Prosperity Bancshares, Inc.® Reports First Quarter 2017 Earnings

HOUSTON, April 26, 2017 /PRNewswire/ -- Prosperity Bancshares, Inc.^® (NYSE: PB), the parent company of Prosperity Bank^® (collectively, "Prosperity"), reported net income for the quarter ended March 31, 2017 of $68.565 million or $0.99 per diluted common share. Additionally, nonperforming assets remain low at 0.21% of first quarter average earning assets.

"We are pleased with our first quarter 2017 performance.  Our non-performing assets decreased 14.7%, as the Texas economy continues to improve.  First quarter loans increased 4.9% annualized compared with loans at December 31, 2016 and our return on first quarter average tangible common equity was 15.82%.  Net income per diluted common share (excluding purchase accounting adjustments) was $0.95 for the three months ended March 31, 2017 compared with $0.86 for the same period in 2016. This represents a 10.5% increase," said David Zalman, Prosperity's Chairman and Chief Executive Officer.

"The Texas and Oklahoma economies are improving with rising oil and gas prices.  Based on data provided by The Federal Reserve Bank of Dallas, Texas grew 203,000 jobs in 2016 and is expected to grow 280,000 jobs in 2017, a 37.9% increase.  Job growth in Texas in 2016, at 2.7%, was higher than the national job growth of 2.0%.  We continue to see single family home construction strengthen and robust sales of higher end homes," continued Zalman.

"We expect that the increase in interest rates will help our net interest margin over time and we are hopeful of regulatory reform and reduced corporate tax rates that should increase earnings.  Reduced regulation will also allow us to concentrate more on building deposits and loans.  With a better economy and loans not contracting to the extent we saw the last several years, we expect more normalized organic growth for loans," concluded Zalman. 

Results of Operations for the Three Months Ended March 31, 2017

Net income was $68.565 million for the three months ended March 31, 2017 compared with $68.951 million for the same period in 2016. Net income per diluted common share was $0.99 for the three months ended March 31, 2017 compared with $0.98 for the same period in 2016. Net income (excluding purchase accounting adjustments) was $65.890 million for the three months ended March 31, 2017 compared with $60.239 million for the three months ended March 31, 2016. Net income per diluted common share (excluding purchase accounting adjustments) was $0.95 for the three months ended March 31, 2017 compared with $0.86 for the same period in 2016. The reconciliations of these non-GAAP financial measures to the nearest respective GAAP financial measures are shown on page 11.  Annualized returns on average assets, average common equity and average tangible common equity for the three months ended March 31, 2017 were 1.23%, 7.45% and 15.82%⁽¹⁾, respectively.  Prosperity's efficiency ratio (excluding credit loss provisions, net gains and losses on the sale of assets and taxes) was 43.01% for the three months ended March 31, 2017.

Net interest income before provision for credit losses for the three months ended March 31, 2017 was $152.435 million compared with $166.257 million during the same period in 2016, a decrease of $13.822 million or 8.3%. This change was primarily due to a decrease in loan discount accretion of $9.741 million. Linked quarter net interest income before provision for credit losses decreased $1.397 million or 0.9% to $152.435 million compared with $153.832 million during the three months ended December 31, 2016. This change was primarily due to a decrease in loan discount accretion of $2.799 million.

The net interest margin on a tax equivalent basis was 3.20% for the three months ended March 31, 2017, compared with 3.48% for the same period in 2016. This change was primarily due to a decrease in loan discount accretion of $9.741 million. On a linked quarter basis the net interest margin was 3.20% compared with 3.26% for the three months ended December 31, 2016. This change was primarily due to a decrease in loan discount accretion of $2.799 million.  Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis was 3.11% for the three months ended March 31, 2017, compared with 3.21% for the same period in 2016 and 3.12% for the three months ended December 31, 2016. The reconciliations of these non-GAAP financial measures to the nearest respective GAAP financial measures are shown on page 11.

Noninterest income was $30.824 million for the three months ended March 31, 2017 compared with $30.793 million for the same period in 2016, an increase of $31 thousand or 0.1%. On a linked quarter basis, noninterest income increased $1.349 million or 4.6% compared with the three months ended December 31, 2016. This increase was primarily due to the net gain on sale of assets for the three months ended March 31, 2017.

Noninterest expense was $78.062 million for the three months ended March 31, 2017 compared with $80.528 million for the same period in 2016, a decrease of $2.466 million or 3.1%. This change was primarily due to a decrease in salaries and benefits expense. On a linked quarter basis, noninterest expense decreased $1.086 million or 1.4% compared with the three months ended December 31, 2016.

Balance Sheet Information

At March 31, 2017, Prosperity had $22.477 billion in total assets, an increase of $499.074 million or 2.3%, compared with $21.978 billion at March 31, 2016.

Loans at March 31, 2017 were $9.739 billion, an increase of $84.845 million or 0.9%, compared with $9.654 billion at March 31, 2016. Linked quarter loans increased $117.193 million or 1.2% (4.9% annualized) from $9.622 billion at December 31, 2016.

As part of its commercial and industrial lending activities, Prosperity extends credit to oil and gas production and service companies. Oil and gas production loans are loans to companies directly involved in the exploration and/or production of oil and gas. Oil and gas service loans are loans to companies that provide services for oil and gas production and exploration. At March 31, 2017, oil and gas loans totaled $267.445 million or 2.8% of total loans, of which $108.267 million were to production companies and $159.178 million were to service companies. This compares with total oil and gas loans of $362.826 million or 3.8% of total loans at March 31, 2016, of which $166.422 million were to production companies and $196.404 million were to service companies. On a linked quarter basis, oil and gas loans decreased $17.094 million, from $284.539 million or 3.0% of total loans at December 31, 2016, of which $119.934 million were production loans and $164.605 million were service loans.

Deposits at March 31, 2017 were $17.036 billion, a decrease of $837.194 million or 4.7%, compared with $17.873 billion at March 31, 2016. Linked quarter deposits decreased $271.730 million or 1.6% from $17.307 billion at December 31, 2016. This change primarily resulted from seasonality.

The table below provides detail on the impact of loans acquired and deposits assumed in the acquisition of Tradition Bancshares, Inc. and its wholly-owned subsidiary Tradition Bank (collectively "Tradition") completed on January 1, 2016:

Excluding loans acquired in the Tradition acquisition and new production at the acquired banking centers since the acquisition date, loans at March 31, 2017 increased $81.323 million or 0.9% compared with March 31, 2016 and, on a linked quarter basis, increased $108.341 million or 1.2%.

Excluding deposits assumed in the Tradition acquisition and new deposits generated at the acquired banking centers since the acquisition date, deposits at March 31, 2017 decreased $772.461 million or 4.4% compared with March 31, 2016 and, on a linked quarter basis, decreased $265.363 million or 1.6%.

Asset Quality

Nonperforming assets totaled $41.199 million or 0.21% of quarterly average interest-earning assets at March 31, 2017, compared with $56.985 million or 0.29% of quarterly average interest-earning assets at March 31, 2016, and $48.302 million or 0.25% of quarterly average interest-earning assets at December 31, 2016.

The allowance for credit losses was $84.095 million or 0.86% of total loans at March 31, 2017, $83.714 million or 0.87% of total loans at March 31, 2016 and $85.326 million or 0.89% of total loans at December 31, 2016.  Excluding loans acquired that are accounted for under FASB Accounting Standards Codification ("ASC") Topics 310-20 and 310-30, the allowance for credit losses was 0.96% of remaining loans as of March 31, 2017, compared with 1.03% at March 31, 2016 and 1.00% at December 31, 2016⁽¹⁾.

The provision for credit losses was $2.675 million for the three months ended March 31, 2017 compared with $14.000 million for the three months ended March 31, 2016 and $2.000 million for the three months ended December 31, 2016. 

Net charge-offs were $3.906 million for the three months ended March 31, 2017 compared with $11.670 million for the three months ended March 31, 2016 and $2.259 million for the three months ended December 31, 2016. Net charge-offs for the first quarter of 2017 were primarily comprised of two commercial and industrial loans. 

Conference Call

Prosperity's management team will host a conference call on Wednesday, April 26, 2017 at 10:30 a.m. Eastern Time (9:30 a.m. Central Time) to discuss Prosperity's first quarter 2017 earnings. Individuals and investment professionals may participate in the call by dialing 877-883-0383. The elite entry number is 7328237.

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

Non-GAAP Financial Measures

Prosperity's management uses certain non−GAAP financial measures to evaluate its performance. Specifically, Prosperity reviews tangible book value per share, return on average tangible common equity and the tangible equity to tangible assets ratio.  Further, as a result of acquisitions and the related purchase accounting adjustments, Prosperity uses certain non-GAAP measures and ratios that exclude the impact of these items to evaluate its net income and earnings per share (excluding purchase accounting adjustments) and its allowance for credit losses to total loans (excluding acquired loans accounted for under ASC Topics 310-20, "Receivables-Nonrefundable Fees and Other Costs" and 310-30, "Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality").  Prosperity believes these non-GAAP financial measures provide information useful to investors in understanding Prosperity's financial results and that their presentation, together with the accompanying reconciliations, provides a more complete understanding of factors and trends affecting Prosperity's business and allows investors to view performance in a manner similar to management, the entire financial services sector, bank stock analysts and bank regulators. Further, Prosperity believes that these non-GAAP financial measures provide useful information by excluding certain items that may not be indicative of its core operating earnings and business outlook.  These non-GAAP financial measures should not be considered a substitute for, nor of greater importance than, GAAP basis measures and results; Prosperity strongly encourages investors to review its consolidated financial statements in their entirety and not to rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. Please refer to page 11 and the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of these non-GAAP financial measures.

Dividend

Prosperity Bancshares, Inc. ("Prosperity Bancshares") declared a second quarter cash dividend of $0.34 per share, to be paid on July 3, 2017 to all shareholders of record as of June 16, 2017.

Acquisition of Tradition Bancshares, Inc.

On January 1, 2016, Prosperity Bancshares completed the acquisition of Tradition Bancshares, Inc. and its wholly-owned subsidiary, Tradition Bank, headquartered in Houston, Texas. Tradition Bank operated 7 banking offices in the Houston, Texas area, including its main office in Bellaire, 3 banking centers in Katy and 1 banking center in The Woodlands. As of December 31, 2015, Tradition Bancshares, Inc., on a consolidated basis, reported total assets of $547.963 million, total loans of $253.315 million, total deposits of $488.928 million and shareholders' equity of $43.103 million.

Under the terms of the definitive agreement, Prosperity Bancshares issued 679,528 shares of Prosperity Bancshares common stock plus $39.0 million in cash for all outstanding shares of Tradition Bancshares, Inc. capital stock.

Prosperity Bancshares, Inc. ®

As of March 31, 2017, Prosperity Bancshares, Inc. ^® is a $22.477 billionHouston, Texas based regional financial holding company, formed in 1983. Operating under a community banking philosophy and seeking to develop broad customer relationships based on service and convenience, Prosperity offers a variety of traditional loan and deposit products to its customers, which consist primarily of small and medium sized businesses and consumers. In addition to established banking products, Prosperity offers a complete line of services including: Internet Banking services at www.prosperitybankusa.com, Retail Brokerage Services, Credit Cards, MasterMoney Debit Cards, 24 hour voice response banking, Trust and Wealth Management, Mortgage Services, Cash Management and Mobile Banking.

As of March 31, 2017, Prosperity operated 244 full-service banking locations: 65 in the Houston area, including The Woodlands; 29 in the South Texas area including Corpus Christi and Victoria; 35 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.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release contains, and the remarks by Prosperity's management on the conference call may contain, forward-looking statements within the meaning of the securities laws that are based on current expectations, assumptions, estimates and projections about Prosperity Bancshares and its subsidiaries.  These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are outside of Prosperity's control, which may cause actual results to differ materially from those expressed or implied by the forward-looking statements.  These risks and uncertainties include but are not limited to whether Prosperity can: successfully identify acquisition targets and integrate the businesses of acquired companies and banks; continue to sustain its current internal growth rate or total growth rate; provide products and services that appeal to its customers; continue to have access to debt and equity capital markets; and achieve its sales objectives.  Other risks include, but are not limited to: the possibility that credit quality could deteriorate; actions of competitors; changes in laws and regulations (including changes in governmental interpretations of regulations and changes in accounting standards); a deterioration or downgrade in the credit quality and credit agency ratings of the securities in Prosperity's securities portfolio; customer and consumer demand, including customer and consumer response to marketing; effectiveness of spending, investments or programs; fluctuations in the cost and availability of supply chain resources; economic conditions, including currency rate, interest rate and commodity price fluctuations; and weather.  These and various other factors are discussed in Prosperity Bancshares' Annual Report on Form 10-K for the year ended December 31, 2016 and other reports and statements Prosperity Bancshares has filed with the SEC. Copies of the SEC filings for Prosperity Bancshares may be downloaded from the Internet at no charge from http://www.prosperitybankusa.com.