Prosperity Bancshares, Inc.® Reports Record Second Quarter 2014 Earnings

HOUSTON, July 25, 2014 /PRNewswire/ -- Prosperity Bancshares, Inc.^® (NYSE: PB), the parent company of Prosperity Bank^® (collectively, "Prosperity"), reported net income for the quarter ended June 30, 2014, of $75.506 million or $1.08 per diluted common share, an increase in net income of $21.662 million or 40.2%, compared with $53.844 million, and an increase in diluted earnings per share of 21.3%, compared with $0.89 per diluted common share for the same period in 2013. 

"I am proud of the strong results our team has generated in the second quarter of 2014.  We achieved diluted earnings per share of $1.08 for the quarter, an increase of 21.3% compared with the second quarter of 2013, and continued to see good organic loan growth with our legacy bank. Excluding loans acquired in acquisitions, loans at June 30, 2014 grew 8.4% compared with June 30, 2013 and 3.0% (11.8% annualized) on a linked quarter basis," said David Zalman, Prosperity's Chairman and Chief Executive Officer. 

"We are finished with the operational integration of F&M Bank in Tulsa and look forward to building and growing strong relationships with customers and associates in the Tulsa and Dallas markets served by F&M.  The F&M Bank associates have been great to work with and we look forward to them assuming leadership roles in our company and helping take us forward," continued Zalman.   

"I continue to see growth and prosperity for our company.  Texas and Oklahoma continue to have some of the best economies in the United States and show positive economic and growth trends," concluded Zalman. 

Prosperity's management uses certain non−GAAP (generally accepted accounting principles) 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.  As a result of acquisitions, and thus purchase accounting adjustments, Prosperity uses certain non-GAAP measures and ratios that exclude the impact of these items to evaluate its allowance for credit losses to total loans (excluding acquired loans accounted for under FASB Accounting Standards Codification ("ASC") Topics 310-20, "Receivables-Nonrefundable Fees and Other Costs" and 310-30, "Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality").  Prosperity has included in this Earnings Release information related to these non-GAAP financial measures for the applicable periods presented.  Please refer to the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of these non-GAAP financial measures.

Results of operations for the three months ended June 30, 2014

For the three months ended June 30, 2014, net income was $75.506 million compared with $53.844 million for the same period in 2013.  Net income per diluted common share was $1.08 for the three months ended June 30, 2014, compared with $0.89 for the same period in 2013.  Net income for the quarter includes one-time merger expenses of $2.026 million.  Annualized returns on average assets, average common equity and average tangible common equity for the three months ended June 30, 2014 were 1.42%, 9.75% and 24.06%, respectively.  Prosperity's efficiency ratio (excluding credit loss provisions, net gains and losses on the sale of assets and securities and taxes) was 42.90% for the three months ended June 30, 2014.

Net interest income before provision for credit losses for the quarter ended June 30, 2014 increased 46.6% to $174.055 million, compared with $118.742 million during the same period in 2013.  The increase was primarily due to a 30.7% increase in average interest-earning assets for the same period.  The net interest margin on a tax equivalent basis for the three months ended June 30, 2014 increased to 3.83%, compared with 3.43% for the same period in 2013 and increased from 3.62% for the three months ended March 31, 2014.  Linked quarter net interest income before provision for credit losses increased 21.1% or $30.364 million to $174.055 million, compared with $143.691 million during the three months ended March 31, 2014, primarily due to the acquisition of F&M Bancorporation Inc. and its wholly-owned subsidiary, The F&M Bank and Trust Company (collectively, "F&M") and an $11.877 million increase in purchase accounting adjustments from purchased loans.  Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis decreased on a linked quarter basis from 3.33% for the quarter ended March 31, 2014 to 3.31% for the quarter ended June 30, 2014. 

Noninterest income increased $8.727 million or 34.5% to $34.001 million for the three months ended June 30, 2014, compared with $25.274 million for the same period in 2013.  This increase was primarily due to an increase in fees and service charges as a result of the additional accounts acquired from F&M and FVNB Corp. and its wholly-owned subsidiary, First Victoria National Bank (collectively, "FVNB").  Trust and brokerage income increased as a result of the additional products and services acquired through the acquisition of FVNB in 2013.  These increases were partially offset by a decrease in debit card income as a result of the Durbin Amendment that became effective on July 1, 2013.  As a result of this legislation, the Federal Reserve imposed limits on the amount of interchange, or swipe, fees that can be collected for financial institutions that have assets of $10 billion or more.  On a linked quarter basis, noninterest income increased $5.397 million or 18.9% primarily due to gains on the sale of assets, including the sale of certain bank buildings, gains on other real estate owned, life insurance proceeds received and increased fees and service charges resulting from the additional accounts acquired in the F&M acquisition consummated during the second quarter of 2014. 

Noninterest expense increased $27.396 million or 44.7% to $88.696 million for the three months ended June 30, 2014, compared with $61.300 million for the same period in 2013.  This increase was primarily due to additional noninterest expenses associated with the acquisitions of FVNB and F&M.  On a linked quarter basis, noninterest expense increased 24.9% or $17.662 million primarily due to the additional salaries and benefits and other noninterest expenses associated with the F&M acquisition.  Additionally, one-time pre-tax merger expenses of $2.026 million primarily related to the F&M acquisition were recorded during the second quarter of 2014. 

Loans at June 30, 2014 were $9.308 billion, an increase of $3.136 billion or 50.8%, compared with $6.172 billion at June 30, 2013, primarily due to the acquisitions of FVNB and F&M.  Linked quarter loans increased $1.556 billion or 20.1% from $7.752 billion at March 31, 2014 due mainly to the acquisition of F&M. 

Deposits at June 30, 2014 were $17.281 billion, an increase of $4.772 billion or 38.2%, compared with $12.509 billion at June 30, 2013, primarily due to the acquisitions of FVNB and F&M.  Linked quarter deposits increased $1.821 billion or 11.8% from $15.460 billion at March 31, 2014 due mainly to the acquisition of F&M. 

Average loans increased 54.8% or $3.354 billion to $9.468 billion for the quarter ended June 30, 2014, compared with $6.115 billion for the same period in 2013.  On a linked quarter basis, average loans increased 22.1% or $1.712 billion from $7.756 billion for the quarter ended March 31, 2014. Average deposits increased 35.3% or $4.483 billion to $17.164 billion for the quarter ended June 30, 2014, compared with $12.681 billion for the same period of 2013.   On a linked quarter basis, average deposits increased 11.6% or $1.782 billion from $15.382 billion for the quarter ended March 31, 2014. 

Results of operations for the six months ended June 30, 2014

For the six months ended June 30, 2014, net income was $142.643 million, compared with $103.149 million for the same period in 2013.  Net income per diluted common share was $2.10 for the six months ended June 30, 2014, compared with $1.76 for the same period in 2013.  Returns on average assets, average common equity and average tangible common equity, each on an annualized basis, for the six months ended June 30, 2014 were 1.43%, 9.72% and 24.12%, respectively.  Prosperity's efficiency ratio (excluding credit loss provisions, net gains and losses on the sale of assets and securities and taxes) was 42.51% for the six months ended June 30, 2014.

Net interest income before provision for credit losses for the six months ended June 30, 2014, increased 40.1% to $317.746 million, compared with $226.824 million during the same period in 2013.  The increase was primarily due to a 28.0% increase in average interest-earning assets over the same period.  The net interest margin on a tax equivalent basis for the six months ended June 30, 2014 increased to 3.73%, compared with 3.43% for the same period in 2013.  Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis increased to 3.32% for the six months ended June 30, 2014 from 3.12% for the same period in 2013. 

Noninterest income increased $13.890 million or 28.5% to $62.605 million for the six months ended June 30, 2014, compared with $48.715 million for the same period in 2013.  This increase was primarily due to the effects of the additional accounts acquired in the acquisitions of Coppermark Bancshares Inc. and its wholly-owned subsidiary, Coppermark Bank (collectively, "Coppermark"), FVNB and F&M completed in 2013 and 2014.  Additionally, trust and brokerage income increased as a result of the additional products and services acquired through the FVNB acquisition.  In addition, gain on the sale of assets increased $4.8 million during the six months ended June 30, 2014 compared to the same period in 2013, primarily due to a $2.224 million gain that was recorded during the first quarter of 2014 on the sale of the agent bank credit card and agent bank merchant processing business of Bankers Credit Card Services, Inc., a subsidiary acquired as part of the acquisition of Coppermark.

Noninterest expense increased $42.663 million or 36.4% to $159.730 million for the six months ended June 30, 2014, compared with $117.067 million for the same period in 2013.  This increase was primarily due to additional noninterest expenses associated with the acquisitions of Coppermark, FVNB and F&M.  Additionally, total noninterest expense for the six months ended June 30, 2014 included one-time pre-tax merger expenses of $2.757 million related primarily to the F&M and FVNB acquisitions. 

Average loans increased 51.4% or $2.925 billion to $8.617 billion for the six months ended June 30, 2014, compared with $5.692 billion for the same period in 2013.  Average deposits increased 33.2% or $4.054 billion to $16.277 billion for the six months ended June 30, 2014, compared with $12.223 billion for the same period of 2013.  

The table below provides detail on loans acquired and deposits assumed in the acquisitions of East Texas Financial Services Inc. and First Federal Bank Texas (collectively "East Texas Financial Services"), Coppermark, FVNB and F&M completed on January 1, 2013, April 1, 2013, November 1, 2013 and April 1, 2014, respectively:

As reflected in the table above, loan and deposit growth was impacted by the acquisitions of East Texas Financial Services, Coppermark, FVNB and F&M.  Excluding loans acquired in these acquisitions and new production at the acquired banking centers since the respective acquisition dates, loans at June 30, 2014 grew $446.437 million or 8.4% compared with June 30, 2013 and increased $164.746 million or 3.0% (11.8% annualized) on a linked quarter basis. Excluding deposits assumed in these acquisitions and new deposits generated at the acquired banking centers since the respective acquisition dates, deposits at June 30, 2014 grew $693.473 million or 6.1% compared with June 30, 2013 and decreased $177.366 million or 1.5% on a linked quarter basis.

At June 30, 2014, Prosperity had $21.2 billion in total assets, $9.308 billion in loans and $17.281 billion in deposits. Assets, loans and deposits at June 30, 2014 increased by 30.6%, 50.8% and 38.2%, respectively, compared with their respective levels at June 30, 2013.

Asset Quality

Nonperforming assets totaled $28.521 million or 0.15% of quarterly average earning assets at June 30, 2014, compared with $14.864 million or 0.11% of quarterly average earning assets at June 30, 2013, and $18.696 million or 0.11% of quarterly average earning assets at March 31, 2014.  The allowance for credit losses was 0.79% of total loans at June 30, 2014, 0.91% of total loans at June 30, 2013 and 0.87% of total loans at March 31, 2014.  Excluding loans acquired that are accounted for under ASC Topics 310-20 and 310-30, the allowance for credit losses was 1.15% of remaining loans as of June 30, 2014, compared with 1.18% at both June 30, 2013 and March 31, 2014.  Refer to the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of this non-GAAP financial measure. 

The provision for credit losses was $6.325 million for the three months ended June 30, 2014, compared with $600 thousand for the three months ended March 31, 2014 and $2.550 million for the three months ended June 30, 2013.  The provision for credit losses was $6.925 million for the six months ended June 30, 2014, compared with $5.350 million for the six months ended June 30, 2013. 

Net charge offs were $155 thousand for the three months ended June 30, 2014, compared with $786 thousand for the three months ended March 31, 2014 and $1.423 million for the three months ended June 30, 2013.  Net charge offs were $941 thousand for the six months ended June 30, 2014, compared with $1.738 million for the six months ended June 30, 2013.

Conference Call

Prosperity's management team will host a conference call on Friday, July 25, 2014 at 10:30 a.m. Eastern Time (9:30 a.m. Central Time) to discuss Prosperity's second quarter 2014 earnings. Individuals and investment professionals may participate in the call by dialing 877-883-0383.  The elite entry number is 8369040.

Alternatively, individuals may listen to the live webcast of the presentation by visiting Prosperity's website at http://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.

Acquisition of F&M Bancorporation

On April 1, 2014, Prosperity completed the acquisition of F&M Bancorporation Inc. ("FMBC") and its wholly-owned subsidiary, The F&M Bank & Trust Company ("F&M") headquartered in Tulsa, Oklahoma.  F&M Bank operated 13 banking offices: 9 in Tulsa, Oklahoma and surrounding areas; 3 in Dallas, Texas; and 1 loan production office in Oklahoma City, Oklahoma.  As of March 31, 2014, FMBC, on a consolidated basis, reported total assets of $2.412 billion, total loans of $1.738 billion and total deposits of $2.267 billion.

Pursuant to the terms of the acquisition agreement, Prosperity issued 3,298,022 shares of Prosperity common stock plus $34.240 million in cash for all outstanding shares of FMBC capital stock, which resulted in goodwill of $214.583 million as of June 30, 2014.  The goodwill balance as of June 30, 2014 does not include subsequent fair value adjustments that are still being finalized. 

Acquisition of FVNB Corp.

On November 1, 2013, Prosperity completed the acquisition of FVNB Corp. and its wholly-owned subsidiary, First Victoria National Bank headquartered in Victoria, Texas.  First Victoria National Bank operated 33 banking offices: 4 in Victoria, Texas; 7 in the South Texas area including Corpus Christi; 6 in the Bryan/College Station area; 5 in the Central Texas area including New Braunfels; and 11 in the Houston area including The Woodlands and Huntsville.  As of September 30, 2013, FVNB, on a consolidated basis, reported total assets of $2.473 billion, total loans of $1.648 billion and total deposits of $2.195 billion. 

Pursuant to the terms of the acquisition agreement, Prosperity issued 5,570,667 shares of Prosperity common stock plus $91.250 million in cash for all outstanding shares of FVNB Corp. capital stock, which resulted in goodwill of $331.090 million as of June 30, 2014.  Additionally, the Company recognized $18.411 million of core deposit intangibles as of June 30, 2014.  These goodwill and core deposit intangible balances as of June 30, 2014 do not include subsequent fair value adjustments that are still being finalized. 

Acquisition of Coppermark Bancshares, Inc.

On April 1, 2013, Prosperity completed the acquisition of Coppermark Bancshares, Inc. and its wholly-owned subsidiary, Coppermark Bank headquartered in Oklahoma City, Oklahoma. Coppermark operated 9 full-service banking offices: 6 in Oklahoma City, Oklahoma and surrounding areas and 3 in the Dallas, Texas area. As of March 31, 2013, Coppermark reported, on a consolidated basis, total assets of $1.248 billion, total loans of $847.558 million and total deposits of $1.120 billion.

Pursuant to the terms of the acquisition agreement, Prosperity issued 3,258,718 shares of Prosperity common stock plus $60.0 million in cash for all outstanding shares of Coppermark Bancshares capital stock, which resulted in goodwill of $117.653 million.  Additionally, the Company recognized $1.514 million of core deposit intangibles.   

Acquisition of East Texas Financial Services, Inc.

On January 1, 2013, Prosperity completed the acquisition of East Texas Financial Services, Inc. (OTC BB: FFBT) and its wholly-owned subsidiary, First Federal Bank Texas ("Firstbank"). Firstbank operated 4 banking offices in the Tyler MSA, including 3 locations in Tyler, Texas and 1 location in Gilmer, Texas. As of December 31, 2012, East Texas Financial Services reported, on a consolidated basis, total assets of $165.955 million, total loans of $129.307 million and total deposits of $112.293 million.

Pursuant to the terms of the acquisition agreement, Prosperity issued 530,940 shares of Prosperity common stock for all outstanding shares of East Texas Financial Services capital stock, which resulted in goodwill of $15.007 million.

Prosperity Bancshares, Inc. ^®

As of June 30, 2014, Prosperity Bancshares Inc. ^®, named America's Best Bank for 2014 by Forbes, is a $21.248 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 http://www.prosperitybankusa.com, Retail Brokerage Services, Credit Cards, MasterMoney Debit Cards, 24 hour voice response banking, Trust and Wealth Management, Mortgage Services and Mobile Banking. Prosperity currently operates 246 full-service banking locations: 62 in the Houston area, including The Woodlands; 30 in the South Texas area including Corpus Christi and Victoria; 37 in the Dallas/Fort Worth area; 22 in the East Texas area; 30 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 9 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 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 fluctuations and interest rate fluctuations; and weather.  These and various other factors are discussed in Prosperity's Annual Report on Form 10-K for the year ended December 31, 2013 and other reports and statements Prosperity 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.

Prosperity Bancshares, Inc.^®
Notes to Selected Financial Data (Unaudited)
(Dollars and share amounts in thousands, except per share data)

Consolidated Financial Highlights

NOTES TO SELECTED FINANCIAL DATA

Prosperity's management uses certain non−GAAP (generally accepted accounting principles) 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 for internal planning and forecasting purposes. In addition, due to the application of purchase accounting, Prosperity uses certain non-GAAP measures and ratios that exclude the impact of these items to evaluate its allowance for credit losses to total loans (excluding acquired loans accounted for under ASC Topics 310-20 and 310-30).  Prosperity has included in this Earnings Release information relating to these non-GAAP financial measures for the applicable periods presented.  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 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.

Prosperity Bancshares, Inc.^®
Notes to Selected Financial Data (Unaudited)
(Dollars in thousands)

SOURCE Prosperity Bancshares, Inc.