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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Q&A Session

David Rochester: Was hoping to get your outlook for the margin in NII for either 2024 or at least maybe the first quarter? And any comments on the trajectory from there through the year would be great, specifically where you see the bottom in NII. And I know your outlook is pretty positive over the next few years, but just more near-term trends would be great to hear and get your thoughts on.

Asylbek Osmonov: So if you look at our margin in the short-term, as we discussed that we’re still having a lot of tailwind from our repricing of the loan and asset from the standpoint. From our borrowing side of it, as you saw, we decreased our borrowing $525 million. So we’re picking up that margin there from paying off from the cash flow on the investments, paying down the borrowings. So we’re picking up about 300 basis points there. So with the combination of loan repricing and paying down on borrowings, we should see expansion on the margin. And what you saw, we had 3 basis points expansion in the fourth quarter and we continue to see that marginal expansion in the first quarter and beyond. But if you look at it in the long-term, we see really — I think in the second half, we see more expense on the margin than we see in the first half of it just because it takes time for the asset repricing.

I think the guidance we gave last quarter that in 24 months, our NIM being like 3.30, 3.40, our model still shows that expansion in 24 months at 3.30, 3.40. So I think it’s looking promising.

David Zalman : I think, Dave, I think that what we said is that quarter to the quarter before the — in 12 months that we’d be at 3%, I think that if you look at the models that we’re running, again, these are just models and the models take into consideration that you have — you’re not going down on loans, you’re not going up on loans, you’re not going down a deposit, not going up. It’s a pretty static model. So the model reflects that in 6 months, we’re looking at around 2.96 and 12 months, 3.14, and 24 months, even better than that. And also, what’s good, even if interest rates go up or down, our models as to in our net interest margin expanding to really get more normal levels. So we’re pretty excited about that.

David Rochester: Great. And so are you assuming the forward curve in that analysis at all, even though you’re keeping the balance sheet static?

Asylbek Osmonov: Yes. On this, what the numbers we showed, that is the rates staying the same. But if you look at our model being 100 basis points down or 200 basis points, our margin still holds up. I think it — down 200 in 24 months, our margin might be a few basis less than what we’re projecting on the flat environment, but it’s still expanding in the 24 — 12, 24 months.

David Rochester : Okay. Great. And what are you guys including in that expectation? I guess it excludes balance sheet changes, but what are you thinking in terms of deposit growth for the year?

David Zalman : That’s probably the $1 million question, Dave. It’s just — I don’t know that anybody really — historically, we’ve always grown the bank organically 2% to 4%. These last several years were kind of crazy. We took in — we were growing 10% a year. And so we did something the other day. We went back and looked — and also back and I looked and said, “Okay.” So after all the deposits we lost recently — and we went back 3 years before the business. What’s really crazy when you — even with the amount that we gained, we’re still about 15% ahead. So that still gave us about a 5% organic growth rate over those years. So going forward, though, it’s really hard because, again, not trying to make excuses, but one of the main objectives of the Fed Reserve is to really slow the economy, and that comes two ways.

One, increasing interest rates, reducing borrowers; and number two, pulling money out of the system, and they pulled $1 trillion out of the system in the last year. So, when they’re pulling money out, that’s something that it’s going to reduce money in the banks unless you’re buying brokered funds. And I would say that, we know that some banks do — I’m not saying it’s wrong or right. We just elected to keep our cost of money — with core deposits in our case and not chase the brokered funds. So that’s just a position we took. I don’t know if it’s right or wrong and I’m not getting to what — you’re really asking what we think. I would think at best is probably a 2% gain in deposits, probably you just agree or is that.

Asylbek Osmonov: Yes. I think not — usually, historically, if you look at our deposits, the first quarter because of tax payment usually goes down a little bit historically. But in the long-term, I think, we should be able to get to historical rates. But it all depends on the macroeconomic conditions and with the quantitative tightening too, that will impact as well.

David Zalman : The main thing is I don’t see a 5% organic growth rate or that — not this year. That’s for sure.

Asylbek Osmonov: Yes, I agree.

Operator: The next question comes from Brett Rabatin with Hovde Group.

Brett Rabatin: Wanted to stick with the balance sheet and the margin. And just looking at the securities portfolio, it’s about $13 billion, and I know you’ve got over $2 billion in cash flow annually. But if you look at the yield kind of year-over-year, it’s kind of flattish at 2.07. Does that start to move up in the next quarter or two? Or can you give us any thoughts on the securities portfolio progression from a yield perspective from here?

Asylbek Osmonov: Yes. Since we’re not purchasing any new securities, I think yield is going to hold up as what we see at around 2.05. But I think it also depends how the mortgage rate is going to do, if there will be a lot of increase in mortgage or decrease in the mortgage rate, they might speed up a little bit turnover of those security and maybe we’ll pick up a little bit yield there. But overall, we’re not expecting the security yield to go up more significantly or come down more.

David Zalman: Yes. The only way that the yield would go up in the bond portfolio is if we elected instead of reducing debt are putting the money in the loans where we prefer putting it, we would buy back securities. In that case, then it would go up.

Asylbek Osmonov: Exactly.

David Zalman: Otherwise, it’s probably going to stay stagnant for the most part or flat.

Brett Rabatin: Okay. And then on the funding side, can you give us a refresher on how much you guys have in index deposits? And then just thinking about the — the usual seasonality for municipal deposits? How much are you guys having that and how you see the next quarter too playing out from that perspective?

Asylbek Osmonov: Okay. From the overall funding, let’s talk, we have — in the borrowing, you saw we have about $3.7 billion, around 5%. So we’re paying down with the cash flow from the investment portfolio. Related to time deposits, we have 13% of our deposit in time deposits. But that’s the special program we introduced paying 5%. We just want to give our customers some way of earning rate rather just lead them to competition, we want to pay up on those. And those are only seven months to deal. So we’re keeping them short term. So when rates would come down, we can reprice them quickly and kind of get out of our system within seven months. So we have about $3.5 billion in the CDs. And — but out of that, $3.1 billion will be maturing within 12 months, and those special CDs, about, I think, $1.8 billion. Rest of them is money market in noninterest-bearing deposits.