 10-Q.
** Furnished with this Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PROSPERITY BANCSHARES, INC. ®
(Registrant)
Date: 5/5/2023
/S/ DAVID ZALMAN
David Zalman
Senior Chairman and Chief Executive Officer
/S/ ASYLBEK OSMONOV
Asylbek Osmonov
Chief Financial Officer