Prosperity Bancshares, Inc. (NYSE:PB) Q4 2024 Earnings Call Transcript
Prosperity Bancshares, Inc. (NYSE:PB) Q4 2024 Earnings Call Transcript January 24, 2024
Prosperity Bancshares, Inc. misses on earnings expectations. Reported EPS is $1.02 EPS, expectations were $1.18. Prosperity Bancshares, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Prosperity Bancshares Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Charlotte Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares fourth quarter 2023 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I’m Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Timanus, Jr, Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; and Bob Dowdell, Executive Vice President. Mays Davenport, our Director of Corporate Strategy is ill and unable to join us today.
David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties, and other factors, which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements.
Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Zalman.
David Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2023 conference call. For the three months ending December 31, 2023, our net income was $95 million or $1.02 per diluted common share, compared with $112 million or $1.20 per diluted common share for the three months ending September 30, 2023 and was impacted by a one-time FDIC special assessment of $19.9 million and merger-related expenses. Excluding the FDIC special assessment, net of tax and merger-related expenses, net of tax, net income was $111 million or $1.19 per diluted common share for the three months ending December 31, 2023. Our annualized return on average assets, average common equity and average tangible common equity excluding the FDIC special assessment net of tax and merger-related expenses net of tax for the three months ended December 31, 2023, were 1.15% return on average assets, 6.29% return on average common equity and 12.3% return on average tangible common equity.
Although our earnings excluding the one-time FDIC assessment and merger-related expenses were strong, they are still lower than last year, primarily because the majority of our earning assets have not yet repriced and our interest-bearing liabilities have. This will correct over time and we expect that our operating ratios will be more reflective of our historical returns. Loans were $21.2 billion on December 31, 2023, a decrease of $252 million or 1.2% from the $21.4 billion on September 30, 2023. Loans increased $2.3 billion or 12.4%, compared with $18.8 billion on December 31, 2022. Loans excluding the warehouse purchase program loans and loans acquired in the merger of First Bancshares of Texas increased $882 million or 4.9% during 2023.
We did see a slight decrease in loans in the fourth quarter. However, we grew loans organically for the year as projected. Our deposits were $27.2 billion on December 31, 2023, a decrease of $133 million or 0.5% compared with $27.3 billion on September 30, 2023. Deposits decreased $1.4 billion or 4.7% compared with $28.5 billion on December 31, 2022. Our deposit outflows have mitigated since last March. However, we still have customers moving money into higher-paying instruments such as high yielding government bonds or high-rate products offered by competitors. When we saw the increase in deposits during the previous two years, we knew that, some portion of them would leave the bank and that's what's happening now. As the Federal Reserve reduces the money it has put into the economy, by reducing its debt, depositors are replacing it buying the higher rate securities it had purchased.
Prosperity has one of the best core deposit bases in the business. We have noninterest-bearing deposits of $9.8 billion, representing a strong 36% of total deposits and certificates of deposits representing only 13% of total deposits. Further, we have not purchased any broker deposits. Our non-performing assets totaled $72.7 million or 21 basis points of quarterly average interest-earning assets on December 31, 2023, compared with $69.5 million or 20 basis points of quarterly average interest-earning assets on September 30, 2023, and $27.5 million or 8 basis points of quarterly average interest-earning assets on December 31, 2022. The increase during 2023 was primarily due to the First Bancshares merger. Despite a relatively low non-performing asset ratio, it is higher than our historical levels due to the recent merger.
This is not unusual for us and we expect to reduce our non-performing asset ratio to a more normal level within a reasonable period of time. The acquired loans charged-off during the fourth quarter were fully reserved for. Our allowance for credit losses on loans and off-balance sheet credit exposure was $369 million on December 31, 2023 compared with $72.7 million in non-performing assets. We look forward to our acquisition of Lone Star State Bancshares, which is pending the receipt of regulatory approvals. We are hopeful that we will receive them soon. We remain interested in M&A and believe our company is in a strong position to participate, especially given our capital, merger and acquisition experience and relationships we have built over the years.
Prosperity operates in two of the best economies in the U.S. Even with the recent interest rate increases, economic activity and job growth in Texas and Oklahoma remain solid. We are excited about our growth and future of our company. Prosperity has a strong capital position that provides us with flexibility in pursuing strategic opportunities such as mergers and acquisitions and the repurchase of our stock when appropriate. We expect that our net interest margin will continue to expand to our historically normal levels as our assets reprice over the next several years, increasing our earnings per share. Further, we have a strong core deposit base of 36% of our deposits in noninterest-bearing accounts. I would like to thank all our customers, associates, directors, and shareholders for helping build such successful bank.
Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Asylbek Osmonov : Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended December 31, 2023 was $237 million compared to $239.5 million for the quarter ended September 30, 2023, and $256.1 million for the same period in 2022. The net interest margin on a tax equivalent basis was 2.75% for the three months ended December 31, 2023 compared to 2.72% for the quarter ended September 30, 2023 and 3.05% for the same period in 2022. Excluding purchase accounting adjustments, the net interest margin for the three months ended December 31, 2023 was 2.71% compared to 2.68% for the quarter ended September 30, 2023 and 3.04% for the same period in 2022. The fourth quarter increase in net interest margin was primarily due to the decrease in borrowings of $525 million during the fourth quarter 2023.
Non-interest income was $36.6 million for the three months ended December 31, 2023, compared to $38.7 million for the quarter ended September 30, 2023 and $37.7 million for the same period in 2022. Non-interest expense for the three months ended December 31, 2023 was $152.2 million, compared to $135.7 million for the quarter ended September 30, 2023 and $119.2 million for the same period in 2022. The linked quarter increase was primarily due to one-time FDIC special assessment of $19.9 million. For the first quarter 2022, we expect non-interest expense to be in the range of $134 million to $136 million. The efficiency ratio was 55.6% for the three months ended December 31, 2023 compared to 48.7% for the quarter ended September 30, 2023 and 40.9% for the same period in 2022.
Excluding the FDIC special assessment, the efficiency ratio was 48.3% for the fourth quarter 2023. The bond portfolio metrics at 12/31/2023 showed a weighted average life of five years and projected annual cash flows of approximately $2.2 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality.
Tim Timanus: Thank you, Asylbek. Our non-performing assets at quarter end December 31, 2023 totaled $72,667,000 or 34 basis points of loans and other real estate, compared to $69,481,000 or 32 basis points at September 30, 2023. This represents a 4.6% increase. As of December 31, 2023, $3.2 million of non-performing assets have been removed or put under contract for sale. The December 31, 2023 non-performing assets total was made up of $70,883,000 in loans, $76,000 in repossessed assets and $1,708,000 in other real estate Net charge-offs for the three months ended December 31, 2023 were $19,133,000 compared to net charge-offs of $3,408,000 for the quarter ended September 30, 2023. This is a $15,725,000 increase on a linked quarter basis.
There was no addition to the allowance for credit losses during the quarter ended December 31, 2023. Also, there was no addition to the allowance during the quarter ended September 30, 2023. No dollars were taken into income from the allowance during the quarters ended December 31, 2023 and September 30, 2023. The average monthly new loan production for the quarter ended December 31, 2023 was $300 million, compared to $398 million for the quarter ended September 30, 2023. Loans outstanding at December 31, 2023 were approximately $21.181 billion compared to $21.33 billion at September 30, 2023. The December 31, 2023 loan total is made up of 42% fixed rate loans, 27% floating rate loans and 31% variable rate loans. I'll now turn it over to Charlotte Rasche.
Charlotte Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.
Operator: [Operator Instructions] The first question comes from Dave Rochester with Compass Point.
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