Prosperity Bancshares Inc
NYSE:PB
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Prosperity Bancshares Inc
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Good day, and welcome to the Prosperity Bancshares Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares’ second quarter 2019 earnings conference call. This call is being broadcast live over the internet at prosperitybankusa.com and will be available for replay at the same location 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, Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Vice Chairman; Asylbek Osmonov, Chief Financial Officer. Eddie Safady, President; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; and Bob Dowdell, Executive Vice President.
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 activity, including asset quality. Finally, we will open the call for questions.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Jake.
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, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements 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.
Thank you, Charlotte.
I would like to welcome and thank everyone listening to our second quarter 2019 conference call. For the second quarter of 2019, we showed impressive returns on average tangible common equity of 14.18% annualized and on average assets of 1.46% annualized. Our earnings were $82.2 million in the second quarter 2019, compared to $81.5 million for the same period in 2018, an increase of $661,000 or 80 basis points.
Out diluted earnings per share were $1.18 for the second quarter of 2019, compared to $1.17 for the same period in 2018, an increase of 90 basis points.
Our loans at June 30, 2019 were $10.597 billion, an increase of $441 million or 4.3%, compared with the $10.147 billion, at June 30, 2018. Our linked quarter loans increase $173 million or 1.7%, 6.7% on an annualized basis from $10.414 billion at March 31, 2019. We saw strong loan growth in the second quarter, reflecting consumer and business confidence.
Our deposit at June 30, 2019 were $16.888 billion a decrease of $90 million or 50 basis points, compared with $16.979 billion at June 30, 2018. Our linked quarter deposits decreased 310 million, or 1.8% from $17.198 billion at March 31, 2019. This quarterly decrease was primarily due to seasonality. Historically, our deposit balances in the second and third quarters are generally lower due to large customer income tax payments, farming customers having declining balances as their crops have been planted but not yet harvested, as well as public funds having lower balances from using their tax dollars throughout the year.
When comparing the second quarter of 2019 to the same period in 2018, our core deposits are higher, but total deposits decreased slightly, primarily due to public funds investing in higher yielding investments outside of the bank. It should be noted that when comparing quarterly average noninterest-bearing demand deposits, they increased 8.4% on an annualized basis when comparing June 30, 2019 to quarter-end, March 31, 2019.
We are excited about our pending merger with LegacyTexas Financial Group, the parent company of LegacyTexas Bank, LegacyTexas Bank operates 42 locations in 19 North Texas cities in and around the Dallas-Fort Worth area. We look forward to partnering with Kevin Hanigan and the entire LegacyTexas team to build the premier Texas-based bank. We had a number of opportunities but believe that this strategic transaction provided the greatest opportunities for the combined organization at this time. With the addition of LegacyTexas, we will have a significant and competitive position in Texas’ two largest metropolitan areas.
Prosperity is fortunate to operate in vibrant and growing states. We continue to see employment growth and a tailwind from companies expanding in and moving to Texas and Oklahoma due to a business-friendly political climate and lower tax rates. As Texas and Oklahoma economies continue to perform well with record low unemployment, consumer confidence remains strong, as evidenced by increased credit card purchases, and businesses continue to do well as reflected by increased sales tax rebates to most cities and small towns.
We posted a 6.7% annualized increase in loans for the second quarter of 2019, also reflecting confidence from business and consumers. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels.
We intend to continue to grow the Company both organically, and through mergers and acquisitions. We want to develop people to be the next generation of leaders, make every customer’s experience easy and enjoyable, and operate in a safe and sound manner. I want to thank everyone involved in our Company for helping to make it the success it has become. Thanks again for your support of our Company.
Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some specific financial results we achieved. Asylbek?
Thank you, Mr. Zalman.
Net interest income before provision for credit losses for the three months ended June 30, 2019 was $154.8 million compared to $161.8 million for the same period in 2018, a decrease of $7 million or 4.3%. The decrease was primarily due to a lower loan discount accretion in the second quarter of 2019 and higher than normal collection on nonaccrual loans in the prior year.
The net interest margin on a tax equivalent basis was 3.16% for the three months ended June 30, 2019, compared to 3.28% for the same period in 2018, and 3.2% for the quarter ended March 31, 2019. Excluding purchase accounting adjustments and higher than normal collection on nonaccrual loans last year, the core net interest margin for the quarter ended June 30, 2019 was 3.14%, compared to 3.12% for the same period in 2018, and 3.16% for the quarter ended March 31, 2019. Noninterest income was $30 million for the three months ended June 30, 2019, compared to $28.4 million for the same period in 2018.
Noninterest expense for the three months ended June 30, 2019, was $80.8 million, compared to $83.6 million for the same period in 2018. The efficiency ratio was 43.74% for the three months ended June 30, 2019, compared to 43.95% for the same period in 2018 and 42.94% for three months ended March 31, 2019.
The bond portfolio metrics at 6/30/2019 showed a weighted average life of 3.64 years and effective duration of 3.25 and projected annual cash flows of approximately $1.9 billion.
And with that, let me turn over the presentation to Tim Timanus for some detail on loans and credit, asset quality.
Thank you, Asylbek.
Our non-performing assets at quarter-end June 30, 2019 totaled $41,558,000 or 39 basis points of loans and other real estate, compared to $40,883,000 or 39 basis points at March 31, 2019. This is an increase of $675,000 from March 31, 2019. The June 30, 2019 non-performing asset total was made up of $38,883,000 in loans $670,000 in repossessed assets and $2,005,000 in other real estate. Of the $41,558,000 in nonperforming assets, $16,595,000 or 40% are energy credits, all of which are service company credits.
Since June 30, 2019, 1,443,000 in nonperforming assets have been sold. Net charges-offs for the three months ended June 30, 2019 were a negative $115,000 compared to net charge-offs of $1,049,000 for the three months ended March 31, 2019. $800,000 was added to the allowance for credit losses during the quarter ended June 30, 2019, compared to $700,000 for the quarter ended March 31, 2019.
The average monthly new loan production for the quarter ended June 30, 2019 was $287 million, compared to $284 million for the quarter ended March 31, 2019. Loans outstanding at June 30, 2019 were $10.587 billion, compared to $10.414 billion at March 31, 2019. The June 30, 2019 loan total is made up of 38% fixed rate loans, 38% floating rate and 24% variable rate.
I will now turn it over to Charlotte Rasche.
Thank you, Tim.
Before we take questions, we wanted to provide you with a brief update on our pending merger with LegacyTexas. Last week, we filed the required regulatory applications with the FDIC and Texas Department of Banking, and we expect to file with the Federal Reserve in the next week or so. We have also begun our operational integration efforts with the team at LegacyTexas. To-date, we have had multiple meetings between the managers and key employees of various departments at both companies to discuss current processes, including deposit operations, loan operations, compliance, risk management, mortgage originations, and IT and information security. We are impressed with the LegacyTexas team members and look forward to working with them. We expect to close the merger in the fourth quarter of 2019, although delays could occur.
At this time, we are prepared to answer your questions. Jake, can you please assist us with questions?
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brady Gailey with KBW. Please go ahead.
Thank you. Good morning, guys. So, I know, last quarter, we talked about the net interest margin, kind of being flat, if not up a little bit. We saw it slip a little bit this quarter. It looks like it’s from lower bond yields and some higher deposit costs. As we look forward, and I know we're now looking at a couple of rate cuts and the yield curve is doing what it's doing. How do you foresee the net interest margin trending?
This is David. Brady, again, the numbers I'm going to give you is really based on the bank as we are today. So, a lot of this will get changed when Legacy and us merge together, that if you look -- if you just check in the slides and look at the bank, the way we are today, I'll give you three scenarios. With no changes or interest rates stay where they're at, we still see a net interest margin that increases pretty significantly, more significantly in the 24 and 36-month timeframe. If you take another scenario and you look at, say, interest rates go down 50 basis points, we see a slight dip of about 2 basis points in the 6 and 12-month categories that increases back in the 24 and 36-month category. And if you look at interest rates down 100%, you will see that that we would have a net interest margin of about 3 basis points, maybe 3 or 4. Again, this doesn't count any increase in loans -- loan to deposit ratio, but if everything just staying exactly like it is, maybe 3 to 4 basis points. So, all in all, not a real big change. Our best scenario of course is, interest rates staying where they're at or going up. That helps us the most. But even going down 50 basis points, in the longer term, we're still positive. But having said this, when you merge Legacy bank and our bank together, you should see some pretty significant net interest margin increase.
Yes. I will agree. This is Asylbek. I want to add on a little bit. If you look at for second half of the year, our loan or core loan yield is 504. Right now, we're putting the new loans at about 550; that would definitely help us from the margin aspect going forward. The wildcard would be, of course, deposits which cost of deposit went up by 3 basis points, and that impacted our quarter. But what we saw this quarter that the cost of deposits stabilizing a bit, and we’re seeing the slowdown in terms of the increases in cost of deposits compared to prior quarters. So, that should help us going forward. But, like Mr. Zalman mentioned, based on the model, our NIM should improve.
I think, overall, I mean, I think the pace at what the rate -- the deposits increased over the past couple of quarters, surprised everybody. I think, we have seen a stabilization in those. And, again, I think that two things working towards this, when we put loans on, we're getting better yield on where they're at right now. And when you're putting security loan, our security yield today is still only 2.36. So, if we’re reinvesting them all today, we’d probably be getting closer to 2.70%. So, we have some gains in both categories. I think that we're probably better positioned than a lot of the other banks, it could be good or bad. I would say that we're more balanced. If we were strictly a commercial portfolio with floating rate loans, we'd definitely be impacted more. It looks like we have about a third, a third, and a third, a third. Fixed rates are a third; floating, 30; fixed plus variables. So, I think, we're pretty balanced overall.
Okay. And then, also the net premium amortization for security was a little bit higher this quarter versus Q1. I think Q1 was relatively low compared to historically. But, I mean, going forward, I would expect really same level...
Yes. We saw a lot more refinancing this quarter with interest rates going down. And that's just natural to expect, I think.
All right. That's helpful. And I know last quarter we talked about delevering the bond book a little bit. It looks like the bond book continued to come down again in the second quarter. Do you see that continuing to trend down or already to the point where those balances should be roughly stable going forward?
So, there's two -- there's probably -- the answer is two parts to that question. One, how much do your loans grow because that's where your money would come from, from your bond book; and then, how much do your deposits grow? Historically it’s seasonally low in this quarter and the third quarters. Historically, our deposits grow 2% to 4%. They were less the last year. So, there's two things that are going on in that category. But, I would say that if you have -- if you look at it historically, you probably should still see both grow a little bit I would think. I think you should see some growth in loans and you should still see the balance, the securities book grow also.
That’s exactly correct because we want to invest in loans as possible. But, the decrease in the investments was -- is in line with decrease on the other borrowing. Because our overnight rate is like 2.58 right now. So, that's the reason we’re running off a little bit our bond portfolio, and that you see the decrease in the both line items.
I don’t think it makes a lot of sense, we talked about this earlier, borrowing money...
It’s correct and it helps our margin as well in that management of balance sheet.
All right. That's helpful. And then, just finally for me on the buyback. You repurchased a little over 1% of the Company. If I look at the price per share, the $64.50, it looks like you repurchased it kind of late in the quarter, maybe even after the LegacyTexas deal was announced. Maybe just thoughts on future buybacks going forward in the back half the year?
Yes. You’re exactly right. After we announced the Legacy deal, our stock took a dive, and we felt that it was underpriced. And we jumped in, really and bought the maximum that we could buy, almost every day until the day that we couldn't buy because of our earnings announcement. So, we just felt that the price, the price of the stock really should be more and we jumped in. And if it happens again, we'll do the same again. We like it, we have a lot of capital, and if the stock ever becomes disproportionate to where it should be, we’ll be back in again.
Next question comes from Jennifer Demba with SunTrust. Please go ahead.
Thank you. Two questions. First, how does the new rate environment expectations now impact your accretion assumptions for the LegacyTexas transaction? And my second question is, what's your appetite for more M&A over the near term? Thanks.
I’ll probably turn the first part of the -- first question, Jennifer to Asylbek because he's done some calculations on what net interest margins should look like and how they may in effect. I’ll take the second question with regard to appetite and more mergers.
Yes. Regarding the accretion to Legacy, you right with the rates decreasing, probably we're not going to see much of a discount that we had in previous acquisition. That will definitely impact the accretion going forward. But again, if you're talking about the SOP of credit discount, as we’ve spoken I think previously, that under CECL that the discount on the credit becomes the allowance starting January 1st. So, going forward, we should not see any of those accretion incomes from the credit side of it. But with the rate environment slowing down or going down, I think that discount would be less than we had previous acquisitions.
I think, probably going a step further, I think Legacy on their own with rates going down would probably see a lower net interest margin. But again, we have such a great opportunity because they have a chunk of money that's more, I guess, purchased money on the Federal Home Loan; the number two, they probably have $800 million or so in what we call CDs that are -- we call those CDs that are broker CDs. I think that we can replace that money with our core deposit, our core deposits. Our cost is what right now? Our total cost…
Cost of deposit is 62 basis points
62 basis points where their overall is over 1%. So, overall, the combination of our two banks together is real benefit for both. It increases our net interest margin. It also helps them dramatically.
So, then, related to the second part of the question about our appetite for more mergers and acquisitions. And I don't want to scare anybody, but as I mentioned earlier, this is our first and foremost that we want to focus on, us and Legacy together and make sure that everybody feels comfortable and that we're going forward. But as mentioned earlier too, and I think that Kevin feels this way the same that I do, we want to build a premier Texas bank. And so, I think that we will look -- we were looking at a couple of other transactions before we did the deal with the Legacy. It just seemed Legacy was the right to do at this particular time. But, there's still more step out there and I think that you will see it back in the market again.
Follow-up to the first question. So, when you announced legacy, you said you saw 2020 earnings accretion would be a little over 10%. So, do you still feel that's achievable with some offset.
We do feel that it’s going to be achievable. And it's only improving with the acquisition of the 800,000 shares that we bought already in stock. That helps our creation as well, too. And that's why we like going out. If you remember too, really, we wanted to really put about 25% cash down on the transaction, Legacy really only wanted us to give them about 10%. I think, we settled somewhere in the 15% category of cash. So, we do have excess money. And if we can buy in the market -- the more we can buy in the market will add to that accretion. And I feel like the cost saves that we gave were really -- they were real. But, we always seem to do pretty good on that.
Yes. That I agree. And 10% accretion, 10 plus accretion, assuming the full savings. But in 2020, probably we're going to realize 60% savings, and 2021 will be 100% savings.
You’re just saying that by the time integration happens -- you're just making a point that we will get 100% the first…
Yes, exactly. That’s why I want to clear that that 10% accretion is not going to happen in 2020 but in ‘21.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Just looking at the Legacy side this quarter, it looks like they had some negative migration this quarter. So, I guess, what I'm asking is, it looks like some of those loans are going to be resolved potentially by the time the deal closes. So, could we expect the credit mark to actually come down?
I would say, no because the loans that you're seeing right now that have been reserved for or being charged off, were loans that we were -- first of all, they might have identified them, but more so than that we identify them also in our due diligence. And those were all identified in due diligence and those were marked appropriately. I guess, the mark -- I guess you could say like this, I guess the mark would come down overall if they're charged off. But from our perspective, it really hasn't changed from what the original mark was. I guess, I don't know if I’m being very clear, but if they are charged off, yes, then, your mark will be down because it's already been taken into consideration.
But, I think, the thing to emphasize is overall, we haven't seen anything and Legacy has not seen anything that would change the overall aggregate mark that we were talking about initially.
Right. I think that everything that we're seeing right now and what we know that they have I think -- they're aware of and we're aware of at the same time. There's nothing -- was unexpected in this.
Understood. And maybe just one more question as it relates to them. They had a pretty nice bump in their mortgage warehouse this quarter, we've kind of seen that across the industry. David, what's your view on that line of business? I know, you guys haven’t historically been in it, but would just love any thoughts on what you would expect to do with that business once the deal closes? Thanks.
Yes. I think, as you get bigger, you take on different lines of business. Sometimes, I think that -- we've always been more conservative in nature. I think, that Legacy is taking more risk than we have. I think going forward, warehouse mortgage lending, Kevin feels very comfortable with it. And so, we're looking at it. And I think that it's part of our -- when we went into this deal, it’s part of something that we're going to keep. I can't tell you that we're going to expand it to from $1.5 billion to $2.5 billion or something like that. But where it’s at right now, we feel comfortable with it.
[Operator Instructions] The next question comes from Matt Olney with Stephens. Please go ahead.
Hey, great. Thanks good morning, guys. I want to circle back the discussion around the margin. And I believe you said the new loan yields are coming on around 5.5%. Can you just clarify, is that the average rate of the new and renewed loan yields in 2Q? And has that change at all over the last few quarters?
So, 5.50% that we mentioned, that's what average we're putting on our books. But if you look at past few quarters, I think Q1 was on average also 5.50, it has not changed significantly. But with the rate -- expected rate change, we're not sure of how it's going to impact. But right now, what we see in our books putting as 5.50%.
I would say this, Matt, too that, even when rates dropped extremely low, we feel -- there was still kind of a base on what we were charging, especially on loans that we would fixed rate for three and five years. I don't know that we really ever dropped below 5% on a fixed rate. Randy, do you want to add some comments there.
Probably the mid 4s, 4.5% when rates were at their lowest.
At the lowest.
But, we've been above 5% for a while.
Yes. I mean, I think there probably -- who knows what rates are going to be. I don’t want to forecast that. But as you say, I that we're well positioned where we're at both, because we have a certain amount of fixed rates and a certain amount of verbal rates, too.
Right. And then, on the liability side, deposit cost still great, especially versus peers. But, I was surprised to see incremental pressure on the CD cost. I think they were up 16 bps sequentially. Just trying to appreciate -- is that pressure -- is that incremental pressure in the metro markets that you guys serve or is this new and more emerging pressure in the rural markets that you've avoided for over the last few years?
That's probably because of me. I saw that -- we really have just -- our CDs. When I started in banking or when the bank started, we probably had around a 30%, 35% ratio of CDs. And if we look today, we just have really dropped to like 10% or 12% on the CDs. And we really felt like, okay, that's enough. So, I mean, we're not leaving the market. You didn't see us go out and offer 2.5% or 3% on one year CD, but we did offer it 2% on one year, and that was to try to keep our existing customers and not to lose. Not that we're trying to go after the higher rate CDs. But, we didn't want to lose more from where we were. And I guess, it was maintaining where we're at, not going back much more on the CDs.
And let me add to that a little bit, David. We're seeing it across the board in all markets. I will say, in the major metropolitan markets, we're not seeing it from the very large banks. But, it's firstly, all financial institutions other than the very large ones. So, we're seeing it in the smaller markets, we're seeing it in the larger markets both. It's just not coming from the Chases and the Bank of Americas and people like that.
Now, I think they’re probably more regional smaller banks more than anybody else, their loan to deposit ratios are just had a massive, 100%. And they're doing whatever it takes to get money into the bank and paying very, very high rates.
That's correct. I will say, for a while we were seeing a fair amount of competition, offering CD rates from one year going out, I guess, to as long as five years in the 2.5% to 3% range, every now and then, went a little over 3. We're not seeing much at 3 anymore. But 2.5 is commonplace. I see it every day. So, it's still out there.
But overall, I think -- I keep making a statement like this. I don’t know that I can base it on, except for Asylbek’s comments as well that we do see somewhat of the pressure on rates stabilizing and maybe coming down. I mean, a year -- a few months ago, like you said, Tim, you did see ads in the paper full page 3% plus and you’re not seen that anymore.
That's correct. For a while, I was probably getting 10 to 20 emails a day from banking centers, having problems with customers wanting to move money to some of these very high rates. That's dropped down to maybe 3 or 4 or 5 a day. So, it's still there, but it's not as prevalent as it was. That's exactly correct.
The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Question for maybe David or Tim just on loan growth. You had a good -- just big picture good overall long growth quarter. But, does this feel like a good pace of growth for you, or would you call out anything as unusual in terms of the increase that you saw?
As of this moment in time, I wouldn't say that there's anything unusual. From what we can tell, things are stable. I don't see any reason to expect any large swings. But, we all get surprised in the business world. So, there are no guarantees. But, everything is still healthy in our markets. If there's any softness, it's typically in the office occupancies in Houston and Dallas, for example. But those are stable in terms of where they’ve been. So, I think it's business as usual, moving forward, for a while.
I think overall, when you look at consumers and businesses, everything looks pretty healthy. I was going to qualify and say, when I looked at the first few days of the quarter, it looks like we were getting off to a slow start. However, when I looked last quarter, it started the same way. We actually were a slower start, we really came through at the end. So, I don't see a whole lot of change…
The pipeline is still good.
The pipeline is still good.
The pipeline is still good. And sometimes, there's a bit of seasonality in the summer when everybody's on vacation, it drops off. This past quarter was reasonably decent for us. So, we didn't see as much of a drop off as we have in some years. So, as of this moment, there's no reason to think it's not going to be stable, and hopefully improving going forward.
And most of your loan categories, it looks like they increased, but this is a small category in energy, but it looks like it was down a bit. And I'm not necessarily asking about the growth there. But curious, if you are seeing some opportunities and how you feel about the overall health of energy in general?
I don't know that we're seeing significant additional opportunities. I mean, there certainly are some. I guess, our take on energy is one of caution. Energy lending can be fine, but it is what it is. It's cyclical, always has been. I'm sure, it always will be. You just have to be careful and not get overly enthusiastic when things look like they're improving a bit, because before you know it, they'll deteriorate a bit. So, we're still in the energy business. We're still making loans out there. I would anticipate that that portfolio would be stable for a while, I don't see it declining significantly, and I don't see it growing significantly, either.
And then, David or Asylbek, just in terms of the securities portfolio, you’ve talked about it a little bit. But, the rate environment obviously changed a bit over the last quarter or two. I'm just curious, if you're thinking about doing anything different with the portfolio, or is it just the same methodical approach that you always take?
I would say the same methodical approach, if anything. We're really reducing the bond portfolio and putting the money into bonds really, I mean the loans for the most part. That's what we -- and we really -- with rates being lower the last month or so, we really haven't -- there hasn't been any need to go out and try to borrow money if they’re on [ph] bank and pay higher rates for CDs or anything. So, that's -- I think we're just sticking with the same strategy.
This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche. Please go ahead.
Thank you, Jake. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our Company and we will continue to work on building shareholder value.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.