Prosperity Bancshares Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Prosperity Bancshares Third Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. 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.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' 3rd 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.

Speaker 1

E. Timanus, Jr, Chairman Asobek Osmanov, Chief Financial Officer Eddie Safady, Vice Chairman Kevin Hannigan, President and Chief Operating Officer Randy Hester, Chief Lending Officer Mays Davenport, Director of Corporate Strategy and Bob Dowdell, Executive Vice President. David Zelman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmanov, 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.

Speaker 1

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 Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10Q and 10 ks and other reports and statements we have filed. All forward looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

Speaker 2

Thank you, Charlotte. I would like to welcome and thank everyone listening to our Q3 2024 conference call. I'm pleased to announce that the Board of Directors approved increasing the 4th quarter 2024 dividend to $0.58 per share from the $0.56 per share that was paid in the prior 4 quarters. The increase reflects the continued confidence the Board has in our company and our markets. The compound annual growth rate in dividends declared from 2,003 to 2024 was 11%.

Speaker 2

We continue to share our success with our shareholders through the payment of dividends and opportunistic stock repurchases, while also continuing to grow our capital. Our tangible capital increased $218,000,000 from September 30, 2023 to September 30, 2024. This is the amount Prosperity retained after paying $212,000,000 in dividends and repurchasing $75,000,000 of our common stock during this period, reflecting Prosperity's stable earnings. Further, Prosperity's tangible book value per share has a compound annual growth rate of 11% for the last 21 years or since 2003. Prosperity reported net income of $127,000,000 for the quarter ended September 30, 2024 compared with $112,000,000 for the same period in 2023.

Speaker 2

The net income per diluted common share was $1.34 for the quarter ended September 30, 2024 compared with $1.20 for the same period in 2023, an 11.7% increase. Prosperity earnings were primarily impacted by a higher net interest margin. The net interest margin on a tax equivalent basis was 2.95% for the 3 months ended September 30, 2024 compared to 2.72% for the same period September 30, 2023. As mentioned in previous calls, our net interest margin should continue to improve to more normal levels as our assets reprice. Prosperity continues to exhibit solid operating metrics with annualized returns on tangible equity of 13.5 percent and return on assets of 1.28 percent for the Q3 of 2024.

Speaker 2

Loans were $22,300,000,000 at September 30, 2024, an increase of $948,000,000 or 4.4 percent compared with $21,400,000,000 at September 30, 2023. Linked quarter loans increased $60,000,000 Excluding the loans acquired in the Lonestar merger and new production by the acquired lending operations since April 1, 2024, loans at September 30, 2024 decreased by $161,000,000 compared with September 30, 2023. The reduction in loans is not unusual for Prosperity as we are still working through loans acquired from the First Capital Bank. If the terms and conditions of any acquired loan does not meet certain standards, we exit the asset. Over the years, this process has resulted in lower non performing and charged off loans and makes us a stronger bank that can withstand various banking cycles.

Speaker 2

Our shareholders have come to expect this. Our deposits were $28,000,000,000 at September 30, 2024, an increase of $774,000,000 or 2.8 percent compared with $27,300,000,000 at September 30, 2023. Link quarter deposits increased $154,000,000 from $27,900,000,000 at June from $27,900,000,000 at June 30, 2024. Excluding deposits assumed in the Lone Star merger at September 30, 2024, deposits decreased by $361,000,000 compared with September 30, 2023 and increased by $206,000,000 compared with June 30, 2024. We're encouraged that the deposits are stabilizing and the core deposits have grown slightly compared with the previous quarter after the effects of the bank failures in 2023.

Speaker 2

Importantly, Prosperity has not purchased any broker deposits during this turbulent time. Our non performing assets totaled $89,900,000 or 25 basis points of quarterly average interest earning assets at September 30, 2024 compared with $69,500,000 or 20 basis points of quarterly average interest earning assets at September 30, 2023 and $89,600,000 or 25 basis points of quarterly average interest earning assets at June 30, 2024 with a significant portion of the balance for each period attributable to the acquired loans. The allowance for credit losses on loans and off balance sheet credit exposure was $392,000,000 at September 30, 2024 compared with $89,900,000 in non performing assets as of September 30, 2024. Our net charge offs were $12,000,000 for the 9 months ended September 30, 2024 compared with $18,900,000 for the 9 months ended September 30, 2023. We continue to have conversations with other bankers considering strategic opportunities.

Speaker 2

We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns and increased regulatory burden all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long term future and will increase shareholder value. An estimated 1000 to 1300 people move to Texas every day based on the U. S. Census Bureau.

Speaker 2

In 2023, 473,000 people moved to Texas, which equates to approximately 40,000 per month or $1300 per day. The Texas and Oklahoma economies continue to benefit from companies relocating from states with higher taxes and more regulation. This combined with people moving to the states requires additional housing and infrastructure, a driver for loans and increased business opportunities. We believe our bank is located in 2 of the best states we can be for future growth and continued prosperity. Thanks again for your support of our company.

Speaker 2

Let me turn over our discussion to Hasselbeck Hasmanov, our Chief Financial Officer to discuss the specific financial results we achieved. Hasselbeck?

Speaker 3

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended September 30, 2024 was $261,700,000 an increase of $2,900,000 compared to $258,800,000 for the quarter ended June 30, 2024 and the increase of $22,200,000 compared to $239,500,000 for the same period in 2023. Fair value loan income for the Q3 of 2024 was $4,800,000 compared to $7,200,000 for the Q2 of 2024.

Speaker 3

Excluding fair value loan income, the core net interest income for the 3 months ended September 30, 2024 increased $5,300,000 compared to the quarter ended June 30, 2024. The net interest margin on a tax equivalent basis was 2.95% for the 3 months ended September 30, 2024 compared to 2.94% for the quarter ended June 30, 2024 and 2.72% for the same period in 2023. Excluding purchase accounting adjustments, the net interest margin for the 3 months ended September 30, 2024 was 2.89% compared to 2.86% for the quarter ended June 30, 2024 and 2.68 percent for the same period in 2023. Non interest income was $41,100,000 for the 3 months ended September 30, 2024 compared to $46,000,000 for the quarter ended June 30, 2024 $38,700,000 for the same period in 2023. Higher non interest income during the Q2 2024 was due to a net gain of $10,700,000 resulting from the gain on diesel stock conversion, partially offset by the loss on sale on the investment securities.

Speaker 3

Non interest expense for the 3 months ended September 30, 2024 2024 was $140,300,000 compared to $152,800,000 for the quarter ended June 30, 2024 $135,700,000 for the same period in 2023. Higher non interest expense during the Q2 2024 was primarily due to merger related expenses of $4,400,000 and FDIC special assessment of 3,600,000 dollars For the Q4 2024, we expect non interest expense to be in the range of $141,000,000 to $143,000,000 The efficiency ratio was 46.9 percent for the 3 months ended September 30, 2024 compared to 51.8 percent for the quarter ended June 30, 2024 and 48.7% for the same period in 2023. The bond portfolio metrics at ninethirtytwenty twenty four have a modified duration of 4 and projected annual cash flows of approximately $2,000,000,000 And with that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality. Timanus? Thank you, Asselbeck.

Speaker 4

Our non performing assets at quarter end September 30, 2024

Speaker 2

totaled $89,923,000

Speaker 4

or 40 basis points of loans and other real estate compared to $89,570,000 or 40 basis points at June 30, 2024. Since September 30, 2024, dollars 2,200,000 in non performing assets had been removed or put under contract for sale. The September 30, 2024 non performing asset total was made up of $83,989,000 in loans, dollars 177,000 in repossessed assets and $5,757,000 in other real estate. Net charge offs for the 3 months ended September 30, 2024 were $5,455,000 compared to net charge offs of $4,368,000 for the quarter ended June 30, 2024. This is a $1,087,000 increase on a linked quarter basis.

Speaker 4

There was no addition to the allowance for credit losses during the quarter ended September 30, 2024 compared to a $9,066,000 addition during the quarter ended June 30, 2024 that resulted from the Lone Star State Bank of West Texas acquisition. No dollars were taken into income from the allowance during the quarter ended September 30, 2024. The average monthly new loan production for the quarter ended September 30, 2024 was $259,000,000 compared to $278,000,000 for the quarter ended June 30, 2024. Loans outstanding at September 30, 2024 were approximately $22,381,000,000 compared to $22,321,000,000 at June 30, 2024. September 30, 2024 loan total is made up of 40% fixed rate loans, 31% floating rate loans and 29% variable rate loans.

Speaker 4

I will now turn it over to Charlotte Rasche.

Speaker 1

Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.

Operator

We will now begin the question and answer session. Our first question today is from Manan Kaceliad with Morgan Stanley. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 6

Good morning.

Speaker 7

You noted NIM should continue to improve to more normal levels as assets reprice. I was wondering how you feel about the NIM guidepost that you previously given?

Speaker 2

Again, I think we're sticking with what we said. We should exit our NIM at 3 at year end. Again, that's there's a lot of things that go into that. That's if rates stay exactly where they are. If rates go down, of course, we'll have to lower our money market accounts by 25 basis points to exit at 3, but we still plan on hedging the year at a 3% NIM.

Speaker 2

And then for 12 months ending in 2025, our model is showing that we'll average 3.27 percent for the year, which means to be lower in the beginning of the year and higher at the end of the year. And then in 'twenty six, our model is still projecting 3.65. That's I'll put a caveat on that. That looks a little strong to me, but that's just what the model is showing right now. And again, those are taking into consideration that the interest rates at the end of the year prime is 7.5% and in 25% that will finish the prime at 6.5% and in 26% to prime at 6%.

Speaker 2

So that's the difference that's going into those.

Speaker 7

Got it. So in terms of the rate environment, what is the best rate environment for you to achieve that NIM of 3.5% or 3.4% or so in the medium term? What are the puts and takes if the short end rates decline another 150 basis points from here? Or if they don't decline as much, where does that put you in terms of that medium term NIM?

Speaker 2

Really historically, and I'm just pulling out a sheet of paper just so I'm making sure what I tell you is accurate. But really, it doesn't change a lot over a 12 month period whether interest rates went up 200 basis points or went down 200 basis points. I don't see I think if interest rates if interest rates were they stayed right now, we probably have a little bit higher net interest margin, if they went up, we have just a little bit higher net interest margin. If they go down, it's a little bit lower, but they really don't change a whole lot interest rates going up or down. I'd say that's up to 200 basis points.

Speaker 2

I think if they went down more than 200 basis points, it probably would start to affect us more.

Speaker 7

Got it. So I guess relative to the forward curve, if rates were up or down 50 basis points, it sounds like you can still get some nice NIM expansion from here?

Speaker 2

Our models are showing that we everything that we've been saying for the last throughout the year is still going forward for the end of this year and also going forward for 'twenty five and also going forward for 'twenty six and even 'twenty seven. So what we're looking forward still looks very good for us.

Speaker 7

Great. Thank you.

Operator

The next question is from Catherine Mealor with KBW. Please go ahead.

Speaker 8

Thanks. Good morning. Good morning. To just follow-up on Manoj's deposit cost, what you're seeing so far. You've got such a low deposit base relative to others.

Speaker 8

Should we see you mentioned you might bring money markets down 20 basis points if we get another cut this quarter. But maybe just any kind of commentary you can give on what you've seen so far? And do we actually see deposit costs on the whole down in

Speaker 2

the next couple of quarters?

Speaker 8

Or is it more kind of stable? And then more of this NIM lift is coming from the asset remix?

Speaker 2

Again, gut feeling, but if interest rates go where they're at, we should get some repricing on the CDs. And we could have shown a lot of growth that we wanted to in deposits. If we would have came up with a product and said, we're going to pay 5.5% on a CD and it would have been easy for us to raise you can raise $500,000,000 or $1,000,000,000 if you wanted to. But again, we didn't want to do that. Our deposit our CD ratio is only about 16% of our deposits.

Speaker 2

But again, we easily could have raised that up if we wanted to. We didn't. We weren't our real focus is on this net interest margin and that's kind of where we're focused. I think that our basis and Hasselbeck can jump in anytime he wants on this deal, but again for every 100 basis points down, we our beta is 22 basis points.

Speaker 3

For the interest bearing deposits and 13 basis points on total deposits. And just to add the color, which we're saying right now. So when we had 50 basis cut initially in September, we didn't cut our general rate. But what we did, we cut their special rate we provide to our customers. We cut the rates on those.

Speaker 3

And as you remember, we introduced those special CDs and we cut the rates on those special CDs. And from the maturity wise on CDs, if you look at the total CDs, 75% of those CD will mature within 6 months and 91% going to mature within a year. So duration of those CDs is short. So as they reprice, we should get a benefit on the cost of deposit, cost of funding side. And we do expect cost of deposit going down next quarter.

Speaker 2

It should go down. Our net margins improved with the repricing of the $2,000,000,000 that rose off of our bonds and repricing on our loans. All of that should be a real positive to make our net interest margin go where we want it to go.

Speaker 3

And I think overall, our exit deposit cost was at end of the September was already lower than average on the Q3. So we trajectory wise we're going down. So that's what continues to see as CD reprice.

Speaker 2

Probably one caveat I would say that if interest rates, if they came down kept coming down at 50 basis points at the shop that affects us. It takes us a little bit more time to adjust. I think coming down at 25 basis points we're fine, but if they come down in bigger increments, it takes us a little bit longer to adjust, I think.

Speaker 8

Okay. That makes sense. And then, you saw nice growth in the warehouse as you guided to last quarter. Any outlook to what we should see out of that business for the back half of the year?

Speaker 9

Sure. I'll take that one. You're right. We ended up the quarter on a high note at $1,229,000,000 I think we averaged $1,115,000,000 for the quarter. So both of those were a little higher than we were forecasting.

Speaker 9

Just as a data point, we closed last night at $1,243,000,000 so it's remained pretty strong. The average for this quarter through last night is $1,201,000,000 dollars I would say it's likely and again rates play a factor in this whole equation. It's likely those numbers come down for seasonal weakness in November December. And if I had to put a number on it, I'm going to say we would average for the quarter probably $1,050,000,000 to maybe $1,100,000,000 So it's going to come off from the highs we're at today. But frankly, we've enjoyed these highs for a little longer than I've anticipated.

Speaker 8

Yes, for sure. Okay, great. Thank you.

Speaker 9

Yes. And just as a follow-up on that, we have recently added one new customer to the warehouse. That's first time in a while we have been letting some customers go. I think we've let 7 or 8 customers go over the course of the last year. This is now going back the other way.

Speaker 9

We added the customer and we have had some increases to a couple of other customers. So net net, I think we've added $140,000,000 worth of new commitments, so far this month.

Speaker 8

Great. Thank you.

Operator

The next question is from Ebrahim Poonawala with Bank of America. Please go ahead.

Speaker 10

Good morning.

Speaker 3

Good morning. Good morning.

Speaker 10

I just wanted to follow-up on the NIM guidance and outlook that David you mentioned. I think the 3.27 average or full year implies exiting next year by 3.4 something around between 3.4, 3.5. And you mentioned some prime rate assumptions. Does that assume another 50, 100 basis points of rate cuts over the next 12 months to get to that 3.27 ish average for full year 2025?

Speaker 2

For 2025, the prime rate we have ending at 6.5% and with average 3.27%. I don't have what the exit is going to be, but it should be higher than the 3.27%. Do you have that also, I don't have it in front of me.

Speaker 3

I don't have it, but I think it's going to be a

Speaker 2

little bit. Your numbers are probably pretty close to what you're saying.

Speaker 10

And if I heard you correctly, the only the biggest risk to that view is if we get rapid rate cuts. Slow rate cuts, steeper curve, all of that should be neutral to positive to that kind of a model outcome?

Speaker 2

I think so. That's right.

Speaker 10

That's helpful. And just separately, I think you mentioned about M and A. Like, yes, there needs to be more M and A, but it's been tough. Obviously, elections may have implications. But if we don't have a big change in the regulatory backdrop coming out of elections, do you still see it as conceivable that Versace could do a deal or 2 in the next 6 to 12 months?

Speaker 2

I do. I mean, I'm not saying we're out there. We're not again, we're not out there just jumping to do deals. We're not going to do that. But if it's a good deal for us and that we can get some good accretion on it and it makes sense and it makes us stronger, then we'll do it.

Speaker 2

But again, we're not out there just trying to go out there and buy banks. Our real focus right now is to grow our bank and really focus on our net interest margin. For us, right now, our biggest focus is our net interest margin to get it towards more normalized level. But again, we do do M and A. I'll give you kind of I know I read somebody where they talked about our growth a little bit.

Speaker 2

So I'll just when I started with the bank, it was we were $40,000,000 in size and had about 15 employees. Now we went public in 1998. We were about $300,000,000 in size. And so over the years, we've grown organically and through M and A growth. From an organic standpoint, we usually grow 2% to 4% a year on the deposits and 6% to 8% a year on the loans.

Speaker 2

Having said that, it's hard sometimes for an analyst to see that because they don't see the amount of loans when we go into a bank and that we get out of those loans and have to make up that difference. But the combination of the M and A and the organic growth together has given us double digit growth over all these years. And so we've really we've grown from a $300,000,000 bank when we went public in 'ninety eight to almost a $40,000,000,000 bank today. So the thought that we don't grow would just be a misnomer. It's just we do grow and we'll continue to grow.

Speaker 2

We are going to focus on our net interest margin right now. Again, I think that that's our primary focus. And again, I think growth has been harder by if you want to say growth has been harder this quarter, that's probably something that's legitimate because you haven't seen the loan growth and we didn't go out and purchase a bunch of deposits just raise the cost of money. But again, everybody has to remember that that's what the Fed wanted. They wanted to raise rates this high.

Speaker 2

They want to slow down the economy and that's kind of where we're at right now. So long answer, I'm sorry. I just wanted to give you some color on it.

Speaker 10

No, that's helpful and that's good perspective, David. Just one on the NIM, given the NIM focus. I think Achalbach mentioned 40% fixed rate, 29% variable rate. Do you I think you mentioned $2,000,000,000 in securities cash flows over the next year. What's that equivalent number for loans and what's the pickup given the current yield curve of what's maturing and what you're picking up when these things are repricing?

Speaker 3

So you're right. On security, we'll have $2,000,000,000 Let's assume that right now our yield is around 2% and going to reprice at $4.75 what we have, that's a pickup of $2.75 That's we're going to be going toward positive on our net interest income. On the loan side, I think we have about $5,000,000,000 cash flow annually. So on the fixed one that we said 40 percent of $5,000,000,000 about what around $2,200,000,000 $2,300,000,000 on the I think the fixed rate was like less than 5%. So they're going to get repriced at 7.5% on the loans and about 30% variable that's still lower than our loans we're putting up right now.

Speaker 3

So there's going to be pickup there and floating is floating. So we're not going to get any benefit on that. So those are items that kind of push pull that would get us to the net interest income that we're quoting that we will continue to increase combination of the securities and fixed loan and variable loans.

Speaker 10

That's helpful. Thanks for taking my questions.

Operator

The next question is from Matt Olney with Stephens. Please go ahead.

Speaker 5

Yes. Thanks for taking the question. I guess kind of along the lines of the last comment from Asselbeck, I want to ask more about the borrowings. I think there's almost $3,900,000,000 of borrowings at the quarter end through that bank term funding program. Just looking for more color on what we should expect there over the next few quarters, especially in the absence of any loan growth?

Speaker 3

Yes. On that one, I think we last Q1 and Q2 and some of the Q3, we're building our cash position at that kind of more regulatory requirement we had. But I think we feel in the position that we're getting there. So right now, I think we'll be paying down on the sum of the borrowings. And I know it's a little making the spread, but even we pay down some of them will be NII neutral, but it will be NIM positive.

Speaker 3

And if we expect another cut, definitely we'll be paying down more on the borrowing. So essentially now the cash flow from the bond portfolio should be going toward the paying down borrowing because of the and getting that same spread I was mentioning about going from 2 to 4 and 4.76 that the quarter.

Speaker 2

We did pay down what, 400 or 500?

Speaker 3

We paid down 500. 5 100.

Speaker 4

3.4. Yes.

Speaker 2

That should help our net interest margin as well. Yes.

Speaker 3

It's going toward positive debt. So we're all working toward paying down on borrow a little.

Speaker 5

Okay. Appreciate that. And then I guess within the margin commentary we discussed in the call kind of exiting the year in 2025. What are you assuming as far as the borrowings, the borrowing position by late 2025?

Speaker 2

I didn't have that in the model. Yes.

Speaker 3

On the model, I think we're paying down the borrowing because once we get to the position of the

Speaker 2

Is it paying down more, I guess what he's asking is it paying down more than the $500,000,000 Yes,

Speaker 3

I think it's paying down more than the $500,000,000 $300,000,000 I don't know exactly, but I know in the model we've built in the cash and then we'll start paying down the borrowing. I would say paying down another $1,000,000,000 $1,500,000,000

Speaker 2

Well, let's make sure we don't know that for sure. That's a big number. So we'll look as good.

Speaker 5

And maybe just to clarify as far as the overnight liquidity position, the big bill we saw at the quarter end over $2,000,000,000 Do you expect to maintain that for most of next year? Or could we see some of that overnight liquidity? Could that come down a little bit from where it was at September 30?

Speaker 2

We've already brought that down. That's what we used to pay down the $500,000,000 in the borrowing.

Speaker 3

Yes. I think the range we gave is the $1,500,000,000 to $2,000,000,000 so that's going to fluctuate. So we're comfortable at $1,500,000,000 and we're comfortable at $2,000,000,000 So based on situationally, we'll be somewhere in that range.

Speaker 7

Okay. That's helpful. Thank you, guys.

Operator

The next question is from Peter Winter with D. A. Davidson. Please go ahead.

Speaker 6

Thanks. I wanted to ask about the loan portfolio. If you could just provide maybe an update on the loan outlook and pipelines and where you think what inning you think you are in terms of the First Capital runoff?

Speaker 9

Oh, man, I'll take that one, but I might need some help on First Capital. I think First Capital runoff has been to date $420,000,000 So we're I'd say we're near the end of the first capital runoff. But there'll be some dribs and drabs, but nothing like the $420,000,000 we've already run off. Obviously, that's been a headwind to growth, Peter. That said, I think for the end of the year, it's going to be low single digits until after election and maybe some additional rate cuts.

Speaker 9

And low single digits may trail its way into the Q1 of next year. And then thereafter to the extent we've got a, let's say, a pro business environment without going too deep into the election and lower rates, I think we move ourselves back into the mid single digit range. Again, part of that is not having the runoff of acquisitions and we don't expect a lot of runoff from the Lone Star dealer. Their assets were right down the middle of the fairway for us whereas First Capital was not. 420 is a big runoff for a bank of that size.

Speaker 9

So I think we're going to get back into the positive zone here going into next year. And the reason I'm delayed a little bit in Q4 and Q1 of next year is to the extent some of this growth comes out of real estate, we need to get deals approved and equity their equity put into those deals before we start funding. So that's why I'm putting up to a 6 month lag on something better than the low single digit range.

Speaker 2

And I really do think that the election is going to that will be all the difference in the world. We have a good regulatory environment and your interest rates do come down that could bump our loans too. But again, I think a lot of borrowing this year has been affected by customers not really knowing which direction things are going to go. I think they're hesitant about that. And I think higher interest rates.

Speaker 2

So if those two things can that will help going forward.

Speaker 6

And just if I could follow-up, just Kevin, when you say low single digit, are you talking quarter to quarter? Like is your thinking loans held for investment are going to start to grow slightly and going into a

Speaker 9

full quarter? That's annualized numbers, Peter, in the next two quarters.

Speaker 6

Okay. Got it. And then David, if I could just say

Speaker 9

while we would get back into that mid single digit range, I wouldn't think of I would never think of us as a double digit kind of 10% to 12%, 15% kind of annualized loan growth unless the economy just was booming and taking off at levels like we haven't seen, we'll be a solid GDP to GDP plus kind of grower.

Speaker 6

Got it. Thanks. And then David, just a big picture question on M and A. I mean, obviously, the focus and you've had a great track record with M and A creating shareholder value when doing deals. But the question is, is there a preference to small fill in deals versus maybe looking at a larger deal and willingness to go into a contiguous market that might move the earnings needle more?

Speaker 2

I wouldn't say that it depends on the size of the deal. I don't know that has anything to do with the decision. The real decision is, is it a good bank that really enhances our position and makes us a stronger bank and can we have accretion whether that's a $2,000,000,000 bank in Texas or a $20,000,000,000 bank somewhere else that really inspires it. It really depends on the people, the people willing to stay with us, the quality of the assets. I will say this, on a bigger deal, we can't take the risk of buying a bank that has more asset issues.

Speaker 2

We have to be more careful on that than we do a bank that maybe is $2,000,000,000 not that you don't have to worry about that. But I think it really all depends down to the deals that we're looking at. I mean the deal that we're looking at, it really depends on the people and where it's located, how it helps us. And so there's a lot of bunch of different things that goes into the equation, but I don't know that it really boils down to either a $2,000,000,000 deal or a $20,000,000,000 deal really.

Speaker 6

Okay. Thanks, David.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

Speaker 1

Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • The board approved raising the Q4 dividend to $0.58 per share (from $0.56), reflecting an 11% CAGR in dividends since 2003, while tangible capital grew by $218 million year-over-year despite $212M in dividends and $75M in buybacks.
  • Prosperity delivered net income of $127 million in Q3 2024 (EPS $1.34 versus $1.20 a year ago), an 11.7% increase driven by a higher net interest margin of 2.95% (tax equivalent).
  • Loans rose 4.4% year-over-year to $22.3 billion and deposits grew 2.8% to $28.0 billion, with core loan runoff from the First Capital acquisition largely complete and deposits stabilizing post-industry turbulence.
  • Management expects net interest margin to exit 2024 at 3.00% and average 3.27% in 2025 (with 2026 projecting 3.65%) as fixed-rate securities and loans reprice in the current rate environment.
  • Asset quality remains solid with nonperforming assets at 25 basis points of earning assets, an allowance for credit losses of $392 million, and net charge-offs of $12 million year-to-date versus $18.9 million last year.
AI Generated. May Contain Errors.
Earnings Conference Call
Prosperity Bancshares Q3 2024
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