Prosperity Bancshares, Inc.® Reports Second Quarter 2016 Earnings

Net income was $68.071 million for the three months ended June 30, 2016 compared with $71.932 million for the same period in 2015. Net income per diluted common share was $0.98 for the three months ended June 30, 2016 compared with $1.03 for the same period in 2015. Net income (excluding purchase accounting adjustments) was $62.359 million for the quarter ended June 30, 2016 compared with $63.800 million for the quarter ended June 30, 2015. Net income per diluted common share (excluding purchase accounting adjustments) was $0.90 for the three months ended June 30, 2016 compared with $0.91 for the three months ended June 30, 2015. The reconciliation of these non-GAAP financial measures is shown on page 13.  Annualized returns on average assets, average common equity and average tangible common equity for the three months ended June 30, 2016 were 1.24%, 7.70% and 17.15%⁽¹⁾, respectively.  Prosperity's efficiency ratio (excluding credit loss provisions, net gains and losses on the sale of assets and taxes) was 42.46% for the three months ended June 30, 2016.

Net interest income before provision for credit losses for the quarter ended June 30, 2016 was $158.467 million compared with $158.239 million during the same period in 2015, an increase of $228 thousand or 0.1%. Linked quarter net interest income before provision for credit losses decreased to $158.467 million compared with $166.257 million during the three months ended March 31, 2016, primarily due to a decrease in loan discount accretion of $5.190 million and a decrease in average interest-earning assets of 1.3% for the three months ended June 30, 2016.

The net interest margin on a tax equivalent basis was 3.37% for the three months ended June 30, 2016, compared with 3.39% for the same period in 2015. Linked quarter net interest margin on a tax equivalent basis was 3.37% for the three months ended June 30, 2016 compared with 3.48% for the three months ended March 31, 2016. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis was 3.19% for the three months ended June 30, 2016, compared with 3.13% for the same period in 2015 and 3.21% for the three months ended March 31, 2016. The reconciliation of these non-GAAP financial measures is shown on page 13.  

Noninterest income was $28.473 million for the three months ended June 30, 2016 compared with $30.297 million for the same period in 2015, a decrease of $1.824 million or 6.0%. On a linked quarter basis, noninterest income decreased $2.320 million or 7.5% compared with the quarter ended March 31, 2016.

Noninterest expense was $79.235 million for the three months ended June 30, 2016 compared with $79.735 million for the same period in 2015,  a decrease of $500 thousand or 0.6%. On a linked quarter basis, noninterest expense decreased $1.293 million or 1.6% compared with the quarter ended March 31, 2016.

Results of Operations for the Six Months ended June 30, 2016

Net income was $137.022 million for the six months ended June 30, 2016 compared with $145.573 million for the same period in 2015.  Net income per diluted common share was $1.96 for the six months ended June 30, 2016 compared with $2.08 for the same period in 2015. Net income (excluding purchase accounting adjustments) was $122.598 million for the six months ended June 30, 2016 compared with $125.183 million for the six months ended June 30, 2015. Net income per diluted common share (excluding purchase accounting adjustments) was $1.75 for the six months ended June 30, 2016 compared with $1.79 for the six months ended June 30, 2015. The reconciliation of these non-GAAP financial measures is shown on page 13. Annualized returns on average assets, average common equity and average tangible common equity for the six months ended June 30, 2016 were 1.24%, 7.77% and 17.37%⁽¹⁾, respectively.  Prosperity's efficiency ratio (excluding credit loss provisions, net gains and losses on the sale of assets and securities and taxes) was 41.75% for the six months ended June 30, 2016.

Net interest income before provision for credit losses for the six months ended June 30, 2016 was $324.724 million compared with $321.144 million for the same period in 2015, an increase of $3.580 million or 1.1%. The change was primarily due to an increase of 2.6% in average interest-earning assets, partially offset by a decrease in loan discount accretion of $9.451 million for the six months ended June 30, 2016. The net interest margin on a tax equivalent basis for the six months ended June 30, 2016 was 3.43% compared with 3.48% for the same period in 2015. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis was 3.20% for the six months ended June 30, 2016 compared with 3.15% for the same period in 2015. The reconciliation of these non-GAAP financial measures is shown on page 13.

Noninterest income was $59.266 million for the six months ended June 30, 2016 compared with $58.718 million for the same period in 2015, an increase of $548 thousand or 0.9%. Noninterest expense was $159.763 million for the six months ended June 30, 2016 compared with $159.197 million for the same period in 2015, an increase of $566 thousand or 0.4%.    One-time pretax merger related expenses of $658 thousand related to the Tradition acquisition were recorded during the six months ended June 30, 2016.

Balance Sheet Information

At June 30, 2016, Prosperity had $21.796 billion in total assets, an increase of $110.023 million or 0.5%, compared with $21.686 billion at June 30, 2015.

Loans at June 30, 2016 were $9.650 billion, an increase of $535.673 million or 5.9%, compared with $9.114 billion at June 30, 2015. Linked quarter loans decreased $4.400 million from $9.654 billion at March 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 June 30, 2016, oil and gas loans totaled $328.409 million or 3.4% of total loans, of which $156.734 million were to production companies and $171.675 million were to service companies. This compares with total oil and gas loans of $433.439 million or 4.8% of total loans at June 30, 2015, of which $216.898 million were to production companies and $216.541 million were to service companies. On a linked quarter basis, oil and gas loans decreased $34.417 million, from $362.826 million or 3.8% of total loans at March 31, 2016, of which $166.422 million were production loans and $196.404 million were service loans.

Deposits at June 30, 2016 were $17.219 billion, an increase of $217.481 million or 1.3%, compared with $17.002 billion at June 30, 2015. Linked quarter deposits decreased $653.621 million or 3.7% from $17.873 billion at March 31, 2016. The decrease primarily resulted from lower deposit balances for Prosperity's over 400 public fund customers due largely to seasonality.

The table below provides detail on the impact of loans acquired and deposits assumed in the acquisition of 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 June 30, 2016 increased $302.333 million or 3.3% compared with June 30, 2015 and, on a linked quarter basis, decreased $5.580 million or 0.1%.

Excluding deposits assumed in the Tradition acquisition and new deposits generated at the acquired banking centers since the acquisition date, deposits at June 30, 2016 decreased $222.629 million or 1.3% compared with June 30, 2015 and, on a linked quarter basis, decreased $617.528 million or 3.5%.

Asset Quality

Nonperforming assets totaled $52.130 million or 0.27% of quarterly average interest-earning assets at June 30, 2016, compared with $35.119 million or 0.19% of quarterly average interest-earning assets at June 30, 2015, and $56.985 million or 0.29% of quarterly average interest-earning assets at March 31, 2016.  

The allowance for credit losses was 0.87% of total loans at June 30, 2016, 0.89% of total loans at June 30, 2015 and 0.87% of total loans at March 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 1.01% of remaining loans as of June 30, 2016, compared with 1.09% at June 30, 2015 and 1.03% at March 31, 2016⁽¹⁾.   

The provision for credit losses was $6.000 million for the three months ended June 30, 2016 compared with $500 thousand for the three months ended June 30, 2015 and $14.000 million for the three months ended March 31, 2016.  The provision for credit losses was $20.000 million for the six months ended June 30, 2016 compared with $1.750 million for the six months ended June 30, 2015.

Net charge-offs were $5.888 million for the three months ended June 30, 2016 compared with $491 thousand for the three months ended June 30, 2015 and $11.670 million for the three months ended March 31, 2016. Net charge-offs for the second quarter of 2016 were primarily comprised of one energy loan and an additional charge on one agricultural loan. Net charge-offs were  $17.558 million for the six months ended June 30, 2016 compared with $1.540 million for the six months ended June 30, 2015.

Conference Call

Prosperity's management team will host a conference call on Wednesday, July 27, 2016 at 10:30 a.m. Eastern Time (9:30 a.m. Central Time) to discuss Prosperity's second quarter 2016 earnings. Individuals and investment professionals may participate in the call by dialing 877-883-0383. The elite entry number is 7002992.

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 directly from Prosperity's home page by clicking the "Investor Relations" tab and then the "Presentations & Calls" link.

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 Prosperity believes that its presentation, together with the accompanying reconciliations, provides a 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 measures provide useful information by excluding certain items that may not be indicative of its core operating earnings and business outlook.  These non-GAAP measures should not be considered a substitute for, nor of greater importance than, GAAP basis measures and results and 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 13 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 third quarter cash dividend of $0.30 per share, to be paid on October 3, 2016 to all shareholders of record as of September 16, 2016.

Stock Repurchase Program

On January 27, 2016, Prosperity Bancshares announced a stock repurchase program under which up to 5%, or approximately 3.54 million shares, of its outstanding common stock may be acquired over the next twelve months at the discretion of management.  As of June 30, 2016, Prosperity Bancshares had repurchased an aggregate of 1.24 million shares of its common stock under this program at an average weighted average price of $40.98 per share. During the second quarter of 2016, Prosperity Bancshares repurchased 85 thousand shares of its common stock at an average weighted price of $45.40 per share. 

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 June 30, 2016, Prosperity Bancshares, Inc. ^® is a $21.796 billion Houston, 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.

Prosperity currently operates 245 full-service banking locations: 65 in the Houston area, including The Woodlands; 29 in the South Texas area including Corpus Christi and Victoria; 36 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.

Bryan/College Station Area -

Fort Worth -

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