pb-10q_20210331.htm

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, 2021

☐	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 “accelerated filer”, “large 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 3, 2021, there were 92,939,039 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, 2021 (unaudited) and December 31, 2020	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 (unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	50

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
Signatures		53

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2021			2020
	(unaudited)
	(Dollars in thousands, except par value)
ASSETS
Cash and due from banks	$	1,947,235		$	1,342,996
Federal funds sold		8,986			553
Total cash and cash equivalents		1,956,221			1,343,549
Available for sale securities, at fair value		638,355			651,514
Held to maturity securities, at cost (fair value of $9,529,602 and $8,039,142, respectively)		9,449,647			7,891,306
Total securities		10,088,002			8,542,820
Loans held for sale		20,991			46,777
Loans held for investment		17,345,506			17,357,788
Loans held for investment - Warehouse Purchase Program		2,272,389			2,842,379
Total loans		19,638,886			20,246,944
Less: allowance for credit losses on loans		(307,210	)		(316,068	)
Loans, net		19,331,676			19,930,876
Accrued interest receivable		76,634			82,068
Goodwill		3,231,636			3,231,636
Core deposit intangibles, net		70,304			73,235
Bank premises and equipment, net		326,970			323,572
Other real estate owned		462			10,593
Bank owned life insurance (BOLI)		324,378			324,356
Federal Home Loan Bank of Dallas stock		8,901			8,901
Other assets		143,234			187,669
TOTAL ASSETS	$	35,558,418		$	34,059,275
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	9,820,445		$	9,151,233
Interest-bearing		18,942,660			18,209,259
Total deposits		28,763,105			27,360,492
Fed funds purchased and other borrowings		—			—
Securities sold under repurchase agreements		377,106			389,583
Subordinated notes		—			—
Accrued interest payable		2,385			3,462
Allowance for credit losses on off-balance sheet credit exposures		29,947			29,947
Other liabilities		164,029			145,122
Total liabilities		29,336,572			27,928,606
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; 92,928,539 shares issued and outstanding at March 31, 2021; 92,570,789 shares issued and outstanding at December 31, 2020		92,929			92,571
Capital surplus		3,637,188			3,634,140
Retained earnings		2,490,963			2,403,189
Accumulated other comprehensive income —net unrealized gain on available for sale securities, net of tax expense of $204 and $205, respectively		766			769
Total shareholders’ equity		6,221,846			6,130,669
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	35,558,418		$	34,059,275

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended
	March 31,
	2021			2020
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	233,075		$	247,243
Securities		38,677			48,282
Federal funds sold and other earning assets		351			713
Total interest income		272,103			296,238
INTEREST EXPENSE:
Deposits		17,362			35,018
Other borrowings		—			2,932
Securities sold under repurchase agreements		159			757
Subordinated notes		—			1,500
Total interest expense		17,521			40,207
NET INTEREST INCOME		254,582			256,031
PROVISION FOR CREDIT LOSSES		—			—
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		254,582			256,031
NONINTEREST INCOME:
Nonsufficient funds (NSF) fees		6,687			9,443
Credit card, debit card and ATM card income		8,031			7,474
Service charges on deposit accounts		5,978			6,104
Trust income		2,837			2,662
Mortgage income		3,307			2,010
Brokerage income		711			650
Net loss on sale or write down of assets		(79	)		(385	)
Other		6,536			6,430
Total noninterest income		34,008			34,388
NONINTEREST EXPENSE:
Salaries and employee benefits		80,037			77,282
Net occupancy and equipment		7,833			8,980
Credit and debit card, data processing and software amortization		8,233			11,421
Regulatory assessments and FDIC insurance		2,670			2,078
Core deposit intangibles amortization		2,931			3,363
Depreciation		4,540			4,768
Communications		2,899			3,195
Net other real estate income		(643	)		(84	)
Merger related expenses		—			544
Other		10,576			13,194
Total noninterest expense		119,076			124,741
INCOME BEFORE INCOME TAXES		169,514			165,678
PROVISION FOR INCOME TAXES		36,205			34,830
NET INCOME	$	133,309		$	130,848
EARNINGS PER SHARE:
Basic	$	1.44		$	1.39
Diluted	$	1.44		$	1.39

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended
	March 31,
	2021			2020
	(Dollars in thousands)
Net income	$	133,309		$	130,848
Other comprehensive loss, before tax:
Securities available for sale:
Change in unrealized losses during the period		(4	)		(4,183	)
Total other comprehensive loss		(4	)		(4,183	)
Deferred tax benefit related to other comprehensive loss		1			878
Other comprehensive loss, net of tax		(3	)		(3,305	)
Comprehensive income	$	133,306		$	127,543

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

													Accumulated
													Other			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, 2019		94,746,019		$	94,746		$	3,734,519		$	2,140,968		$	602		$	5,970,835
Cumulative change in accounting principle upon adoption of ASU 2016-13⁽¹⁾ and other											(92,860	)					(92,860	)
BALANCE AT JANUARY 1, 2020 (AS ADJUSTED FOR CHANGE IN ACCOUNTING STANDARD)		94,746,019			94,746			3,734,519			2,048,108			602			5,877,975
Net income											130,848						130,848
Other comprehensive loss														(3,305	)		(3,305	)
Common stock issued in connection with the issuance of restricted stock awards, net		(2,750	)		(3	)		3									—
Common stock repurchase		(2,091,557	)		(2,092	)		(107,969	)								(110,061	)
Stock based compensation expense								3,340									3,340
Cash dividends declared, $0.46 per share											(43,223	)					(43,223	)
BALANCE AT MARCH 31, 2020		92,651,712			92,651			3,629,893			2,135,733			(2,703	)		5,855,574

BALANCE AT DECEMBER 31, 2020		92,570,789		$	92,571		$	3,634,140		$	2,403,189		$	769		$	6,130,669
Net income											133,309						133,309
Other comprehensive loss														(3	)		(3	)
Common stock issued in connection with the issuance of restricted stock awards, net		357,750			358			(358	)								—
Stock based compensation expense								3,406									3,406
Cash dividends declared, $0.49 per share											(45,535	)					(45,535	)
BALANCE AT MARCH 31, 2021		92,928,539		$	92,929		$	3,637,188		$	2,490,963		$	766		$	6,221,846

(1)	ASU 2016-13 became effective for the Company on January 1, 2020.

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended
	March 31,
	2021			2020
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	133,309		$	130,848
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization		7,471			8,131
Net amortization of premium on investments		12,844			8,005
Net gain on sale of other real estate and repossessed assets		(887	)		(130	)
Net loss on sale or write down of premises and equipment		79			385
Net accretion of discount on loans		(16,341	)		(28,482	)
Net amortization of premium on deposits		(507	)		(2,270	)
Gain on sale of loans		(3,029	)		(1,360	)
Proceeds from sale of loans held for sale		110,602			96,119
Originations of loans held for sale		(82,777	)		(79,377	)
Stock based compensation expense		3,406			3,340
Decrease in accrued interest receivable and other assets		50,582			41,497
Increase in accrued interest payable and other liabilities		15,995			33,225
Net cash provided by operating activities		230,747			209,931

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of held to maturity securities		697,733			500,666
Purchase of held to maturity securities		(2,268,954	)		(206,563	)
Proceeds from maturities and principal paydowns of available for sale securities		313,192			4,011,040
Purchase of available for sale securities		(300,000	)		(4,042,771	)
Originations of WPP loans		(10,595,636	)		(6,196,020	)
Proceeds from pay-offs of WPP		11,165,626			6,035,020
Net decrease in loans held for investment		20,125			23,161
Purchase of bank premises and equipment		(8,020	)		(6,329	)
Proceeds from sale of bank premises, equipment and other real estate		10,968			2,180
Proceeds from insurance claims		1,783			—
Net cash (used in) provided by investing activities		(963,183	)		120,384

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits		669,212			(302,571	)
Net increase (decrease) in interest-bearing deposits		733,908			(68,534	)
Net proceeds of other short-term borrowings		—			35,000
Repayments of other long-term borrowings		—			(301	)
Net decrease in securities sold under repurchase agreements		(12,477	)		(32,599	)
Repurchase of common stock		—			(110,061	)
Payments of cash dividends		(45,535	)		(43,223	)
Net cash provided by (used in) financing activities		1,345,108			(522,289	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		612,672			(191,974	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,343,549			574,108
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,956,221		$	382,134

NONCASH ACTIVITIES:
Acquisition of real estate through foreclosure of collateral	$	281		$	112

SUPPLEMENTAL INFORMATION:
Interest paid	$	18,598		$	40,062

See notes to consolidated financial statements

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(UNAUDITED)

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, 2020. Operating results for the three-month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 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,
	2021				2020
	Amount		Per Share Amount		Amount		Per Share Amount
	(Amounts in thousands, except per share data)
Net income	$	133,309			$	130,848
Basic:
Weighted average shares outstanding		92,854	$	1.44		94,371	$	1.39
Diluted:
Weighted average shares outstanding		92,854	$	1.44		94,371	$	1.39

As of March 31, 2021, all stock options have been exercised and there are no options outstanding. There were no stock options exercisable during the three months ended March 31, 2021 or 2020 that would have had an anti-dilutive effect on the above computation.

3. NEW ACCOUNTING STANDARDS

Accounting Standards Updates (“ASU”)

ASU 2020-04, "Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting - Accounting Standards Codification (“ASC”) Topic 848." ASU 2020-04 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. The guidance allows for companies to: (i) account for certain contract modifications as a continuation of the existing contract without additional analysis; (ii) continue hedge accounting when certain critical terms of a hedging relationship change and assess effectiveness in ways that disregard certain potential sources of ineffectiveness; and (iii) make a one-time sale and/or transfer of certain debt securities from held-to-maturity to available-for-sale or trading. This ASU is available for adoption effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within ASU 2020-04, the amendments must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The one-time election to sell and/or transfer debt securities classified as held-to-maturity may be made at any time after March 12, 2020. The Company anticipates this ASU will simplify any modifications it executes between the selected start date (yet to be determined) and December 31, 2022 that are directly related to the LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees and costs. ASU 2020-04 is not expected to 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, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations	$	600,440	$	2,171	$	(1,192	)	$	601,419
Mortgage-backed securities		36,945		497		(506	)		36,936
Total	$	637,385	$	2,668	$	(1,698	)	$	638,355
Held to Maturity
States and political subdivisions	$	144,517	$	5,679	$	(41	)	$	150,155
Collateralized mortgage obligations		76,073		1,584		(106	)		77,551
Mortgage-backed securities		9,229,057		127,519		(54,680	)		9,301,896
Total	$	9,449,647	$	134,782	$	(54,827	)	$	9,529,602

	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations	$	611,353	$	1,601	$	(620	)	$	612,334
Mortgage-backed securities		39,187		539		(546	)		39,180
Total	$	650,540	$	2,140	$	(1,166	)	$	651,514
Held to Maturity
States and political subdivisions	$	166,175	$	8,341	$	(32	)	$	174,484
Collateralized mortgage obligations		96,000		1,669		(219	)		97,450
Mortgage-backed securities		7,629,131		144,710		(6,633	)		7,767,208
Total	$	7,891,306	$	154,720	$	(6,884	)	$	8,039,142

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, 2021, 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, 2021, 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, 2021, the Company’s municipal securities represent 1.4% 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, 2021, 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:

	March 31, 2021
	Less than 12 Months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations	$	141,726	$	(1,181	)	$	1,722	$	(11	)	$	143,448	$	(1,192	)
Mortgage-backed securities		5		—			25,049		(506	)		25,054		(506	)
Total	$	141,731	$	(1,181	)	$	26,771	$	(517	)	$	168,502	$	(1,698	)
Held to Maturity
States and political subdivisions	$	3,177	$	(41	)	$	—	$	—		$	3,177	$	(41	)
Collateralized mortgage obligations		5,583		(58	)		3,555		(48	)		9,138		(106	)
Mortgage-backed securities		2,763,743		(54,367	)		27,136		(313	)		2,790,879		(54,680	)
Total	$	2,772,503	$	(54,466	)	$	30,691	$	(361	)	$	2,803,194	$	(54,827	)

	December 31, 2020
	Less than 12 Months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations	$	254,318	$	(608	)	$	2,230	$	(12	)	$	256,548	$	(620	)
Mortgage-backed securities		74		—			26,151		(546	)		26,225		(546	)
Total	$	254,392	$	(608	)	$	28,381	$	(558	)	$	282,773	$	(1,166	)
Held to Maturity
States and political subdivisions	$	2,746	$	(32	)	$	—	$	—		$	2,746	$	(32	)
Collateralized mortgage obligations		26,141		(219	)		—		—			26,141		(219	)
Mortgage-backed securities		674,795		(6,283	)		29,900		(350	)		704,695		(6,633	)
Total	$	703,682	$	(6,534	)	$	29,900	$	(350	)	$	733,582	$	(6,884	)

At March 31, 2021 and December 31, 2020, there were 74 securities and 64 securities, respectively, in an unrealized loss position for 12 months or more.

The amortized cost and fair value of investment securities at March 31, 2021, by contractual maturity, are shown below. 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.

	Held to Maturity				Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	20,703	$	20,807	$	—	$	—
Due after one year through five years		85,425		89,465		—		—
Due after five years through ten years		30,440		31,740		—		—
Due after ten years		7,949		8,143		—		—
Subtotal		144,517		150,155		—		—
Mortgage-backed securities and collateralized mortgage obligations		9,305,130		9,379,447		637,385		638,355
Total	$	9,449,647	$	9,529,602	$	637,385	$	638,355

The Company recorded no gain or loss on the sale of securities for the three months ended March 31, 2021 and 2020. As of March 31, 2021, the Company did not own any non-agency collateralized mortgage obligations.

At March 31, 2021 and December 31, 2020, 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 $6.93 billion and $6.11 billion and a fair value of $7.02 billion and $6.23 billion at March 31, 2021 and December 31, 2020, 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:

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Residential mortgage loans held for sale	$	20,991	$	46,777

Commercial and industrial		3,738,274		3,674,200
Real estate:
Construction, land development and other land loans		2,031,355		1,956,960
1-4 family residential (includes home equity)		4,843,724		4,710,761
Commercial real estate (includes multi-family residential)		5,858,475		6,078,764
Farmland		401,282		410,931
Agriculture		170,501		170,421
Consumer and other		301,895		355,751
Total loans held for investment, excluding Warehouse Purchase Program		17,345,506		17,357,788
Warehouse Purchase Program		2,272,389		2,842,379
Total loans, including Warehouse Purchase Program	$	19,638,886	$	20,246,944

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 73.3% of the Company’s total loan portfolio, excluding Warehouse Purchase Program loans, at March 31, 2021. As of March 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, loans outstanding to directors, officers and their affiliates totaled $1.6 million and $1.7 million, 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 the three months ended March 31, 2021			As of and for the year ended December 31, 2020
	(Dollars in thousands)
Beginning balance on January 1	$	1,732		$	4,152
New loans		—			813
Transfers		—			—
Repayments		(87	)		(3,233	)
Ending balance	$	1,645		$	1,732

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:

	March 31, 2021
	Loans Past Due and Still Accruing
	30-89 Days		90 or More Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
	(Dollars in thousands)
Construction, land development and other land loans	$	5,086	$	56	$	5,142	$	1,636	$	2,024,577	$	2,031,355
Warehouse Purchase Program loans		—		—		—		—		2,272,389		2,272,389
Agriculture and agriculture real estate (includes farmland)		369		—		369		534		570,880		571,783
1-4 family (includes home equity) ⁽¹⁾		6,678		32		6,710		11,425		4,846,580		4,864,715
Commercial real estate (includes multi-family residential)		22,455		225		22,680		16,671		5,819,124		5,858,475
Commercial and industrial		9,485		—		9,485		11,208		3,717,581		3,738,274
Consumer and other		872		—		872		1,551		299,472		301,895
Total	$	44,945	$	313	$	45,258	$	43,025	$	19,550,603	$	19,638,886

	December 31, 2020
	Loans Past Due and Still Accruing
	30-89 Days		90 or More Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
	(Dollars in thousands)
Construction, land development and other land loans	$	14,820	$	236	$	15,056	$	1,262	$	1,940,642	$	1,956,960
Warehouse Purchase Program loans		—		—		—		—		2,842,379		2,842,379
Agriculture and agriculture real estate (includes farmland)		538		—		538		1,344		579,470		581,352
1-4 family (includes home equity) ⁽¹⁾		7,527		36		7,563		15,999		4,733,976		4,757,538
Commercial real estate (includes multi-family residential)		17,039		1,409		18,448		10,906		6,049,410		6,078,764
Commercial and industrial		14,383		—		14,383		16,084		3,643,733		3,674,200
Consumer and other		380		18		398		1,590		353,763		355,751
Total	$	54,687	$	1,699	$	56,386	$	47,185	$	20,143,373	$	20,246,944

(1)	Includes $21.0 million and $46.8 million of residential mortgage loans held for sale at March 31, 2021 and December 31, 2020, respectively.

The following table presents information regarding nonperforming assets as of the dates indicated:

	March 31, 2021			December 31, 2020
	(Dollars in thousands)
Nonaccrual loans ^{(1) (2)}	$	43,025		$	47,185
Accruing loans 90 or more days past due		313			1,699
Total nonperforming loans		43,338			48,884
Repossessed assets		362			93
Other real estate		462			10,593
Total nonperforming assets	$	44,162		$	59,570

Nonperforming assets to total loans and other real estate		0.22	%		0.29	%
Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate		0.25	%		0.34	%

(1)	Includes troubled debt restructurings of $8.7 million and $11.3 million as of March 31, 2021 and December 31, 2020, respectively.

(2)	There were no nonperforming or troubled debt restructurings of warehouse lines of credit or Warehouse Purchase Program loans for the periods presented.

The Company had $44.2 million in nonperforming assets at March 31, 2021 compared with $59.6 million at December 31, 2020. Nonperforming assets were 0.22% of total loans and other real estate at March 31, 2021 and 0.29% of total loans and other real estate at December 31, 2020.

If interest on nonaccrual loans had been accrued under the original loan terms, approximately $982 thousand and $869 thousand would have been recorded as income for the three months ended March 31, 2021 and 2020, respectively. The Company had $43.0 million in nonaccrual loans at March 31, 2021 compared with $58.2 million at March 31, 2020.

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 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, 2021 and December 31, 2020.

	March 31, 2021			December 31, 2020
	(Dollars in thousands)
PCD loans:
Outstanding balance	$	163,191		$	195,631
Discount		(11,157	)		(14,216	)
Recorded investment	$	152,034		$	181,415

Changes in the accretable yield for acquired PCD loans for the three months ended March 31, 2021 and 2020 were as follows:

	Three Months Ended March 31,
	2021			2020
	(Dollars in thousands)
Balance at beginning of period	$	14,216		$	35,654
Adjustments		—			(175	)
Accretion charge-offs		(32	)		—
Accretion		(3,027	)		(6,019	)
Balance at March 31,	$	11,157		$	29,460

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 non-performing or impaired. The PCD discount reflected above as of March 31, 2021, 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, 2021 and December 31, 2020.

	March 31, 2021			December 31, 2020
	(Dollars in thousands)
Non-PCD loans:
Outstanding balance	$	3,339,670		$	3,869,205
Discount		(26,285	)		(39,587	)
Recorded investment	$	3,313,385		$	3,829,618

Changes in the discount accretion for Non-PCD loans for the three months ended March 31, 2021 and 2020 were as follows:

	Three Months Ended March 31,
	2021			2020
	(Dollars in thousands)
Balance at beginning of period	$	39,587		$	110,130
Adjustments		—			—
Accretion charge-offs		11			(54	)
Accretion		(13,313	)		(22,463	)
Balance at March 31,	$	26,285		$	87,613

Credit Quality Indicators. As part of the on-going 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.

The following tables present loans by risk grade, by category of loan and year of origination/renewal at March 31, 2021.

	Term Loans
	Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
	(Dollars in thousands)

Construction, Land Development and Other Land Loans
Grade 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 2		—		—		—		—		83		175		—		—		258
Grade 3		175,067		777,262		382,469		116,663		135,436		54,457		123,027		—		1,764,381
Grade 4		3,127		89,839		91,719		29,032		8,761		9,294		11,335		—		243,107
Grade 5		2,625		11,729		491		813		76		112		—		—		15,846
Grade 6		—		4,442		—		—		—		1,192		—		—		5,634
Grade 7		—		397		—		1,179		—		59		—		—		1,635
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		—		154		102		238		—		—		—		494
Total	$	180,819	$	883,669	$	474,833	$	147,789	$	144,594	$	65,289	$	134,362	$	—	$	2,031,355

Agriculture and Agriculture Real Estate (includes Farmland)
Grade 1	$	463	$	1,532	$	377	$	161	$	174	$	—	$	8,785	$	90	$	11,582
Grade 2		—		10		—		—		344		1,393		23		—		1,770
Grade 3		23,622		116,759		64,809		51,000		35,448		118,139		79,549		—		489,326
Grade 4		5,365		11,268		3,883		5,227		2,869		20,396		10,055		8		59,071
Grade 5		—		2,386		568		98		—		—		2,538		—		5,590
Grade 6		—		1,281		42		59		—		836		—		—		2,218
Grade 7		—		146		61		4		—		322		—		—		533
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		955		193		274		—		271		—		—		1,693
Total	$	29,450	$	134,337	$	69,933	$	56,823	$	38,835	$	141,357	$	100,950	$	98	$	571,783

1-4 Family (includes Home Equity) ⁽¹⁾
Grade 1	$	—	$	116	$	—	$	—	$	—	$	—	$	—	$	—	$	116
Grade 2		77		415		306		874		433		6,741		950		—		9,796
Grade 3		396,356		1,408,886		778,786		508,016		389,576		1,099,044		115,347		1,530		4,697,541
Grade 4		4,588		11,960		21,366		25,480		26,267		46,169		2,605		—		138,435
Grade 5		—		315		318		154		501		2,438		247		—		3,973
Grade 6		—		21		65		2		2		2,405		—		—		2,495
Grade 7		—		115		989		1,699		2,483		5,532		—		—		10,818
Grade 8		—		—		—		—		—		38		—		—		38
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		—		—		—		—		1,503		—		—		1,503
Total	$	401,021	$	1,421,828	$	801,830	$	536,225	$	419,262	$	1,163,870	$	119,149	$	1,530	$	4,864,715

	Term Loans
	Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
	(Dollars in thousands)

Commercial Real Estate (includes Multi-Family Residential)
Grade 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 2		596		8,826		1,444		—		6,937		1,069		—		—		18,872
Grade 3		135,632		682,123		815,581		799,073		592,083		1,217,452		90,900		2,425		4,335,269
Grade 4		32,617		121,746		120,200		186,136		194,686		384,973		7,710		—		1,048,068
Grade 5		—		47,109		15,471		53,977		25,264		143,502		2,305		—		287,628
Grade 6		—		20,451		166		1,238		22,159		33,684		—		—		77,698
Grade 7		—		16		—		1,201		14		9,335		1,439		—		12,005
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		35,636		25,238		6,649		664		—		10,748		—		—		78,935
Total	$	204,481	$	905,509	$	959,511	$	1,042,289	$	841,143	$	1,800,763	$	102,354	$	2,425	$	5,858,475

Commercial and Industrial
Grade 1	$	543,536	$	610,253	$	3,274	$	3,138	$	678	$	799	$	22,920	$	160	$	1,184,758
Grade 2		1,398		970		8,631		510		1,085		2,153		8,504		—		23,251
Grade 3		227,659		379,975		265,630		199,222		91,252		169,696		705,395		917		2,039,746
Grade 4		7,334		54,622		58,081		47,689		9,982		17,124		140,212		975		336,019
Grade 5		33		10,735		19,074		4,655		1,408		85		7,943		81		44,014
Grade 6		451		1,792		74		168		61		3,513		8,426		—		14,485
Grade 7		163		462		288		7,710		141		1,160		20,163		—		30,087
Grade 8		—		—		—		—		—		5		—		—		5
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		41,441		808		11,170		10,131		108		2,251		—		65,909
Total	$	780,574	$	1,100,250	$	355,860	$	274,262	$	114,738	$	194,643	$	915,814	$	2,133	$	3,738,274

Consumer and Other
Grade 1	$	5,968	$	26,100	$	6,637	$	2,683	$	1,903	$	1,150	$	1,496	$	—	$	45,937
Grade 2		—		1,267		621		384		30,443		1,429		537		—		34,681
Grade 3		20,551		36,543		37,667		22,455		10,995		11,321		49,164		—		188,696
Grade 4		8		5,786		128		340		72		141		10,947		—		17,422
Grade 5		—		14		—		63		17		—		—		—		94
Grade 6		—		—		—		—		—		—		9,997		—		9,997
Grade 7		—		—		1,529		14		3		22		—		—		1,568
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		3,500		—		—		—		—		—		—		3,500
Total	$	26,527	$	73,210	$	46,582	$	25,939	$	43,433	$	14,063	$	72,141	$	—	$	301,895

	Term Loans
	Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
	(Dollars in thousands)

Warehouse Purchase Program
Grade 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 2		—		—		—		—		—		—		—		—		—
Grade 3		2,272,389		—		—		—		—		—		—		—		2,272,389
Grade 4		—		—		—		—		—		—		—		—		—
Grade 5		—		—		—		—		—		—		—		—		—
Grade 6		—		—		—		—		—		—		—		—		—
Grade 7		—		—		—		—		—		—		—		—		—
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		—		—		—		—		—		—		—		—
Total	$	2,272,389	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	2,272,389

Total
Grade 1	$	549,967	$	638,001	$	10,288	$	5,982	$	2,755	$	1,949	$	33,201	$	250	$	1,242,393
Grade 2		2,071		11,488		11,002		1,768		39,325		12,960		10,014		—		88,628
Grade 3		3,251,276		3,401,548		2,344,942		1,696,429		1,254,790		2,670,109		1,163,382		4,872		15,787,348
Grade 4		53,039		295,221		295,377		293,904		242,637		478,097		182,864		983		1,842,122
Grade 5		2,658		72,288		35,922		59,760		27,266		146,137		13,033		81		357,145
Grade 6		451		27,987		347		1,467		22,222		41,630		18,423		—		112,527
Grade 7		163		1,136		2,867		11,807		2,641		16,430		21,602		—		56,646
Grade 8		—		—		—		—		—		43		—		—		43
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		35,636		71,134		7,804		12,210		10,369		12,630		2,251		—		152,034
Total	$	3,895,261	$	4,518,803	$	2,708,549	$	2,083,327	$	1,602,005	$	3,379,985	$	1,444,770	$	6,186	$	19,638,886

(1)	Includes $21.0 million of residential mortgage loans held for sale at March 31, 2021.

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, 2021 for estimated losses in the Company’s loan portfolio. The amount of the allowance for credit losses 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 the borrower’s 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 probable 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:

•

for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of collateral;

•

for commercial real estate loans and multifamily residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;

•

for construction, land development and other land loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio;

•

for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral;

•

for the Warehouse Purchase Program, the capitalization and liquidity of the mortgage banking client, the operating experience, the client’s satisfactory underwriting of purchased loans and the consistent timeliness by client of loan resale to investors;

•

for agriculture real estate loans, the experience and financial capability of the borrower, projected debt service coverage of the operations of the borrower and loan to value ratio; and

•

for non-real estate agriculture loans, the operating results, experience and financial capability of the borrower, historical and expected market conditions and the value, nature and marketability of collateral.

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 the borrower’s ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, general economic conditions and 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 allocated to it. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The Company uses this information to establish the amount of the general valuation allowance.

The following table details activity in the allowance for credit losses on loans by category of loan for the three months ended March 31, 2021 and 2020.

	Construction, Land Development and Other Land Loans		Agriculture and Agriculture Real Estate (includes Farmland)			1-4 Family (includes Home Equity)			Commercial Real Estate (includes Multi-Family Residential)			Commercial and Industrial			Consumer and Other			Total
	(Dollars in thousands)
Allowance for credit losses:
Three Months Ended
Balance December 31, 2020	$	44,892	$	7,824		$	44,555		$	87,857		$	116,795		$	14,145		$	316,068
Provision for credit losses		5,221		312			3,194			4,572			(9,816	)		(3,483	)		—
Charge-offs		—		(38	)		(54	)		(6,589	)		(1,754	)		(935	)		(9,370	)
Recoveries		5		5			7			—			170			325			512
Net charge-offs		5		(33	)		(47	)		(6,589	)		(1,584	)		(610	)		(8,858	)
Balance March 31, 2021	$	50,118	$	8,103		$	47,702		$	85,840		$	105,395		$	10,052		$	307,210

Allowance for credit losses:
Three Months Ended
Balance December 31, 2019	$	14,654	$	2,971		$	15,277		$	12,332		$	40,445		$	1,790		$	87,469
Impact of adoption ASU 2016-13		14,075		2,797			8,267			48,990			139,624			26,785			240,538
Provision for credit losses		—		—			—			—			—			—			—
Charge-offs		—		(31	)		(29	)		—			(611	)		(1,316	)		(1,987	)
Recoveries		12		32			24			81			639			398			1,186
Net charge-offs		12		1			(5	)		81			28			(918	)		(801	)
Balance March 31, 2020	$	28,741	$	5,769		$	23,539		$	61,403		$	180,097		$	27,657		$	327,206

The allowance for credit losses on loans as of March 31, 2021 totaled $307.2 million or 1.56% of total loans, including acquired loans with discounts, a decrease of $8.9 million or 2.8% compared to the allowance for credit losses on loans totaling $316.1 million or 1.56% of total loans, including acquired loans with discounts, as of December 31, 2020. Net charge-offs were $8.9 million for the three months ended March 31, 2021. Net charge-offs for the first quarter of 2021 included $7.1 million related to resolved PCD loans, which had specific reserves that were allocated to the charge-offs. Additionally, $4.2 million of specific reserves on resolved PCD loans was released to the general reserve without taking any charge-off. As of March 31, 2021, the Company also had loans totaling $1.14 billion pursuant to the Paycheck Protection Program (“PPP”), which are fully guaranteed by the Small Business Administration and do not carry an allowance.

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, unless that obligation is unconditionally cancellable by the Company. The allowance is adjusted as a provision for credit loss expense. 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, 2021 and December 31, 2020, 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, 2021, the Company had $1.64 billion in commitments expected to fund.

Troubled Debt Restructurings. The restructuring of a loan is considered a “troubled debt restructuring” if both (1) the borrower is experiencing financial difficulties and (2) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Under ASC Topic 310-40 “Receivables—Troubled Debt Restructurings by Creditors,” the Company evaluates all loan modifications to identify whether the restructuring constitutes a troubled debt restructuring. As of March 31, 2021 and 2020, the Company had $8.7 million and $13.0 million, respectively, in outstanding troubled debt restructurings.

As of March 31, 2021, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. Default is determined at 90 or more days past due. The modifications generally relate to extending the amortization periods of the loans, which includes loans modified during bankruptcy.

For the three months ended March 31, 2021 and 2020, the Company did not add any loans as new troubled debt restructurings.

Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Consolidated Appropriations Act of 2021 (“CAA”), banks may deem that loan modifications do not result in troubled debt restructurings if they are (1) related to the novel strain of coronavirus disease first reported in December 2019 (“COVID-19”); (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the COVID-19 national emergency declaration by the President of the United States or (B) January 1, 2022. Additionally, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40 and federal banking agencies’ interagency guidance. These modifications include modifications such as principal and interest payment deferrals, temporary interest only payment terms, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The Company's troubled debt restructurings do not include loan modifications related to COVID-19. Beginning in mid-March of 2020, the Company began offering deferral and modification of principal and/or interest payments to selected borrowers on a case-by-case basis. As of March 31, 2021, the Company had approximately $316.7 million in outstanding loans subject to deferral and modification agreements.

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:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities) or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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.

The following tables present fair values for assets and liabilities measured at fair value on a recurring basis:

	As of March 31, 2021
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Available for sale securities:
Collateralized mortgage obligations	$	—	$	601,419	$	—	$	601,419
Mortgage-backed securities		—		36,936		—		36,936
Total	$	—	$	638,355	$	—	$	638,355

Derivative financial instruments:
Loan customer counterparty	$	—	$	8,881	$	—	$	8,881
Financial institution counterparty		—		—		—		—
Liabilities:
Derivative financial instruments:
Loan customer counterparty	$	—	$	—	$	—	$	—
Financial institution counterparty		—		8,881		—		8,881

	As of December 31, 2020
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Available for sale securities:
Collateralized mortgage obligations	$	—	$	612,334	$	—	$	612,334
Mortgage-backed securities		—		39,180		—		39,180
Total available for sale securities	$	—	$	651,514	$	—	$	651,514

Derivative financial instruments:
Loan customer counterparty		—		11,912		—		11,912
Financial institution counterparty		—		—		—		—
Liabilities:
Derivative financial instruments:
Loan customer counterparty		—		—		—		—
Financial institution counterparty		—		11,912		—		11,912

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, 2021, the Company had additions to other real estate owned of $281 thousand, of which $150 thousand were outstanding as of March 31, 2021. For the three months ended March 31, 2021, the Company had additions to impaired loans of $4.4 million, of which $4.4 million were outstanding as of March 31, 2021. The remaining financial assets and liabilities measured at fair value on a non-recurring basis that were recorded in 2021 and remained outstanding at March 31, 2021 were not significant.

The following tables present carrying and fair value information of financial instruments as of the dates indicated:

	As of March 31, 2021
	Carrying		Estimated Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Cash and due from banks	$	1,947,235	$	1,947,235	$	—	$	—	$	1,947,235
Federal funds sold		8,986		8,986		—		—		8,986
Held to maturity securities		9,449,647		—		9,529,602		—		9,529,602
Loans held for sale		20,991		—		20,991		—		20,991
Loans held for investment, net of allowance		17,038,296		—		—		17,137,592		17,137,592
Loans held for investment - Warehouse Purchase Program		2,272,389		—		2,272,389		—		2,272,389
Other real estate owned		462		—		462		—		462
Liabilities
Deposits:
Noninterest-bearing	$	9,820,445	$	—	$	9,820,445	$	—	$	9,820,445
Interest-bearing		18,942,660		—		18,954,529		—		18,954,529
Securities sold under repurchase agreements		377,106		—		377,115		—		377,115

	As of December 31, 2020
	Carrying		Estimated Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Cash and due from banks	$	1,342,996	$	1,342,996	$	—	$	—	$	1,342,996
Federal funds sold		553		553		—		—		553
Held to maturity securities		7,891,306		—		8,039,142		—		8,039,142
Loans held for sale		46,777		—		46,777		—		46,777
Loans held for investment, net of allowance		17,041,720		—		—		17,118,745		17,118,745
Loans held for investment - Warehouse Purchase Program		2,842,379		—		2,842,379		—		2,842,379
Other real estate owned		10,593		—		10,593		—		10,593
Liabilities
Deposits:
Noninterest-bearing	$	9,151,233	$	—	$	9,151,233	$	—	$	9,151,233
Interest-bearing		18,209,259		—		18,227,623		—		18,227,623
Securities sold under repurchase agreements		389,583		—		389,595		—		389,595

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, 2021. 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, 2021 and the year ended December 31, 2020 were as follows:

	Goodwill		Core Deposit Intangibles
	(Dollars in thousands)
Balance as of December 31, 2019	$	3,223,671	$	86,404
Less:
Amortization		—		(13,169	)
Add:
Measurement period adjustment of LegacyTexas Merger⁽¹⁾		7,965		—
Balance as of December 31, 2020		3,231,636		73,235
Less:
Amortization		—		(2,931	)
Balance as of March 31, 2021	$	3,231,636	$	70,304

(1)	LegacyTexas Financial Group, Inc. (“LegacyTexas”) merged into Bancshares on November 1, 2019.

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 and core deposit intangibles has occurred. If any such impairment is determined, a write-down is recorded. As of March 31, 2021, 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 $2.9 million and $3.4 million for the three months ended March 31, 2021 and 2020, respectively. The estimated aggregate future amortization expense for core deposit intangibles remaining as of March 31, 2021 is as follows (dollars in thousands):

Remaining 2021	$	8,621
2022		10,336
2023		9,360
2024		8,699
2025		8,173
Thereafter		25,115
Total	$	70,304

8. STOCK–BASED COMPENSATION

At March 31, 2021, the Company had two stock-based employee compensation plans 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 the Company’s 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, 2021, 4,576 shares of common stock had been issued pursuant to vested awards and 391,155 shares of unvested restricted stock have been granted under the 2020 Plan.

During 2012, Bancshares’ Board of Directors established the Prosperity Bancshares, Inc. 2012 Stock Incentive Plan (the “2012 Plan”), which was approved by Bancshares’ shareholders and authorized the issuance of up to 1,250,000 shares of common stock upon the exercise of options granted under the 2012 Plan or pursuant to the grant or exercise, as the case may be, of other awards granted under the 2012 Plan, including restricted stock, stock appreciation rights, phantom stock awards and performance awards. As of March 31, 2021, 696,388 shares of common stock had been issued pursuant to vested awards and 149,987 shares of unvested restricted stock had been granted under the 2012 Plan prior to the adoption of the 2020 Plan by the Company’s shareholders. The Company does not plan to make any further awards pursuant to the 2012 Plan.

As of March 31, 2021, the Company had no stock options outstanding. Stock-based compensation expense related to restricted stock was $3.4 million and $3.3 million during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was $29.3 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 1.97 years.

9. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ITEMS

The Company’s leases and off-balance sheet items as of March 31, 2021 are summarized below.

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 18 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 for the three months ended March 31, 2021 was $450 thousand and the Company had no sublease income for the three months ended March 31, 2020. As of March 31, 2021, operating lease ROU assets and lease liabilities were approximately $54.7 million. ROU assets and lease liabilities were classified as other assets and other liabilities, respectively.

As of March 31, 2021, the weighted average remaining lease terms of the Company’s operating leases were 6.9 years. The weighted average discount rate used to determine the lease liabilities as of March 31, 2021 for the Company’s operating leases was 2.26%. Cash paid for the Company’s operating leases for the three months ended March 31, 2021 and 2020 was $3.5 million and $3.6 million, respectively. The Company obtained $258 thousand in ROU assets in exchange for lease liabilities for one operating lease during the three months ended March 31, 2021.

The Company’s future undiscounted cash payments associated with its operating leases as of March 31, 2021 are summarized below (dollars in thousands).

Remaining 2021	$	8,305
2022		10,608
2023		9,860
2024		8,938
2025		8,546
2026		7,853
Thereafter		12,716
Total undiscounted lease payments	$	66,826

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, 2021 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 do not necessarily reflect the actual future cash funding requirements.

	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		Total
	(Dollars in thousands)
Standby letters of credit	$	96,944	$	6,133	$	803	$	—	$	103,880
Unused capacity on Warehouse Purchase Program loans		1,500,611		—		—		—		1,500,611
Commitments to extend credit		1,713,071		779,833		369,880		1,127,890		3,990,674
Total	$	3,310,626	$	785,966	$	370,683	$	1,127,890	$	5,595,165

The Company funds an allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt through a charge to provision for credit losses on the Company’s consolidated statement of income. At March 31, 2021 and December 31, 2020, this allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt, included in “Allowance for credit losses on off-balance sheet credit exposures” 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 income were as follows:

	Three Months Ended March 31,
	2021								2020
	Before Tax Amount			Tax Effect		Net of Tax Amount			Before Tax Amount			Tax Effect		Net of Tax Amount
	(Dollars in thousands)
Other comprehensive loss:
Securities available for sale:
Change in unrealized loss during period	$	(4	)	$	1	$	(3	)	$	(4,183	)	$	878	$	(3,305	)
Total securities available for sale		(4	)		1		(3	)		(4,183	)		878		(3,305	)
Total other comprehensive loss	$	(4	)	$	1	$	(3	)	$	(4,183	)	$	878	$	(3,305	)

Activity in accumulated other comprehensive income associated with securities available for sale, net of tax, was as follows:

	Securities Available for Sale			Accumulated Other Comprehensive Income (Loss)
	(Dollars in thousands)
Balance at December 31, 2020	$	769		$	769
Other comprehensive loss		(3	)		(3	)
Balance at March 31, 2021	$	766		$	766

Balance at December 31, 2019	$	602		$	602
Other comprehensive loss		(3,305	)		(3,305	)
Balance at March 31, 2020	$	(2,703	)	$	(2,703	)

11. DERIVATIVE FINANCIAL INSTRUMENTS

The following table provides the outstanding notional balances and fair values of outstanding derivative positions at March 31, 2021 and December 31, 2020.

	March 31, 2021						December 31, 2020
	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value		Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
	(Dollars in thousands)
Commercial loan interest rate swaps and caps:
Loan customer counterparty	$	249,433	$	8,881	$	—	$	224,684	$	11,912	$	—
Financial institution counterparty		249,433		—		8,881		224,684		—		11,912

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.

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, 2021 and December 31, 2020 are presented in the following table.

	Weighted-Average Interest Rate
	March 31, 2021						December 31, 2020
	Received			Paid			Received			Paid
Loan customer counterparty		2.62	%		0.68	%		2.83	%		0.79	%

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 $8.9 million at March 31, 2021 and $11.9 million at December 31, 2020. 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 zero at March 31, 2021. 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 $10.3 million at March 31, 2021 and $13.8 million at December 31, 2020.

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, 2021 and 2020 was as follows:

	Three Months Ended March 31,
Derivatives not designated as hedging instruments	2021		2020
	(Dollars in thousands)
Interest rate lock commitments	$	—	$	1,112
Forward mortgage-backed securities trades		—		(1,937	)

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:

•

changes in the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations resulting in, among other things, a deterioration in credit quality or reduced demand for credit, including the result and effect on the Company’s loan portfolio and allowance for credit losses;

•

the effect, impact, potential duration or other implications of the COVID-19 pandemic, including any actions undertaken by federal, state and local governmental authorities in response to the pandemic;

•

volatility in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations;

•

changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio;

•

changes in local economic and business conditions, including fluctuations in the price of oil, natural gas and other commodities, which adversely affect the Company’s customers and their ability to transact profitable business with the company, including the ability of the Company’s borrowers to repay their loans according to their terms or a change in the value of the related collateral;

•

increased competition for deposits and loans adversely affecting rates and terms;

•

the expected cost savings, synergies and other financial and operational benefits from the merger of LegacyTexas Financial Group, Inc. into Prosperity Bancshares, Inc. and LegacyTexas Bank into Prosperity Bank (collectively, the “Merger”) might not be realized within the expected time frames or at all, and costs or difficulties relating to the integration of LegacyTexas might be greater than expected;

•

the timing, impact and other uncertainties of any future acquisitions, including the Company’s ability to identify suitable future acquisition candidates, the success or failure in the integration of their operations, and the ability to enter new markets successfully and capitalize on growth opportunities;

•

the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations;

•

increased credit risk in the Company’s assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio;

•

the concentration of the Company’s loan portfolio in loans collateralized by residential and commercial real estate;

•

the failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses, including such assumptions related to potential, pending or recent acquisitions;

•

changes in the availability of funds resulting in increased costs or reduced liquidity;

•

a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company’s securities portfolio;

•

increased asset levels and changes in the composition of assets and the resulting impact on the Company’s capital levels and regulatory capital ratios;

•

the Company’s ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes;

•

the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;

•

government intervention in the U.S. financial system;

•

changes in statutes and government regulations or their interpretations applicable to financial holding companies and the Company’s present and future banking and other subsidiaries, including changes in tax requirements and tax rates;

•

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

•

poor performance by external vendors;

•

the cost and effects of a failure, interruption, or breach of security of the Company’s systems;

•

the failure of analytical and forecasting models and tools used by the Company to estimate probable credit losses and to measure the fair value of financial instruments;

•

additional risks from new lines of businesses or new products and services;

•

claims or litigation related to intellectual property or fiduciary responsibilities;

•

the failure of the Company’s enterprise risk management framework to identify or address risks adequately;

•

a failure in or breach of operational or security systems of the Company’s infrastructure, or those of its third-party vendors and other service providers, including as a result of cyber attacks;

•

potential risk of environmental liability associated with lending activities;

•

acts of terrorism, an outbreak of hostilities or other international or domestic calamities, civil unrest, insurrections, other political, economic or diplomatic developments, including those caused by public health issues, outbreaks of diseases and pandemics, such as the COVID-19 pandemic, weather or other acts of God and other matters beyond the Company’s control; and

•

other risks and uncertainties described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, or in the Company’s other reports and documents filed with the Securities and Exchange Commission.

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, 2020.

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, 2021, the Bank operated 275 full-service banking locations; with 65 in the Houston area, including The Woodlands; 30 in the South Texas area including Corpus Christi and Victoria; 65 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; 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 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.

Total assets were $35.56 billion at March 31, 2021 compared with $34.06 billion at December 31, 2020, an increase of $1.50 billion or 4.4%. Total loans were $19.64 billion at March 31, 2021 compared with $20.25 billion at December 31, 2020, a decrease of $608.1 million or 3.0%. Total deposits were $28.76 billion at March 31, 2021 compared with $27.36 billion at December 31, 2020, an increase of $1.40 billion or 5.1%. Total shareholders’ equity was $6.22 billion at March 31, 2021 compared with $6.13 billion at December 31, 2020, an increase of $91.2 million or 1.5%.

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are integral to understanding the results reported. 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, 2020. 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 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. The fair value of acquired loans incorporates assumptions regarding future credit losses and therefore no allowance for credit losses related to the acquired loans is recorded on the acquisition date.

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 replaces 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 probable losses on impaired loans and 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 the borrower’s 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. 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”, “Financial Condition—Allowance for Credit Losses on Loans” sections 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.

Fair Values of Financial Instruments—The Company determines the fair market values of financial instruments based on the fair value hierarchy established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value. Level 1 inputs include quoted active market prices, where available. If such quoted market prices are not available, Level 2 inputs are used. These inputs are based upon internally developed analytical tools that primarily use observable, market-based parameters. Level 3 inputs are unobservable inputs which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

COVID-19 PANDEMIC

In December 2019, a novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, Hubei Province, China. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. On March 13, 2020, the U.S. President announced a national emergency relating to the pandemic, which has since been extended. On May 5, 2021, the Governor of Texas further extended the proclamation certifying that COVID-19 poses an imminent threat of disaster in the state and declaring a state of disaster for all counties in Texas while lifting restrictions on all businesses and activities in the state. On April 11, 2021, the Governor of Oklahoma further extended the executive order that declared an emergency caused by the impending threat of COVID-19 to the people of Oklahoma while lifting restrictions on all businesses and activities in the state. The Bank continues to monitor the latest developments regarding COVID-19. The COVID-19 pandemic has resulted in significant economic uncertainties that have had, and could continue to have, an adverse impact on the Company’s operating income, financial condition and cash flows. The extent to which the COVID-19 pandemic will impact the Company’s operations and financial results during 2021 cannot be reasonably or reliably estimated at this time.

The health and safety of the Bank’s associates, customers, and communities are of utmost importance; and the Company has taken additional measures in an effort to ensure this safety, including restricting nonessential employee travel, expanding remote access availability, distancing work stations, professional cleaning of its facilities, and signs and distancing reminders for customers in the banking centers. Further, the Company remains committed to providing uninterrupted and reliable banking service and has business continuity plans and protocols in place to ensure critical operations are able to continue without disruption.

In response to the COVID-19 pandemic, on March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. The CARES Act provides assistance for American workers, families and small businesses. The Paycheck Protection Program (“PPP”), established by the CARES Act and implemented by the Small Business Administration (“SBA”) with support from the Department of the Treasury, provides small businesses with funds to pay payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities and are 100% guaranteed by the SBA. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”), which modified the covered expense period from eight weeks to 24 weeks, extended the maturity date of the loans out to five years and gave greater flexibility to employers having difficulty hiring workers. PPP loans originated prior to June 5, 2020, have a two year term which can be extended for up to five years if the lender and borrower both agree, and earn interest at 1%. PPP loans originated on and after June 5, 2020, have a minimum five year term, which can be extended for up to five additional years if the lender and borrower both agree. On December 27, 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was signed into law, which extended certain provisions of the CARES Act, provided additional funding and contained new relief provisions. The CAA extended the PPP application period to March 31, 2021 and permits eligible companies to obtain a second PPP loan (“second draw”) under terms specified in the CAA, with a maximum amount of $2.0 million and limit of one second draw loan. Second draw PPP borrowers are eligible for loan forgiveness on the same terms as the first draw PPP borrowers. Lenders that were permitted to originate first draw PPP loans are permitted to originate second draw loans. Additionally, the Bank is entitled to a per loan processing fee based on a tiered schedule ranging from 5% to 1% of the loan balance for the first draw PPP loans and the CAA established pre-determined fees for processing and servicing the second draw PPP loans. On March 11, 2021, the American Rescue Plan Act of 2021 was signed into

law, which added an additional $7.25 billion in PPP funding. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extended the PPP application filing deadline from March 31, 2021 to May 31, 2021 and extended the authorization of loans to June 30, 2021. Since the implementation of the PPP in 2020, the Company has obtained SBA approvals on approximately 18,500 loans totaling $1.98 billion and, as of March 31, 2021, had an outstanding balance of 9,621 loans totaling $1.14 billion after remittance.

Also, in response to the COVID-19 pandemic, the Company has provided relief to its loan customers through loan extensions and deferrals. Under the CARES Act and the CAA, banks may elect to deem that loan modifications do not result in troubled debt restructurings if they are (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the COVID-19 national emergency declaration by the President of the United States or (B) January 1, 2022. Additionally, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under Accounting Standards Codification (“ASC”) Subtopic 310-40 and federal banking agencies’ interagency guidance. These modifications include modifications such as principal and interest payment deferrals, temporary interest only payment terms, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The Company's troubled debt restructurings do not include loan modifications related to COVID-19. Beginning in mid-March of 2020, the Company began offering deferral and modification of principal and/or interest payments to selected borrowers on a case-by-case basis. As of March 31, 2021, the Company had approximately $316.7 million in outstanding loans subject to deferral and modification agreements.

RESULTS OF OPERATIONS

Net income available to common shareholders was $133.3 million for the quarter ended March 31, 2021 compared with $130.8 million for the same period in 2020, an increase of $2.5 million or 1.9%. Net income per diluted common share was $1.44 for the quarter ended March 31, 2021 compared with $1.39 for the same period in 2020, an increase of 3.6%. The Company posted annualized returns on average common equity of 8.60% and 8.86%, annualized returns on average assets of 1.54% and 1.67% and efficiency ratios of 41.25% and 42.90% for the quarters ended March 31, 2021 and 2020, respectively. The efficiency ratio is calculated by dividing total noninterest expense 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 of assets 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, 2021

Net interest income before the provision for credit losses was $254.6 million for the quarter ended March 31, 2021, a decrease of $1.4 million or 0.6%, compared with $256.0 million for the same period in 2020. The decrease was primarily due to a decrease in the average rate on interest-earning assets and a decrease in loan discount accretion of $12.1 million, partially offset by a decrease in the average rate on interest-bearing liabilities.

Interest income on loans was $233.1 million for the quarter ended March 31, 2021, a decrease of $14.2 million or 5.7%, compared with $247.2 million for the same period in 2020. The decrease was primarily due to the decrease in loan discount accretion of $12.1 million.

Interest income on securities was $38.7 million for the quarter ended March 31, 2021, a decrease of $9.6 million or 19.9%, compared with $48.3 million for the same period in 2020. This decrease was primarily due to lower securities yields, partially offset by an increase in the average securities balance.

Average interest-bearing liabilities were $18.94 billion for the quarter ended March 31, 2021, an increase of $1.25 billion or 7.1%, compared with $17.69 billion for the same period in 2020, primarily due to an increase in savings and money market deposits partially offset by decreases in other borrowings and subordinated notes. The net interest margin on a tax-equivalent basis was 3.41% for the quarter ended March 31, 2021, a decrease of 40 basis points or 10.5% compared to 3.81% for the same period in 2020.

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.

	Three Months Ended March 31,
	2021								2020
	Average Outstanding Balance			Interest Earned/Paid		Average Yield/Rate ⁽¹⁾			Average Outstanding Balance			Interest Earned/Paid		Average Yield/Rate ⁽¹⁾
	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans held for sale	$	33,327		$	238		2.90	%	$	66,917		$	632		3.80	%
Loans held for investment		17,279,066			213,978		5.02	%		17,263,098			236,517		5.51	%
Loans held for investment - Warehouse Purchase Program		2,369,601			18,859		3.23	%		1,120,324			10,094		3.62	%
Total loans		19,681,994			233,075		4.80	%		18,450,339			247,243		5.39	%
Investment securities		9,148,841			38,677		1.71	%		8,434,196			48,282		2.30	%
Federal funds sold and other earning assets		1,506,645			351		0.09	%		223,631			713		1.28	%
Total interest-earning assets		30,337,480			272,103		3.64	%		27,108,166			296,238		4.40	%
Allowance for credit losses on loans		(315,590	)							(328,005	)
Noninterest-earning assets		4,522,470								4,577,251
Total assets	$	34,544,360							$	31,357,412

Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	6,112,469		$	5,943		0.39	%	$	4,990,376		$	7,096		0.57	%
Savings and money market deposits		9,420,064			5,753		0.25	%		7,965,440			14,122		0.71	%
Certificates and other time deposits		3,031,621			5,666		0.76	%		3,404,748			13,800		1.63	%
Federal funds purchased and other borrowings		—			—		—			832,961			2,932		1.42	%
Securities sold under repurchase agreements		376,662			159		0.17	%		366,615			757		0.83	%
Subordinated notes		—			—		—			125,694			1,500		4.80	%
Total interest-bearing liabilities		18,940,816			17,521		0.38	%		17,685,834			40,207		0.91	%
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		9,206,791								7,491,798
Allowance for credit losses on off-balance sheet credit exposures		29,947								13,009
Other liabilities		169,138								262,523
Total liabilities		28,346,692								25,453,164
Shareholders' equity		6,197,668								5,904,248
Total liabilities and shareholders' equity	$	34,544,360							$	31,357,412

Net interest rate spread							3.26	%							3.49	%
Net interest income and margin ^{(2) (3)}				$	254,582		3.40	%				$	256,031		3.80	%
Net interest income and margin (tax equivalent) ⁽⁴⁾				$	255,217		3.41	%				$	256,754		3.81	%

(1)	Annualized and based on average balances on an actual 365-day or 366-day basis for the three months ended March 31, 2021 and 2020.

(2)	Yield is based on amortized cost and does not include any component of unrealized gains or losses.

(3)	The net interest margin is equal to net interest income divided by average interest-earning assets.

(4)	In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 21%.

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 attributable to both rate and volume which cannot be segregated have been allocated to rate.

	Three Months Ended March 31,
	2021 vs. 2020
	Increase
	(Decrease)
	Due to Change in
	Volume			Rate			Total
	(Dollars in thousands)
Interest-Earning Assets:
Loans held for sale	$	(315	)	$	(79	)	$	(394	)
Loans held for investment ⁽¹⁾		217			(22,756	)		(22,539	)
Loans held for investment - Warehouse Purchase Program		11,163			(2,398	)		8,765
Investment securities ⁽¹⁾		4,057			(13,662	)		(9,605	)
Federal funds sold and other earning assets		4,057			(4,419	)		(362	)
Total increase (decrease) in interest income		19,179			(43,314	)		(24,135	)

Interest-Bearing Liabilities:
Interest-bearing demand deposits		1,582			(2,735	)		(1,153	)
Savings and money market deposits		2,558			(10,927	)		(8,369	)
Certificates and other time deposits ⁽¹⁾		(1,500	)		(6,634	)		(8,134	)
Other borrowings		(2,932	)		—			(2,932	)
Securities sold under repurchase agreements		21			(619	)		(598	)
Subordinated notes		(1,500	)		—			(1,500	)
Total decrease in interest expense		(1,771	)		(20,915	)		(22,686	)
Increase (decrease) in net interest income	$	20,950		$	(22,399	)	$	(1,449	)

(1)	Includes impact of purchase accounting adjustments.

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 the borrower’s 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 provisions for credit losses for the quarters ended March 31, 2021 and 2020.

Net charge-offs were $8.9 million for the quarter ended March 31, 2021 compared with net charge-offs of $801 thousand for the quarter ended March 31, 2020. Net charge-offs for the first quarter of 2021 included $7.1 million related to resolved PCD loans, which had specific reserves that were allocated to the charge-offs. Further, an additional $4.2 million of specific reserves on resolved PCD loans without any related charge-offs was released to the general reserve. See “Financial Condition – Allowance for Credit Losses” below for more information.

Noninterest Income

The Company’s primary sources of recurring noninterest income are nonsufficient funds (“NSF”) fees, credit, debit and ATM card income, 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 $34.0 million for the three months ended March 31, 2021 compared with $34.4 million for the same period in 2020, a decrease of $380 thousand or 1.1%.

The following table presents, for the periods indicated, the major categories of noninterest income:

	Three Months Ended March 31,
	2021			2020
	(Dollars in thousands)
Nonsufficient funds (NSF) fees	$	6,687		$	9,443
Credit card, debit card and ATM card income		8,031			7,474
Service charges on deposit accounts		5,978			6,104
Trust income		2,837			2,662
Mortgage income		3,307			2,010
Brokerage income		711			650
Bank owned life insurance income		1,292			1,545
Net loss on sale or write down of assets		(79	)		(385	)
Other		5,244			4,885
Total noninterest income	$	34,008		$	34,388

Noninterest Expense

Noninterest expense totaled $119.1 million for the quarter ended March 31, 2021 compared with $124.7 million for the quarter ended March 31, 2020, a decrease of $5.7 million or 4.5%, primarily due to decreases in data processing, other noninterest expenses and net occupancy and equipment, partially offset by an increase in salaries and benefits.

The following table presents, for the periods indicated, the major categories of noninterest expense:

	Three Months Ended March 31,
	2021			2020
	(Dollars in thousands)
Salaries and employee benefits ⁽¹⁾	$	80,037		$	77,282
Non-staff expenses:
Net occupancy and equipment		7,833			8,980
Credit and debit card, data processing and software amortization		8,233			11,421
Regulatory assessments and FDIC insurance		2,670			2,078
Core deposit intangibles amortization		2,931			3,363
Depreciation		4,540			4,768
Communications ⁽²⁾		2,899			3,195
Net other real estate income ⁽³⁾		(643	)		(84	)
Merger related expenses ⁽⁴⁾		—			544
Other		10,576			13,194
Total noninterest expense	$	119,076		$	124,741

(1)	Includes stock-based compensation expense of $3.4 million and $3.3 million for the three months ended March 31, 2021 and 2020, respectively.

(2)	Communications expense includes telephone, data circuits, postage and courier expenses.

(3)	Net other real estate income is net of rental expense, rental income and gains and losses on sales of real estate.

(4)	LegacyTexas merged into Bancshares on November 1, 2019.

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 $36.2 million for the three months ended March 31, 2021 compared with $34.8 million for the same period in 2020, an increase of $1.4 million or 3.9%. The increase was due to the increase in income before income taxes primarily due to the decreases in noninterest expense. The Company’s effective tax rate for the three months ended March 31, 2021 and 2020 was 21.4% and 21.0%, 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 preliminarily 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 purchased credit-deteriorated loans (“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.

	March 31, 2021
			Acquired Loans
	Originated Loans		Re-Underwritten Acquired Loans		Non-PCD Loans		PCD Loans		Total Loans
	(Dollars in thousands)
Residential mortgage loans held for sale	$	20,991	$	—	$	—	$	—	$	20,991
Commercial and industrial		2,337,506		824,798		510,061		65,909		3,738,274
Warehouse purchase program		2,272,389		—		—		—		2,272,389
Real estate:
Construction, land development and other land loans		1,864,132		100,786		65,943		494		2,031,355
1-4 family residential (includes home equity)		3,399,781		340,898		1,101,542		1,503		4,843,724
Commercial real estate (includes multi-family residential)		3,606,416		587,044		1,586,080		78,935		5,858,475
Farmland		365,070		10,666		23,853		1,693		401,282
Agriculture		133,027		37,084		390		—		170,501
Consumer and other		250,757		22,122		25,516		3,500		301,895
Total loans held for investment		14,229,078		1,923,398		3,313,385		152,034		19,617,895
Total	$	14,250,069	$	1,923,398	$	3,313,385	$	152,034	$	19,638,886

	December 31, 2020
			Acquired Loans
	Originated Loans		Re-Underwritten Acquired Loans		Non-PCD Loans		PCD Loans		Total Loans
	(Dollars in thousands)
Residential mortgage loans held for sale	$	46,777	$	—	$	—	$	—		$	46,777
Commercial and industrial		2,082,366		890,278		625,102		76,454			3,674,200
Warehouse purchase program		2,842,379		—		—		—			2,842,379
Real estate:
Construction, land development and other land loans		1,752,925		125,820		77,674		541			1,956,960
1-4 family residential (includes home equity)		3,143,532		358,745		1,206,891		1,593			4,710,761
Commercial real estate (includes multi-family residential)		3,548,257		576,444		1,861,743		92,320			6,078,764
Farmland		372,627		10,576		25,994		1,734			410,931
Agriculture		126,533		43,476		412		—			170,421
Consumer and other		290,300		24,876		31,802		8,773			355,751
Total loans held for investment		14,158,919		2,030,215		3,829,618		181,415			20,200,167
Total	$	14,205,696	$	2,030,215	$	3,829,618	$	181,415		$	20,246,944

At March 31, 2021, total loans were $19.64 billion, a decrease of $608.1 million or 3.0%, compared with $20.25 billion at December 31, 2020. Loans at March 31, 2021 included $21.0 million of loans held for sale and $2.27 billion of Warehouse Purchase Program loans compared with $46.8 million of loans held for sale and $2.84 billion of Warehouse Purchase Program loans at December 31, 2020. At March 31, 2021, loans represented 55.2% of total assets compared with 59.4% of total assets at December 31, 2020.

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 on the basis of 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. As of March 31, 2021, oil and gas loans totaled $503.9 million (net of discount and excluding PPP loans totaling $142.6 million) or 2.6% of total loans, compared with total oil and gas loans of $512.7 million (net of discount and excluding PPP loans totaling $88.7 million) or 2.5% of total loans as of December 31, 2020. In addition, as of March 31, 2021, the Company had total unfunded commitments to oil and gas companies of $248.1 million compared with total unfunded commitments to oil and gas companies of $243.2 million as of December 31, 2020. Total unfunded commitments to producers include letters of credit issued in lieu of oil well plugging bonds.

(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. As of March 31, 2021, loans to hotels totaled $401.2 million (excluding PPP loans totaling $13.1 million) or 2.0% of total loans; and loans to restaurants totaled $208.7 million (excluding PPP loans totaling $125.2 million) or 1.1% of total 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 floating 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 Company acquired the Warehouse Purchase Program as part of the Merger. 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 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.

Nonperforming assets decreased $15.4 million, or 25.9%, to $44.2 million at March 31, 2021 compared with $59.6 million at December 31, 2020, of which $14.3 million and $18.7 million, respectively, were attributable to acquired loans. The decrease in nonperforming assets was primarily due to the $10.1 million decrease in other real estate due to various property sales.

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:

	March 31, 2021
				Acquired Loans
	Originated Loans			Re-Underwritten Acquired Loans			Non-PCD Loans			PCD Loans			Total
	(Dollars in thousands)
Nonaccrual loans ⁽¹⁾⁽²⁾	$	29,301		$	1,312		$	7,603		$	4,809		$	43,025
Accruing loans 90 or more days past due		81			232			—			—			313
Total nonperforming loans		29,382			1,544			7,603			4,809			43,338
Repossessed assets		352			10			—			—			362
Other real estate		144			150			168						462
Total nonperforming assets	$	29,878		$	1,704		$	7,771		$	4,809		$	44,162

Nonperforming assets to total loans and other real estate by category		0.21	%		0.09	%		0.23	%		3.16	%		0.22	%
Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate by category		0.25	%		0.09	%		0.23	%		3.16	%		0.25	%

	December 31, 2020
				Acquired Loans
	Originated Loans			Re-Underwritten Acquired Loans			Non-PCD Loans			PCD Loans			Total
	(Dollars in thousands)
Nonaccrual loans ⁽¹⁾⁽²⁾	$	32,650		$	2,953		$	10,867		$	715		$	47,185
Accruing loans 90 or more days past due		396			—			1,303			—			1,699
Total nonperforming loans		33,046			2,953			12,170			715			48,884
Repossessed assets		93			—			—			—			93
Other real estate		7,711			—			2,882			—			10,593
Total nonperforming assets	$	40,850		$	2,953		$	15,052		$	715		$	59,570

Nonperforming assets to total loans and other real estate by category		0.29	%		0.15	%		0.39	%		0.39	%		0.29	%
Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate by category		0.36	%		0.15	%		0.39	%		0.39	%		0.34	%

(1)	Includes troubled debt restructurings of $8.7 million and $11.3 million as of March 31, 2021 and December 31, 2020, respectively.

(2)	There were no non-performing or troubled debt restructurings of warehouse lines of credit or Warehouse Purchase Program loans for the periods presented.

Nonperforming assets were 0.22% of total loans and other real estate at March 31, 2021 and 0.29% of total loans and other real estate at December 31, 2020. The allowance for credit losses as a percentage of total nonperforming loans was 708.9% at March 31, 2021 and 646.6% at December 31, 2020.

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, 2021 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 the borrower’s performance differ from the assumptions used in making the initial determinations.

The Company’s allowance for credit losses 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 the borrower’s ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, general economic conditions, 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 allocated to it. The Company uses this information to establish the amount of the general valuation allowance.

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.

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 probable 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 become impaired subsequent to acquisition are assessed for the specific 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 additional provision for credit losses is made. PCD loans were recorded at their acquisition date fair values, which were based on expected cash flows and included 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 Policies” above for more information.

As described in the section captioned “Critical Accounting Policies” 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. The allowance for credit losses on loans as of March 31, 2021 totaled $307.2 million or 1.56% of total loans, including acquired loans with discounts, a decrease of $8.9 million or 2.8% compared to the allowance for credit losses on loans totaling $316.1 million or 1.56% of total loans, including acquired loans with discounts, as of December 31, 2020. Net charge-offs were $8.9 million for the three months ended March 31, 2021. Net charge-offs for the first quarter of 2021 included $7.1 million related to resolved PCD loans, which had specific reserves that were allocated to the charge-offs. Additionally, $4.2 million of specific reserves on resolved PCD loans was released to the general reserve without taking any charge-off. As of March 31, 2021, the Company also had loans totaling $1.14 billion pursuant to the Paycheck Protection Program, which are fully guaranteed by the SBA and do not carry an allowance.

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, 2021
	Originated Loans			Acquired Loans			Total
	(Dollars in thousands)
Average loans outstanding	$	13,966,961		$	5,715,033		$	19,681,994
Gross loans outstanding at end of period	$	14,250,069		$	5,388,817		$	19,638,886
Allowance for credit losses at beginning of period	$	150,630		$	165,438		$	316,068
Provision for credit losses		10,946			(10,946	)		—
Charge-offs:
Commercial and industrial		(1,153	)		(601	)		(1,754	)
Real estate and agriculture		(92	)		(6,589	)		(6,681	)
Consumer and other		(754	)		(181	)		(935	)
Recoveries:
Commercial and industrial		134			36			170
Real estate and agriculture		17			—			17
Consumer and other		312			13			325
Net charge-offs⁽¹⁾		(1,536	)		(7,322	)		(8,858	)
Allowance for credit losses at end of period	$	160,040		$	147,170		$	307,210
Ratio of allowance to end of period loans		1.12	%		2.73	%		1.56	%
Ratio of allowance to end of period loans, excluding Warehouse Purchase Program		1.34	%		2.73	%		1.77	%
Ratio of net charge-offs to average loans (annualized)		0.04	%		0.51	%		0.18	%
Ratio of allowance to end of period nonperforming loans		544.7	%		1054.5	%		708.9	%

	As of and for the Three Months Ended March 31, 2020
	Originated Loans			Acquired Loans			Total
	(Dollars in thousands)
Average loans outstanding	$	11,267,150		$	7,183,189		$	18,450,339
Gross loans outstanding at end of period	$	12,183,622		$	6,943,573		$	19,127,195
Allowance for credit losses at beginning of period	$	77,013		$	10,456		$	87,469
Cumulative effect from adoption of ASU 2016-13 ⁽²⁾	$	28,107		$	212,431		$	240,538
Provision for credit losses		—			—			—
Charge-offs:
Commercial and industrial		(164	)		(447	)		(611	)
Real estate and agriculture		(30	)		(30	)		(60	)
Consumer and other		(1,054	)		(262	)		(1,316	)
Recoveries:
Commercial and industrial		29			610			639
Real estate and agriculture		113			36			149
Consumer and other		280			118			398
Net (charge-offs) recoveries ⁽¹⁾		(826	)		25			(801	)
Allowance for credit losses at end of period	$	104,294		$	222,912		$	327,206
Ratio of allowance to end of period loans ⁽²⁾		0.86	%		3.21	%		1.71	%
Ratio of allowance to end of period loans, excluding Warehouse Purchase Program ⁽²⁾		1.00	%		3.21	%		1.88	%
Ratio of net charge-offs (recoveries) to average loans (annualized)		0.03	%		(0.00	%)		0.02	%
Ratio of allowance to end of period nonperforming loans		254.2	%		1091.3	%		532.5	%

(1)	There was no net charge-off activity on Warehouse Purchase Program loans during the periods presented.

(2)	ASU 2016-13 became effective for the Company on January 1, 2020.

The Company had gross charge-offs on originated loans of $2.0 million during the three months ended March 31, 2021. Partially offsetting these charge-offs were recoveries on originated loans of $463 thousand. Gross charge-offs on acquired loans were $7.4 million during the three months ended March 31, 2021. Partially offsetting these charge-offs were recoveries on acquired loans of $49 thousand. Total charge-offs for the three months ended March 31, 2021 were $9.4 million, partially offset by total recoveries of $512 thousand.

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.

	March 31, 2021
			Acquired Loans
	Originated Loans		Re-Underwritten Acquired Loans		Non-PCD Loans		PCD Loans		Total Allowance		Percent of Loans to Total Loans⁽¹⁾
	(Dollars in thousands)
Balance of allowance for credit losses applicable to:
Commercial and industrial	$	27,048	$	28,701	$	26,504	$	23,142	$	105,395		21.5	%
Real estate		121,041		11,677		28,925		22,017		183,660		73.5	%
Agriculture and agriculture real estate		6,700		998		232		173		8,103		3.3	%
Consumer and other		5,251		647		654		3,500		10,052		1.7	%
Total allowance for credit losses	$	160,040	$	42,023	$	56,315	$	48,832	$	307,210		100.0	%

	December 31, 2020
			Acquired Loans
	Originated Loans		Re-Underwritten Acquired Loans		Non-PCD Loans		PCD Loans			Total Allowance			Percent of Loans to Total Loans⁽¹⁾
	(Dollars in thousands)
Balance of allowance for credit losses applicable to:
Commercial and industrial	$	31,537	$	29,358	$	31,798		$	24,102		$	116,795		21.1	%
Real estate		106,154		11,363		30,194			29,593			177,304		73.4	%
Agriculture and agriculture real estate		6,233		1,189		230			172			7,824		3.4	%
Consumer and other		6,706		715		828			5,896			14,145		2.1	%
Total allowance for credit losses	$	150,630	$	42,625	$	63,050		$	59,763		$	316,068		100.0	%

(1)	Loans outstanding as of a percentage of total loans, excluding Warehouse Purchase Program loans.

The allowance for credit losses totaled $307.2 million at March 31, 2021 and $316.1 million at December 31, 2020. The allowance for credit losses totaled 1.56% of total loans at both March 31, 2021 and December 31, 2020.

At March 31, 2021, $160.0 million of the allowance for credit losses was attributable to originated loans, an increase of $9.4 million or 6.2% compared with $150.6 million of the allowance at December 31, 2020. At March 31, 2021, $42.0 million of the allowance for credit losses was attributable to re-underwritten acquired loans compared with $42.6 million of the allowance at December 31, 2020, a decrease of $602 thousand or 1.4%. At March 31, 2021, $56.3 million of the allowance for credit losses was attributable to Non-PCD loans compared with $63.1 million of the allowance at December 31, 2020, a decrease of $6.7 million or 10.7%. At March 31, 2021, $48.8 million of the allowance for credit losses was attributable to PCD loans compared with $59.8 million of the allowance at December 31, 2020, a decrease of $10.9 million or 18.3%.

At March 31, 2021, the Company had $37.4 million of total outstanding discounts on Non-PCD loans and PCD loans, of which $37.4 million was accretable.

The Company believes that the allowance for credit losses on loans at March 31, 2021 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, 2021.

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 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 looking at 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 both March 31, 2021 and December 31, 2020, the Company had $29.9 million in allowance for credit losses on off-balance sheet credit exposures.

Securities

The carrying cost of securities totaled $10.09 billion at March 31, 2021 compared with $8.54 billion at December 31, 2020, an increase of $1.55 billion or 18.1%. At March 31, 2021, securities represented 28.4% of total assets compared with 25.1% of total assets at December 31, 2020.

The amortized cost and fair value of investment securities were as follows:

	March 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations	$	600,440	$	2,171	$	(1,192	)	$	601,419
Mortgage-backed securities		36,945		497		(506	)		36,936
Total	$	637,385	$	2,668	$	(1,698	)	$	638,355
Held to Maturity
States and political subdivisions	$	144,517	$	5,679	$	(41	)	$	150,155
Collateralized mortgage obligations		76,073		1,584		(106	)		77,551
Mortgage-backed securities		9,229,057		127,519		(54,680	)		9,301,896
Total	$	9,449,647	$	134,782	$	(54,827	)	$	9,529,602

	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations	$	611,353	$	1,601	$	(620	)	$	612,334
Mortgage-backed securities		39,187		539		(546	)		39,180
Total	$	650,540	$	2,140	$	(1,166	)	$	651,514
Held to Maturity
States and political subdivisions	$	166,175	$	8,341	$	(32	)	$	174,484
Collateralized mortgage obligations		96,000		1,669		(219	)		97,450
Mortgage-backed securities		7,629,131		144,710		(6,633	)		7,767,208
Total	$	7,891,306	$	154,720	$	(6,884	)	$	8,039,142

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.”

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.

Deposits

Total deposits were $28.76 billion at March 31, 2021 compared with $27.36 billion at December 31, 2020, an increase of $1.40 billion or 5.1%. At March 31, 2021, noninterest-bearing deposits totaled $9.82 billion, an increase of $669.2 million or 7.3% compared with $9.15 billion at December 31, 2020. Interest-bearing deposits totaled $18.94 billion at March 31, 2021 compared with $18.21 billion at December 31, 2020, an increase of $733.4 million or 4.0%.

Average deposits for the three months ended March 31, 2021 were $27.77 billion, an increase of $3.92 billion or 16.4%, compared with $23.85 billion for the three months ended March 31, 2020. The ratio of average interest-bearing deposits to total average deposits was 66.8% and 68.6% during the first three months of 2021 and 2020, respectively.

The following table summarizes the daily average balances and weighted average rates paid on deposits for the periods indicated below:

	Three Months Ended March 31,
	2021					2020
	Average Balance		Average Rate ⁽¹⁾			Average Balance		Average Rate ⁽¹⁾
	(Dollars in thousands)
Interest-bearing demand deposits	$	6,112,469		0.39	%	$	4,990,376		0.57	%
Regular savings		2,939,970		0.11	%		2,766,465		0.31	%
Money market savings		6,480,094		0.31	%		5,198,975		0.93	%
Certificates, IRAs and other time deposits		3,031,621		0.76	%		3,404,748		1.63	%
Total interest-bearing deposits		18,564,154		0.38	%		16,360,564		0.86	%
Noninterest-bearing demand deposits		9,206,791					7,491,798
Total deposits	$	27,770,945		0.25	%	$	23,852,362		0.59	%

(1)	Annualized and based on average balances on an actual 365-day or 366-day basis for the three months ended March 31, 2021 and 2020.

Other Borrowings

The following table presents the Company’s borrowings as of the dates indicated:

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Securities sold under repurchase agreements		377,106		389,583
Total	$	377,106	$	389,583

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, 2021, the Company had total funds of $9.40 billion available under this line. At March 31, 2021 and at December 31, 2020, the Company had no FHLB advances or long-term notes payable balances.

Securities sold under repurchase agreements— At March 31, 2021, the Company had $377.1 million in securities sold under repurchase agreements with banking customers compared with $389.6 million at December 31, 2020, a decrease of $12.5 million or 3.2%. Repurchase agreements are generally settled on the following business day; however, approximately $5.4 million of the repurchase agreements outstanding at March 31, 2021 have maturity dates ranging from 6 to 24 months. All securities sold under repurchase agreements are collateralized by certain pledged securities.

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, 2021, the Company had outstanding $3.99 billion in commitments to extend credit, $103.9 million in commitments associated with outstanding standby letters of credit, $29.9 million in allowance for credit losses on off-balance sheet credit exposures and $1.50 billion in commitments associated with unused capacity on Warehouse Purchase Program loans. Since commitments associated with letters of credit 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, 2021, the Company had cash and cash equivalents of $1.96 billion compared with $1.34 billion at December 31, 2020, an increase of $612.7 million or 45.6%. The increase was primarily due to the increase in deposits of $1.40 billion and net cash provided by operating activities of $230.7 million, partially offset by the payment of cash dividends of $45.5 million.

Share Repurchases

On January 26, 2021, Bancshares announced a stock repurchase program under which Bancshares could repurchase up to 5%, or approximately 4.65 million shares, of Bancshares’ outstanding common stock over a one-year period expiring on January 26, 2022, 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. No repurchases were made during the first quarter of 2021.

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 18 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 for the three months ended March 31, 2021 was $450 thousand and the Company had no sublease income for the three months ended March 31, 2020. As of March 31, 2021, operating lease ROU assets and lease liabilities were approximately $54.7 million. ROU assets and lease liabilities were classified as other assets and other liabilities, respectively.

The Company’s future undiscounted cash payments associated with its operating leases as of March 31, 2021 are summarized below (dollars in thousands).

Remaining 2021	$	8,305
2022		10,608
2023		9,860
2024		8,938
2025		8,546
2026		7,853
Thereafter		12,716
Total undiscounted lease payments	$	66,826

Off-Balance Sheet Items

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, 2021 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 do not necessarily reflect the actual future cash funding requirements.

	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		Total
	(Dollars in thousands)
Standby letters of credit	$	96,944	$	6,133	$	803	$	—	$	103,880
Unused capacity on Warehouse Purchase Program loans		1,500,611		—		—		—		1,500,611
Commitments to extend credit		1,713,071		779,833		369,880		1,127,890		3,990,674
Total	$	3,310,626	$	785,966	$	370,683	$	1,127,890	$	5,595,165

Allowance for Credit Losses on Off-balance Sheet Credit Exposures. The Company funds an allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt through a charge to provision for credit losses on the Company’s consolidated statement of income. At both March 31, 2021 and December 31, 2020, this allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt, included in “Allowance for credit losses on off-balance sheet credit exposures” on the Company’s consolidated balance sheet, totaled $29.9 million.

Capital Resources

Total shareholders’ equity was $6.22 billion at March 31, 2021 compared with $6.13 billion at December 31, 2020, an increase of $91.2 million or 1.5%. The increase was primarily the result of net income of $133.3 million partially offset by dividend payments of $45.5 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 allows banking organizations that implement 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 has elected to adopt the option provided by the interim final rule, which will largely delay the effects of CECL on its regulatory capital for the next two years, 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 at 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.

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, 2021, 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, 2021:

	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, 2021
The Company
CET1 capital (to risk weighted assets)		4.50	%			7.00	%	N/A				14.60	%
Tier 1 capital (to risk weighted assets)		6.00	%			8.50	%	N/A				14.60	%
Total capital (to risk weighted assets)		8.00	%			10.50	%	N/A				15.07	%
Tier 1 capital (to average assets)		4.00	%	⁽¹⁾		4.00	%	N/A				9.68	%

The Bank
CET1 capital (to risk weighted assets)		4.50	%			7.00	%		6.50	%		14.51	%
Tier 1 capital (to risk weighted assets)		6.00	%			8.50	%		8.00	%		14.51	%
Total capital (to risk weighted assets)		8.00	%			10.50	%		10.00	%		14.97	%
Tier 1 capital (to average assets)		4.00	%	⁽²⁾		4.00	%		5.00	%		9.62	%

(1)	The Federal Reserve Board may require the Company to maintain a leverage ratio above the required minimum.

(2)	The FDIC may require the Bank to maintain a leverage ratio above the required minimum.

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, 2020, filed on February 26, 2021 (the “2020 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 2020 Form 10-K and presented as of December 31, 2020.

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, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

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, 2020.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a. None.

b. None.

c. On January 26, 2021, Bancshares announced a stock repurchase program under which Bancshares could repurchase up to 5%, or approximately 4.65 million shares, of Bancshares’ outstanding common stock over a one-year period expiring on January 26, 2022, 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. No repurchases were made during the first quarter of 2021.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

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)

10.1			Executive Employment Agreement dated March 10, 2021 by and among Prosperity Bancshares, Inc. and Edward Z. Safady (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 11, 2021 (File No. 001-35388))

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, 2021 (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: 5/6/2021		/S/ DAVID ZALMAN
		David Zalman
		Senior Chairman and Chief Executive Officer

Date: 5/6/2021		/S/ ASYLBEK OSMONOV
		Asylbek Osmonov
		Chief Financial Officer