Prosperity Bancshares, Inc. (NYSE:PB) Q1 2024 Earnings Call Transcript

Prosperity Bancshares, Inc. (NYSE:PB) Q1 2024 Earnings Call Transcript April 24, 2024

Prosperity Bancshares, Inc. beats earnings expectations. Reported EPS is $1.18, expectations were $1.16. PB isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Prosperity Bancshares, Inc. First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to hand the call to Charlotte Rasche. Please go ahead.

Charlotte Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares first quarter 2024 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; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. David 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 the 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 Prosperity Bancshares’ 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’d like to welcome and thank everyone listening to our first quarter 2024 conference call. We are excited to announce that on April 1, 2024, we completed the merger of Lone Star State Bancshares Inc. and Lone Star Bank, headquartered in Lubbock, Texas. The operational integration is scheduled for late October 2024 when Lone Star customers will have full access to our 288 full-service locations. We welcome the Lone Star customers and associates to Prosperity and will work hard to win your trust. Prosperity continues to focus on long-term relationships and our customer success while maintaining strong asset quality and earnings and a fair return to shareholders. Prosperity maintained a high tangible equity to tangible asset ratio of 10.33% for the first quarter of 2024, while sharing earnings with our shareholders.

Prosperity repurchased 567,692 shares of common stock during the first quarter of 2024 in addition to the quarterly dividend. In 2023, Prosperity’s total capital return to shareholders from dividends and share repurchases was $278 million. For the three months ended March 31, 2024, the net income was $110 million or $1.18 per diluted common share compared with $95 million or $1.02 per diluted common share for the three months ended December 31, 2023. The change was primarily due to higher interest income and lower FDIC assessments. For the three months ended March 31, 2024, the annualized return on average assets was 1.13% and the annualized return on average tangible equity was 12.06% and the efficiency ratio was 49%. The loans were $21.265 billion at March 31, 2024, an increase of $84 million or 40 basis points, a 1.6% annualized from the $21.181 billion at December 31, 2023.

The loans increased $9.131 billion or 10% compared with the $19.334 billion at March 31, 2023. The loans, excluding warehouse purchase program loans, and loans acquired in the merger of First Bancshares increased $115 million or 60 basis points or 2.4% annualized during the first quarter of 2024. Our deposits appear to have stabilized and core deposits have increased modestly. Deposits were $27.176 billion at March 31, 2024, a decrease of $4.3 million from the $27.180 billion at December 31, 2023. Deposits increased $171 million or 60 basis points compared with the $27.4 billion at March 31, 2023. Deposits, excluding public fund deposits increased $109 million during the first quarter with no broker deposits purchased. The net interest margin on a tax equivalent basis was 2.79% for the three months ending March 31, 2024 compared with 2.75% for the three months ended December 31, 2023.

Based on our models, we believe our net interest margin should continue to improve to a more normalized level as our bond portfolio and loan portfolio reprice. Our average net interest margin from 2012 to 2022 was 3.37% compared with our net interest margin of 2.79% for the first quarter of 2024. Our non-performing assets totaled $83 million or 24 basis points of quarterly average interest-earning assets at March 31, 2024, compared with $72 million or 21 basis points of quarterly average earning assets at December 31, 2023. Our non-performing assets are higher than our historical levels, primarily due to acquired loans. We expect to reduce our non-performing assets ratio to a more normal level within a year. The $2.4 trillion Texas economy is now the eighth largest economy in the world, larger than Russia, Canada, Italy and others.

Texas is the top state for Fortune 500 headquartered companies currently at 55, and was named the 2023 State of the Year for Best in Nation business climate and job road. Texas added 369,600 non-farm jobs in 2023, the most in the nation. We believe the Texas and Oklahoma economy should outperform most other states. As previously mentioned, the merger of Lone Star State Bancshares was completed on April 1, 2024, and the operational integration is scheduled for late October 2024. We’re excited to have the Lone Star associates on the Prosperity team. We continue to have active conversations with other bankers regarding potential acquisition opportunities and hope to continue to grow through thoughtful mergers and acquisitions. Overall, I want to thank all our associates for helping create the success we have had.

We have a strong team and a deep bench at prosperity, and we’ll continue to work hard to help our customers and our associates succeed and to increase shareholder value. Thank you 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 that we achieved. Asylbek?

Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended March 31, 2024 was $238.2 million compared to $237 million for the quarter ended December 31, 2023, and $243.5 million for the same period in 2023. The net interest margin on a tax equivalent basis was 2.79% for the three months ended March 31, 2024 compared to 2.75% for the quarter ended December 31, 2023, and 2.93% for the same period in 2023. Excluding purchase accounting adjustments, the net interest margin for the three months ended March 31, 2024, was 2.76% compared to 2.71% for the quarter ended December 31, 2023, and 2.91% for the same period in 2023. The first quarter increase in net interest margin was primarily due to repricing to higher-yielding earning assets.

Non-interest income was $38.9 million for the three months ended March 31, 2024, compared to $36.6 million for the quarter ended December 31, 2023, and $38.3 million for the same period in 2023. Non-interest expense for the three months ended March 31, 2024 was $135.8 million compared to $152.2 million for the quarter ended December 31, 2023, and $123 million for the same period in 2023. Beginning in the second quarter of 2024, we expect the run rate for non-interest expense to be in the range of $141 million to $143 million. The expected increase is based on the acquisition of Lone Star State Bank on April 1, 2024, and Prosperity Bank’s annual merit increase in the second quarter 2024. Additionally, during the second quarter 2024, we expect one-time merger related costs of $6 million to $8 million and additional FDIC special assessment of approximately $3 million to $5 million.

Further, second quarter results will include purchase accounting provision expense related to the Lone Star acquisition. The efficiency ratio was 49.1% for the three months ended March 31, 2024, compared to 55.6% for the quarter ended December 31, 2023, and 43.7% for the same period in 2023. The bond portfolio metrics at 3, 31, 2024 have a modified duration of 4.1 and projected annual cash flows of approximately $2.1 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Mr. Timanus?

Tim Timanus: Thank you, Asylbek. Our non-performing assets at quarter end March 31, 2024, totaled $83,811,000, which is 39 basis points of loans and other real estate. This is compared to $72,667,000 or 34 basis points at December 31, 2023. This represents a 15.34% increase. Since March 31, 2024, $7,425,000 of non-performing assets have been removed or put under contract for sale. For March 31, 2024, non-performing asset total was comprised of $81,510,000 in loans, $97,000 in repossessed assets and $2,204,000 in other real estate. Net charge-offs for the three months ended March 31, 2024, were $2,143,000 compared to net charge-offs of $19,133, 000 for the quarter ended December 31, 2023. This is a $16,990,000 decrease on a linked quarter basis.

There was no addition to the allowance for credit losses during the quarter ended March 31, 2024. Also, there was no addition to the allowance during the quarter ended December 31, 2023. No dollars were taken into income from the allowance during the quarters ended March 31, 2024, and December 31, 2023. The average monthly new loan production for the quarter ended March 31, 2024 was $308 million compared to $300 million for the quarter ended December 31, 2023. Loans outstanding at March 31, 2024, were approximately $21.265 billion compared to $21.181 billion at December 31, 2023. The March 31, 2024 loan total is made up of 41% fixed rate loans, 28% floating rate loans and 31% variable-rate loans. I will 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] Today’s first question comes from Peter Winter with D.A. Davidson. Please go ahead.

See also 11 Best Coal Mining Stocks To Invest In and ChatGPT Stock Predictions: 10 Stocks That Have 10X Potential.

Q&A Session

Peter Winter : Good morning. First, I just want to congratulate you guys on closing Lone Star. I can’t imagine the level of frustration just given how long it took to close. But I was just wondering, given that experience, are you still interested in bank M&A or kind of on pause for a little while?

David Zalman: Well, it’s a good question. We have to ask ourselves that all the time. As you know, it was very difficult closing the Lone Star transaction. First, it was held up by the DOJ took quite a while. We spent a lot of money trying to get it out of there. And then we had a time getting it from the FDIC approved until now. But — we thought about it a lot. I don’t — it was hard. I think things have changed in Washington. There’s no question about it. It is hard to get deals done. You probably really have to think about the deals you want to do. But the answer to the question is, yes, we’re still into the M&A world, and we’ll probably still do more. It’s just — I think that it will be more — it will be really thoughtful before we determine the transaction that we want to do.

I don’t know that people can just do all the transactions that they used to do. I don’t know that the climate is even right for that right now. But the answer is still yes. We are interested in M&A.

Peter Winter: Got it. And then just separately, it’s nice to see the increase in net interest income sequentially. I’m just wondering, can you talk about what the impact with Lone Star is in the second quarter to net interest income and just kind of your outlook in the second half of the year?

Asylbek Osmonov: Peter, we looked at our impact of Lone Star on our book and from the — I’ll talk about a little bit margin. When we run our models, it’s accretive to the margin and net interest income. So I think it’s going to be a few basis points on margin. So — but considering Lone Star will be positive in the long term as the assets repriced ours and theirs.

David Zalman: I would also say, Peter, that the net interest margin did show the improvement. It probably would have shown a more improvement this quarter, but the regulators are requiring most banks to keep more liquidity on their — on their books. And in the past, we always had a line of credit because we borrowed in front of what our runoff of our $2 billion in bonds that rolled off every year. We also just organic growth of 2% to 4% of deposits gave us almost another $1 billion. So we would always borrow in advance, not leave a lot of money on the sidelines. And in today’s world, the regulatory agencies really are pushing to keep more liquidity on hand. And again, if we wouldn’t have had to do that and build that up, building that up, we would have paid our loan down and our borrowings down and our margin would have been somewhat higher.

Peter Winter : Just if I could follow up. Just — what is the outlook then going forward on the margin? You’ve given us some guidance in the first quarter. I’m just wondering what the outlook is?

David Zalman: I think that we’re on — we’re — I think we’re right there. I mean I think that everything that we had said, we’re still on course to do what we said we would do.

Asylbek Osmonov: I agree. And with the addition of Lone Star, I think the projection is we increased our NIM projects a little few points higher than we projected. So that’s been NIM accretive.

David Zalman: I’d just be glad to get back to where we were like more.

Asylbek Osmonov: So I think the guidance we provided the 24 months, 330 — 340 I think we can maybe estimate about 340 to 350 in 24 months.

David Zalman: Just looking in the short term, though, I think that we’re — the goals we had given to you guys in 6 months being somewhere around 3% and a little bit better than that at year-end. So I think everything that we said seems to be going in the direction that we gave guidance for in the previous earnings announcement. So I think the model, again, something can always change, but I think that we’re on course.

Peter Winter: Thanks, David.

Operator: The next question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose: Hey, good morning guys. Thanks for taking my question. Just a few on Lone Star, maybe for Asylbek. I think you guys had talked about kind of a day 2 provision addition. I know this is going back like a year of around, I want to say, $12 million. I just want to see if that holds. And then what the accretable yield addition will be as it relates to Lone Star, again, I think things have changed. I appreciate the margin guidance, but was just looking for those? Thanks.

Asylbek Osmonov: Michael, related to Lone Star, we’re still working on the valuation of their loan portfolio. And I would say we’re getting the preliminary, but is subject to change as we finalize I think day 2 accounting could be between $8 million to $12 million. I know we provided guidance between $10 million to $12 million, but I think we could be between only $8 million to $12 million. So it’s — might be decreasing, but we’re working towards that on the day 2 provision. On accretable yield, it was also a preliminary number, but I think initially, it will be around between $1.5 million to $2 million fair value income on loans per quarter. That’s what we estimated that’s going to be $10 million to — $9 million to $12 million.

Michael Rose: Okay. That’s very helpful. And maybe just a follow-up. I think Kevin is in the room, I was asked the warehouse question came in a little bit better this quarter. Just wanted to kind of see the outlook maybe for the second quarter now that we’re entering kind of a more seasonal pattern, but understanding that mortgage rates have gone up and there’s a lack of supply? Thanks.