Prosperity Bancshares, Inc.® (NYSE: PB), the parent company of Prosperity Bank® (collectively, "Prosperity") with a branch locations throughout Texas, including San Angelo at 4109 College Hills Blvd., reported net income for the quarter ended September 30, 2015 of $70.598 million or $1.01 per diluted common share. Additionally, non-performing assets remain low at 0.26% of third quarter average earning assets with an annualized return on third quarter average assets of 1.30%.
"I am excited to announce that the Prosperity Board of Directors has decided to increase the dividend payable to shareholders to $0.30 per share for the fourth quarter, representing a 10% increase. The Board and management appreciate our shareholders and are glad to be able to show our appreciation with this increase," said David Zalman, Prosperity's Chairman and Chief Executive Officer.
"Prosperity enjoyed another successful quarter. Because of the acquisitions we completed over the last several years, our net income figures include purchase accounting adjustment income, which has been quickly declining. Excluding these purchase accounting adjustments, net income per diluted common share was $0.92 for the three months ended September 30, 2015 compared with $0.84 for the three months ended September 30, 2014, a 9.5% increase. Prosperity's return on average tangible common equity for the three months ended September 30, 2015 was 19.30%. The reconciliations of these non-GAAP financial measures are included below," continued Zalman.
"Despite employment declines in the oil and gas extraction and the manufacturing sectors, the Texas unemployment rate fell in August to 4.1% and continues to be lower than the U.S. rate, which was 5.1%. Oklahoma's unemployment rate inched down slightly in September to 4.4% compared with 4.6% in August, according to data recently released by the U.S. Labor Department."
"Although our loans decreased overall during the first nine months of 2015 primarily due to planned reductions at some of our acquired banks, our third quarter results showed loan growth of 1% (4% annualized) compared to the previous quarter ended June 30, 2015. Deposits have been flat for the first nine months of 2015, but, when comparing deposits as of September 30, 2015 to September 30, 2014, Prosperity has been successful in replacing over $500 million in higher cost time deposits at acquired banks with more traditional transactional accounts," stated Zalman.
"Prosperity continues to be one of the best in class in asset quality with non-performing assets at 0.26% of third quarter average earning assets," concluded Zalman.
Results of Operations for the Three Months Ended September 30, 2015
Net income was $70.598 million for the three months ended September 30, 2015 compared with $76.570 million for the same period in 2014. Net income per diluted common share was $1.01 for the three months ended September 30, 2015 compared with $1.10 for the same period in 2014. Net income (excluding purchase accounting adjustments) was $64.154 million for the quarter ended September 30, 2015 compared with $58.635 million for the quarter ended September 30, 2014, an increase of 9.4%. Net income per diluted common share (excluding purchase accounting adjustments) was $0.92 for the three months ended September 30, 2015 compared with $0.84 for the three months ended September 30, 2014. The reconciliation of these non-GAAP financial measures is shown on page 12. Annualized returns on average assets, average common equity and average tangible common equity for the three months ended September 30, 2015 were 1.30%, 8.31% and 19.30%, respectively. Prosperity's efficiency ratio (excluding credit loss provisions, net gains and losses on the sale of assets and taxes) was 40.72% for the three months ended September 30, 2015.
Net interest income before provision for credit losses for the quarter ended September 30, 2015 was $156.108 million compared with $175.657 million during the same period in 2014. This change was primarily due to a decrease in loan discount accretion of $17.424 million for the quarter ended September 30, 2015 compared with the quarter ended September 30, 2014. Linked quarter net interest income before provision for credit losses was $156.108 million for the three months ended September 30, 2015 compared with $158.239 million for the three months ended June 30, 2015. This change was primarily due to a decrease in loan discount accretion of $2.568 million for the quarter ended September 30, 2015 compared with the quarter ended June 30, 2015. The net interest margin on a tax equivalent basis was 3.30% for the three months ended September 30, 2015, compared with 3.85% for the same period in 2014 and 3.39% for the three months ended June 30, 2015. This change was primarily due to the decrease in loan discount accretion and lower yields on average interest-earning assets partially offset by lower rates paid on average interest-bearing liabilities for the three months ended September 30, 2015. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis was 3.10% for the three months ended September 30, 2015, compared with 3.26% for the same period in 2014 and 3.13% for the three months ended June 30, 2015.
Noninterest income was $31.780 million for the three months ended September 30, 2015 compared with $30.191 million for the same period in 2014. This change was primarily due to an increase in mortgage income and other noninterest income. On a linked quarter basis, noninterest income increased $1.483 million or 4.9% compared with the quarter ended June 30, 2015. This was primarily due to an increase in NSF fees and service charges on deposit accounts.
Noninterest expense was $76.430 million for the three months ended September 30, 2015 compared with $85.540 million for the same period in 2014. This change was primarily due to a decrease in salary and benefits expense, other noninterest expense, net occupancy and equipment expense and regulatory assessments. On a linked quarter basis, noninterest expense decreased $3.305 million or 4.1% compared with the quarter ended June 30, 2015. This was primarily due to a decrease in salary and benefits expense, other noninterest expense and regulatory assessments for the three months ended September 30, 2015.
Results of Operations for the Nine Months Ended September 30, 2015
Net income was $216.171 million for the nine months ended September 30, 2015 compared with $219.213 million for the same period in 2014. Net income per diluted common share was $3.09 for the nine months ended September 30, 2015 compared with $3.19 for the same period in 2014. Net income (excluding purchase accounting adjustments) was $189.332 million for the nine months ended September 30, 2015 compared with $177.638 million for the nine months ended September 30, 2014. Net income per diluted common share (excluding purchase accounting adjustments) was $2.71 for the nine months ended September 30, 2015 compared with $2.59 for the nine months ended September 30, 2014. The reconciliation of these non-GAAP financial measures is shown on page 12. Returns on average assets, average common equity and average tangible common equity, each on an annualized basis, for the nine months ended September 30, 2015 were 1.33%, 8.63% and 20.51%, respectively. Prosperity's efficiency ratio (excluding credit loss provisions, net gains and losses on the sale of assets and securities and taxes) was 41.64% for the nine months ended September 30, 2015.
Net interest income before provision for credit losses for the nine months ended September 30, 2015 was $477.252 million compared with $493.403 million during the same period in 2014. The change was primarily due to a decrease of $23.002 million in loan discount accretion partially offset by lower rates paid on average interest-bearing liabilities for the nine months ended September 30, 2015. The net interest margin on a tax equivalent basis for the nine months ended September 30, 2015 decreased to 3.42% compared with 3.77% for the same period in 2014. This was primarily due to a decrease in loan discount accretion and lower yields on average interest-earning assets partially offset by lower rates paid on average interest-bearing liabilities for the nine months ended September 30, 2015. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis was 3.13% for the nine months ended September 30, 2015 compared with 3.30% for the same period in 2014.
Noninterest income was $90.498 million for the nine months ended September 30, 2015 compared with $91.452 million for the same period in 2014. This change was primarily due to a decrease in net gain on sale of assets and NSF fees partially offset by an increase in other noninterest income and mortgage income. Noninterest expense was $235.627 million for the nine months ended September 30, 2015 compared with $243.926 million for the same period in 2014. This change was primarily due to a decrease in salary and benefits expense and other noninterest expense partially offset by an increase in regulatory assessments and a net gain on sale of other real estate recorded in 2014.
Balance Sheet Information
At September 30, 2015, Prosperity had $21.567 billion in total assets, an increase of $449.922 million or 2.1%, compared with $21.117 billion at September 30, 2014.
Loans at September 30, 2015 were $9.205 billion, a decrease of $163.900 million or 1.7%, compared with $9.369 billion at September 30, 2014. Linked quarter loans increased $90.653 million or 1.0% (4.0% annualized) from $9.114 billion at June 30, 2015.
As part of its lending activities, Prosperity extends credit to oil and gas production and servicing companies. Oil and gas production loans are loans to companies directly involved in the exploration and or production of oil and gas. Oil and gas servicing loans are loans to companies that provide services for oil and gas production and exploration. At September 30, 2015, oil and gas loans totaled $405.176 million or 4.4% of total loans, of which $185.162 million were production loans and $220.014 million were servicing loans compared with total oil and gas loans of $500.409 million or 5.3% of total loans at December 31, 2014, of which $271.972 million were production loans and $228.437 million were servicing loans.
Deposits at September 30, 2015 were $16.940 billion, a decrease of $74.090 million or 0.4%, compared with $17.014 billion at September 30, 2014. Linked quarter deposits decreased $61.727 million or 0.4% from $17.002 billion at June 30, 2015.
Asset Quality
Nonperforming assets totaled $48.628 million or 0.26% of quarterly average earning assets at September 30, 2015, compared with $50.082 million or 0.27% of quarterly average earning assets at September 30, 2014, and $35.119 million or 0.19% of quarterly average earning assets at June 30, 2015. The allowance for credit losses was 0.88% of total loans at September 30, 2015, 0.83% of total loans at September 30, 2014 and 0.89% of total loans at June 30, 2015. Excluding loans acquired that are accounted for under FASB Accounting Standards Codification ("ASC") Topics 310-20 and 310-30, the allowance for credit losses was 1.06% of remaining loans as of September 30, 2015, compared with 1.14% at September 30, 2014 and 1.09% at June 30, 2015. Refer to the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of this non-GAAP financial measure.
The provision for credit losses was $5.310 million for the three months ended September 30, 2015 compared with $5.000 million for the three months ended September 30, 2014 and $500 thousand for the three months ended June 30, 2015. The provision for credit losses was $7.060 million for the nine months ended September 30, 2015 compared with $11.925 million for the nine months ended September 30, 2014.
Net charge offs were $5.279 million for the three months ended September 30, 2015 compared with $653 thousand for the three months ended September 30, 2014 and $491 thousand for the three months ended June 30, 2015. This increase was primarily due to the charge off of three commercial and industrial loans during the third quarter of 2015. Net charge offs were $6.819 million for the nine months ended September 30, 2015 compared with $1.594 million for the nine months ended September 30, 2014.
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