Prosperity Bancshares, Inc. (PB), a leading financial holding company in Texas, has reported its second quarter 2024 results, showcasing strong financial performance and promising growth prospects. The company's net income for the full year 2023 stood at $419.3 million, while its annual revenue reached $1.60 billion. Additionally, Prosperity Bancshares generated robust annual operating cash flow of $652.5 million and impressive annual free cash flow of $618.4 million.
Financials
In the second quarter of 2024, the company reported net income of $111.0 million, or $1.17 per diluted common share, compared to $110.4 million, or $1.18 per diluted common share, in the first quarter of 2024. The quarterly results were impacted by an increase in net interest income, a gain on the Visa Class B-1 stock exchange net of investment security sales, partially offset by a merger-related provision for credit losses, merger-related expenses, an FDIC special assessment, and an increase in non-interest expenses related to three months of Lone Star State operations.
Excluding the merger-related provision and expenses, the gain on the Visa Class B-1 stock exchange net of investment security sales, and the FDIC special assessment, each net of tax, net income for the second quarter of 2024 was $116.0 million, or $1.22 per diluted common share. The company's annualized returns on average assets and average tangible common equity were 1.17% and 12.34%, respectively, for the second quarter of 2024.
Net interest income before provision for credit losses was $258.8 million for the second quarter of 2024, an increase of $20.5 million, or 8.6%, compared to the first quarter of 2024. The increase was partially due to the operation of Lone Star Bank, which was acquired on April 1, 2024. The net interest margin on a tax-equivalent basis was 2.94% for the second quarter of 2024, compared to 2.79% for the first quarter of 2024 and 2.73% for the same period in 2023.
Non-interest income was $46.0 million for the second quarter of 2024, compared to $38.9 million for the first quarter of 2024 and $39.7 million for the same period in 2023. The increase in non-interest income was primarily driven by a net gain of $10.7 million resulting from the Visa stock conversion, partially offset by a loss on the sale of investment securities.
Non-interest expense for the second quarter of 2024 was $152.8 million, compared to $135.8 million for the first quarter of 2024 and $145.9 million for the same period in 2023. The increase was primarily due to merger-related expenses of $4.4 million, three months of Lone Star Bank operations, and a $3.6 million FDIC special assessment. For the third quarter of 2024, the company expects non-interest expense to be in the range of $141 million to $143 million.
The company's efficiency ratio was 51.8% for the second quarter of 2024, compared to 49.1% for the first quarter of 2024 and 53.2% for the same period in 2023. Excluding merger-related expenses, the FDIC special assessment, and the net gain on the sale of securities, the efficiency ratio was 49.1% for the second quarter of 2024.
Loans outstanding at June 30, 2024, were $22.3 billion, an increase of $666 million, or 3.1%, compared to $21.6 billion at June 30, 2023. The increase was primarily due to the Lone Star merger. Excluding loans acquired in the Lone Star and First Capital acquisitions and new production at the acquired banking centers since the respective acquisition dates, loans at June 30, 2024, decreased $37 million, or 2 basis points, when compared to June 30, 2023, and increased $63 million, or 3 basis points, compared to March 31, 2024.
Deposits were $27.9 billion at June 30, 2024, an increase of $552 million, or 2%, compared to $27.3 billion at June 30, 2023. The increase was primarily due to the Lone Star merger. Excluding deposits assumed in the Lone Star and First Capital acquisitions and new deposits generated at the acquired banking centers since the respective acquisition dates, deposits at June 30, 2024, decreased by $470 million, or 1.8%, when compared to June 30, 2023, and decreased by $298 million, or 1.2%, compared to March 31, 2024.
Non-performing assets totaled $89.6 million, or 25 basis points of quarterly average interest-earning assets, at June 30, 2024, compared to $83.8 million, or 24 basis points, at March 31, 2024, and $62.7 million, or 18 basis points, at June 30, 2023. A significant portion of the non-performing assets balance for each period was attributable to the acquired loans.
The allowance for credit losses on loans was $359 million, and the allowance for credit losses on loans and off-balance sheet credit exposure was $397 million as of June 30, 2024. The allowance for credit losses on loans was 4.02 times the amount of non-performing assets.
Business Overview
Prosperity Bancshares continues to focus on strategic acquisitions, building core customer relationships, maintaining sound asset quality, and operating the bank in an efficient manner. The company remains optimistic about the future and confident in its ability to create meaningful long-term value for its shareholders.
The company's geographic footprint is primarily in Texas, with a strong presence in the Houston, Dallas/Fort Worth, South Texas, East Texas, Central Texas, West Texas, and Central Oklahoma areas. Prosperity Bancshares has 283 full-service banking locations across these regions, serving a diverse customer base.
In terms of revenue breakdown, 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 company's net interest income is its largest source of revenue, and it has been focused on maintaining efficiency and stringent cost control practices to support its profitability.
Prosperity Bancshares' three principal components of its growth strategy are internal growth, efficient operations, and strategic acquisitions. The company has a centralized infrastructure that can accommodate substantial additional growth, enabling it to achieve necessary controls while minimizing operational costs through economies of scale. The company's emphasis on acquisitions, including the recent merger with Lone Star State Bancshares, is expected to contribute to its long-term financial strength.
The company's financial ratios remain strong, with a common equity tier 1 capital ratio of 15.42% and a total risk-based capital ratio of 16.67% as of June 30, 2024. These ratios demonstrate Prosperity Bancshares' solid capital position and ability to support its growth initiatives.
Liquidity
In terms of liquidity, the company had $1.09 billion in cash and cash equivalents as of March 31, 2024, an increase of $628.3 million, or 137.1%, compared to December 31, 2023. The company's liquidity position is further bolstered by its available lines of credit with the Federal Home Loan Bank and the Federal Reserve, totaling $15 billion.
Outlook
Looking ahead, Prosperity Bancshares' management remains optimistic about the company's future prospects. The company expects continued margin expansion, driven by the repricing of its loan and securities portfolios, as well as the integration of the Lone Star acquisition. Additionally, the company's focus on building core customer relationships, maintaining sound asset quality, and operating the bank efficiently positions it well for future growth and value creation for its shareholders.
Conclusion
Overall, Prosperity Bancshares' second quarter 2024 results demonstrate the company's ability to navigate the current market environment and deliver solid financial performance. With its strong balance sheet, diversified revenue streams, and strategic growth initiatives, the company is well-positioned to continue creating value for its shareholders in the years to come.