Company Overview and History

Prosperity Bancshares, a financial institution deeply rooted in the vibrant economies of Texas and Oklahoma, has carved out a remarkable journey over the past decades, transforming itself from a small $40 million bank into a banking powerhouse with nearly $40 billion in assets. This evolution has been fueled by a relentless focus on strategic acquisitions, efficient operations, and a steadfast commitment to serving the needs of businesses and individuals across its expansive footprint.

Established in 1983, Prosperity Bancshares began its humble beginnings as a community bank in Houston, Texas, with approximately 15 employees. The company went public in 1998, at which time it had grown to approximately $300 million in size. Under the visionary leadership of David Zalman, who joined the company in 1986 and has served as the Senior Chairman and Chief Executive Officer since 1998, the bank has undergone a remarkable transformation. Through a combination of organic growth and strategic acquisitions, Prosperity has expanded its presence across Texas and into Oklahoma, establishing a network of 288 full-service banking locations as of June 30, 2024.

Growth and Challenges

In its early years, Prosperity experienced organic growth of 2-4% per year on deposits and 6-8% per year on loans. However, the company faced challenges working through loans acquired in mergers that did not meet its standards. To maintain asset quality and strengthen the bank, Prosperity took a disciplined approach, exiting assets that did not align with its lending philosophy. This process resulted in lower non-performing and charged-off loans, enhancing the bank's ability to withstand various banking cycles.

Throughout its history, Prosperity has successfully navigated industry challenges such as changes in regulations, technological advancements, and economic cycles. The company's ability to overcome these obstacles is attributed to its disciplined approach to lending, investments in technology, and careful evaluation of potential merger opportunities. Prosperity's focus on building a strong core deposit base and managing risk has been key to its success over the past several decades.

Financials

The company's financial performance reflects its ability to navigate various economic landscapes. For the fiscal year ended December 31, 2023, Prosperity Bancshares reported annual net income of $419.32 million, annual revenue of $1.07 billion, annual operating cash flow of $646.36 million, and annual free cash flow of $612.20 million. These figures demonstrate the bank's consistent profitability, strong cash generation, and ability to manage its operations efficiently.

In the most recent quarter (Q3 2024), Prosperity reported revenue of $302.79 million and net income of $127.3 million, representing a year-over-year growth of 11.7% in net income compared to Q3 2023. The company's net interest income before provision for credit losses was $497.00 million for the six months ended June 30, 2024, an increase of 3.6% compared to the same period in 2023. The net interest margin on a tax-equivalent basis was 2.87% for the six months ended June 30, 2024, up 4 basis points from the same period in 2023.

Noninterest income totaled $84.87 million for the six months ended June 30, 2024, an increase of 8.9% compared to the same period in 2023. Noninterest expense was $288.69 million for the six months ended June 30, 2024, an increase of 7.4% compared to the same period in 2023. Net income available to common shareholders was $222.00 million for the six months ended June 30, 2024, an increase of 4.9% compared to the same period in 2023.

Risk Management and Loan Portfolio

Prosperity's commitment to prudent risk management is evident in its conservative approach to lending. As of June 30, 2024, the bank's loan portfolio totaled $22.32 billion, with a significant portion comprised of commercial and industrial loans, commercial real estate loans, and 1-4 family residential loans. The company's allowance for credit losses on loans stood at $359.85 million, representing 1.61% of total loans, indicating a robust risk management framework.

The loan portfolio, which represents 56.1% of Prosperity's total assets as of June 30, 2024, saw an increase of 5.4% compared to December 31, 2023. This growth demonstrates the bank's continued focus on expanding its lending activities while maintaining a diversified portfolio across various loan types.

Liquidity

The bank's liquidity position remains strong, with $1.51 billion in cash and cash equivalents as of June 30, 2024. Additionally, Prosperity's capital ratios exceed regulatory requirements, with a Common Equity Tier 1 capital ratio of 15.35% and a total risk-based capital ratio of 16.60% as of the same date, positioning the bank well to weather potential economic headwinds.

As of December 31, 2023, Prosperity reported a debt-to-equity ratio of 0.53, cash holdings of $458.41 million, and a current ratio and quick ratio of 0.57. The bank also has access to an available line of credit with the Federal Home Loan Bank of Dallas, allowing it to borrow on a collateralized basis with a total borrowing capacity of $11 billion as of June 30, 2024. These metrics further underscore the bank's strong liquidity position and financial stability.

Deposit Base and Securities Portfolio

Prosperity's deposit base includes both interest-bearing and non-interest-bearing deposits. Total deposits were $27.93 billion as of June 30, 2024, an increase of 2.8% compared to December 31, 2023. Interest-bearing deposits were $18.23 billion, up 4.7%, while non-interest-bearing deposits were $9.71 billion, down 0.7%. The ratio of average interest-bearing deposits to total average deposits was 65.2% during the first six months of 2024.

The bank's securities portfolio, which includes available-for-sale and held-to-maturity securities, primarily consists of corporate debt securities, collateralized mortgage obligations, and mortgage-backed securities. The total securities portfolio was $11.70 billion as of June 30, 2024, down 8.6% from December 31, 2023, representing 29.4% of Prosperity's total assets.

Community Involvement

Prosperity's success is not solely measured by its financial performance; the bank has also demonstrated a strong commitment to its communities. Through its philanthropic initiatives and community involvement, the bank has established itself as a trusted partner, contributing to the overall economic and social well-being of the regions it serves.

Future Outlook and Guidance

Looking ahead, Prosperity Bancshares remains well-positioned for continued growth. The company's strategic focus on expanding its presence in Texas and Oklahoma, coupled with its disciplined approach to risk management and operational efficiency, positions it as a formidable player in the banking industry.

Based on recent guidance, Prosperity expects to exit 2024 with a 3% net interest margin. For the 12 months ending in 2025, the bank's model projects an average net interest margin of 3.27%, with a further increase to 3.65% in 2026, although management notes this projection may be optimistic. The bank anticipates non-interest expense to range between $141 million and $143 million for Q4 2024.

Regarding loan growth, Prosperity expects low single-digit annualized growth in Q4 2024 and Q1 2025, potentially moving back into the mid-single-digit range thereafter. On the deposit side, the bank anticipates deposit costs to decrease in the next quarter as CDs reprice.

Prosperity has demonstrated impressive long-term growth, with a compound annual growth rate (CAGR) in dividends declared of 11% from 2003 to 2024. Additionally, the bank's tangible book value per share has shown a CAGR of 11% for the last 21 years since 2003, highlighting its consistent ability to create shareholder value.

As the company navigates the evolving landscape, investors can take comfort in Prosperity's track record of delivering consistent financial performance and shareholder value, supported by its strong market position in Texas and Oklahoma and its conservative approach to banking.