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Text: I'm Charlotte Rasche, General Counsel of Prosperity Bancshares.
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.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Matt.
Before we begin, let me make the usual disclaimers.
I'm pleased to report that because of the confidence in our company, our strong capital position and our continued success, our Board of Directors voted to increase the fourth quarter dividend to $0.52, a 6.1% increase from the third quarter.
Prosperity continues to do well, and we want to share that success with our shareholders.
Additionally, as our stock price experienced declines in the third quarter, Prosperity repurchased 767,134 shares of its common stock at a weighted price of $67.87.
Prosperity Bank was ranked by Forbes as the second best bank in America for 2021 and has been in the top 10 of the Forbes list since 2010.
Prosperity reported net income of $128.6 million for the quarter ended September 30, '21 compared to $130 million for the same period in 2020.
The net income per diluted common share was $1.39 for the quarter ended September 30, 2021 and compared with $1.40 for the same period in 2020.
Prosperity continues to exhibit solid operating metrics and return on tangible equity of 16.2% and return on assets of 1.42% for the third quarter of 2021.
Net interest margins have been stressed throughout the low rate environment.
However, we believe this should improve if interest rates rise as projected as the bank is positioned for increased earnings in a higher rate environment.
Our loans on September 30, 2021 were just shy of $19 billion, a decrease of $1.8 billion or 8.8% and compared with $20.8 billion on September 30, 2020.
Our linked quarter loans, excluding Warehouse Purchase Program and PPP loans increased $217 million or 1.3%, 5.3% annualized from $16.4 billion on June 30, 2021.
We saw loan growth throughout the company with the exception of the Dallas-Fort Worth area as we continue to reduce loans that were categorized as PCD loans at the time of the merger as well as loans in the nonrecourse structure commercial real estate category.
Excluding these categories, Dallas/Fort Worth continues to show solid growth and win some marquee deals in their area.
Deposits on September 30, 2021, were $29.5 billion, an increase of $3 billion or 11.3% and compared with $26.5 billion on September 30, 2020.
Our linked quarter deposits increased $341 million or 1.2%, 4.7% annualized from $29.1 billion on June 30, 2021.
Deposits continue to increase, which we believe is due in part to the government benefits and programs implemented during the pandemic and more people saving to have a safety net after the recent events.
Our nonperforming assets totaled $36.5 million or 11 basis points of quarterly average interest-earning assets on September 30, 2021, compared with $69 million or 24 basis points of quarterly average earning assets on September 30, 2020, and $33 million or 11 basis points of quarterly average interest-earning assets on June 30, 2021.
The reduction in nonperforming assets year-over-year is 47.4%.
The allowance for credit losses on loans was $287 million or 1.73% of total loans when excluding Warehouse Purchase Program, and PPP loans on September 30, 2021.
The allowance for unfunded commitments was $29.9 million on September 30, 2021, unchanged from prior periods.
This is a total reserve of $317 million.
Our net charge-offs were $15.7 million for three months ending September 30, 2021.
Net charge-offs included $4.6 million related to resolved PCD loans and $10.8 million related to a partial charge-off of one commercial structure real estate loan that was not a PCD loan and obtained through the acquisition.
The PCD loans have specific reserves of $3.1 million, of which $2.2 million was allocated to the charge-offs and $944,000 was moved to the general reserve.
Further, an additional $14.3 million of specific reserves on resolved PCD loans without any related charge-offs was released to the general reserve.
Overall, in the third quarter 2021, we resolved $54.9 million in acquired loans at $15.7 million in net charge-off and we leased $15.2 million to the general reserve.
We have seen more, but with regard to acquisitions, we've seen more merger and acquisition transactions recently and believe that due to increases in technology and staffing cost, additional government regulations and succession planning concerns, there will be continued activity, especially if current market valuations continue.
We remain ready to enter conversations and negotiations when it's right for all parties and is appropriately accretive to our existing shareholders.
The Texas and Oklahoma economies continue to benefit from companies reloading from states with higher taxes and more regulation.
Texas is projected to increase jobs by 493,000 in 2021.
This increase, combined with people moving to the state requires additional housing and infrastructure, a driver for loans and increased business opportunities.
We are seeing higher prices for most crops and higher oil prices, which should help the local economies.
Inflation continues to be higher than we would like, but we hope that it will moderate next year as the Federal Reserve begins tapering its asset purchases as expected.
We believe there are also signs that inventories are starting to increase and supply chains are improving, although it will take some time to stabilize and return to normal.
Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended September 30, 2021, was $248.6 million compared to $258.1 million for the same period in 2020, a decrease of $9.5 million or 3.7%.
The current quarter net interest income includes $5.4 million in fair value loan income compared to $22.5 million for the same period in 2020, a decrease of $17.2 million.
The third quarter 2021 net interest income, excluding the impact of PPP loans, Warehouse Purchase Program loans and fair value loan income improved compared to the same results in the second quarter 2021.
The net interest margin on a tax equivalent basis was 3.10% for the three months ended September 30, 2021, compared to 3.57% for the same period in 2020 and 3.11% for the quarter ended June 30, 2021.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended September 30, 2021, was 3.03% compared to 3.25% for the same period in 2020 and 2.96% for the quarter ended June 30, 2021.
Noninterest income was $34.6 million for the three months ended September 30, 2021, compared to $34.9 million for the same period in 2020 and $35.6 million for the quarter ended June 30, 2021.
Noninterest expense for the three months ended September 30, 2021, was $119.8 million compared to $117.9 million for the same period in 2020.
On a linked-quarter basis, noninterest expense increased $4.6 million from $115.2 million for the quarter ended June 30, 2021.
The increase was primarily due to gain on sale of ORE of $1.8 million recorded during the prior quarter and higher current quarter salaries and benefits resulting from higher incentives.
For the fourth quarter 2021, we expect noninterest expense to be in line with the current quarter or in the range of $118 million to $120 million.
The efficiency ratio was 42.3% for the three months ended September 30, 2021, compared to 40.2% for the same period in 2020 and 41% for three months ended June 30, 2021.
During the third quarter 2021, we recognized $5.4 million in fair value loan income.
This amount includes $3.3 million from anticipated accretion, which is in line with the guidance provided last quarter and $2.1 million from early payoffs.
We estimate fair value loan income from anticipated accretion for the fourth quarter of 2021 to be around $2 million to $3 million.
As of September 30, 2021, the remaining discount balance is $18 million.
Also during the third quarter 2021, we recognized $13.4 million in fee income from PPP loans.
As of September 30, 2021, PPP loans had a remaining deferred fee balance of $15.6 million, with the majority of these deferred fees to be earned in the next two quarters.
The bond portfolio metrics at 9/30 2021 showed a weighted average life of 3.5 years and projected annual cash flows of approximately $2.6 billion.
Our nonperforming assets at quarter end, September 30, '21 totaled $36,549,000 or 19 basis points of loans and other real estate, compared to $33,664,000 or 17 basis points at June 30, '21.
This represents approximately a 9% increase in nonperforming assets, which comes from one loan.
The September 30, '21 nonperforming asset total, was made up of $36,73,000 in loans, $326,000 in repossessed assets and $150,000 in other real estate.
Of the $36,549,000 in nonperforming assets, $5,459,000 or 15% are energy credits, all of which are service company credits.
The $5,459,000 as of September 30, '21 is a 35% decline from $8,378,000 as of June 30, '21.
Since September 30, '21, $7,990,000 in nonperforming assets have been put under contracts for sale, but there is no assurance that these contracts will close.
Net charge-offs for the three months ended September 30, '21, were $15,697,000 compared to $4,326,000 for the quarter ended June 30, '21.
The $15,697,000 includes approximately $11 million charged off on one commercial credit secured by an office building.
No dollars were added to the allowance for credit losses during the quarter ended September 30, '21, nor were any taken into income from the allowance.
The average monthly new loan production for the quarter ended September 30, '21, was $596 million.
Loans outstanding at September 30, '21 were approximately $18,958 billion, which includes approximately $366 million in PPP loans.
The September 30, '21 loan total is made up of 38% fixed-rate loans, 37% floating rate and 25% variable rate.
Matt, can you please assist us with questions?

user
compname reports q3 earnings per share $1.39.
q3 earnings per share $1.39.
increase in dividend of 6.1% to $0.52 for q4 2021.
qtrly net interest income before provision for credit losses was $248.6 million compared with $258.1 million.

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