Prosperity Bancshares, Inc.

Good day, everyone, and welcome to the Prosperity Bancshares second quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please see a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. At this time, I'd like to turn the conference call over to Charlotte Rasche. Ma'am, please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' second quarter 2020 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, Senior Chairman and Chief Executive Officer, H.E 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 Carnes, Chief Credit Officer, Mays Davenport, director of corporate strategy, 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 activities, 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, Jamie. 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 bank shares 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 bank shares filings with the Securities and Exchange Commission. including forms 10Q and 10K 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, and good morning to everyone. I would like to welcome and thank everyone listening to our second quarter 2020 conference call. We are pleased with our second quarter 2020 results and with completing the operational integration of Legacy on schedule in early June. The team members from Legacy, now Prosperity, have been excellent and we could not have achieved such a smooth integration without their commitment and efforts. I want to thank all of our team members who worked many hours to make this happen. We remain excited about the combination and look forward to continuing to build the best bank anywhere. For the second quarter of 2020, we showed impressive returns on average tangible common equity of 19.98% annualized and on average assets of 1.61%. Our earnings were $130.9 million in the second quarter of 2020, compared with $82 million for the same period in 2019, an increase of $48.6 million, or 59.1%. Our diluted earnings per share were $1.41 for the second quarter of 2020, compared with $1.18 for the same period in 2019, an increase of 19.5%. The second quarter 2020 earnings per share of $1.41 includes a $0.22 income tax benefit, a $0.06 charge for merger-related expenses, and a $0.03 charge for the write-down of fixed assets related to the merger and some CRA funds. In summary, there was $0.22 in benefits to earnings and $0.09 in deductions, mostly related to the merger. Loans at June 30, 2020 were $21.25 billion, an increase of $10.4 billion, or 98.6%. compared with $10,587,000,000 at June 30, 2019. Our linked quarter loans increased $1,898,000,000 or 9.9% from the $19,127,000,000 at March 31, 2020 of which $1,392,000,000 were SBA Paycheck Protection Program, sometimes referred to as PPP loans. Mortgage warehouse loans also increased $843 million in the second quarter of 2020 compared to the first quarter. Our core loans, excluding held for sale and the warehouse purchase program, and the PPP loans decreased $311 million. However, a portion of this decrease resulted from loans that were intentionally removed that were identified in our due diligence of legacy. We saw strong loan growth in the first part of the second quarter, but that slowed as business shut down or reduced operations in response to various government orders. Our deposits at June 30 2020 were $26,153,000,000 an increase of $9,265,000,000 or 54.9% compared with $16,888,000,000 at June 30, 2019. Our linked quarter deposits increased $2,000,000,000 $326 million, or 9.8% from the $23,826,000,000 at March 31, 2020. Historically, our deposits are lower in the second quarter of the year compared with the first quarter, and then begin to increase in the third and fourth quarters for us. but this year second quarter deposits are higher. A large portion is from the PPP loans as well as reduction in customer spending and customer saving more right now. With regard to asset quality has always been one of the primary focuses of our bank and always will be. I have always said you will like us in the good times but love us in the bad times and this is playing out to be true again During this pandemic and oil price downturn, nonperforming assets totaled 77.9 million, or 28 basis points, of quarterly average interest-earning assets at June 30, 2020. We continue to provide relief to our loan customers through loan extensions and deferrals when possible. For the second quarter of 2020, net charge-offs were $13 million. Of these charge-offs, $12.4 million were related to PCD loans with specific reserves of $28.5 million that we acquired in the merger. So further, $16.1 million in specific reserves were released to the General Reserve in addition to the $10 million provision for loan losses for the second quarter. M&A activity has subsided during this pandemic. Although there are some conversations and probably a few deals working, we believe that the M&A activity will start to pick up as businesses reopen and economic activity increases. Size does seem to matter now, especially with lower net interest margins, the need for increased technology, and the potential for additional regulatory burden if there's a change in the administration. An example is the increased volume at our customer call center, with many older customers wanting to set up online and mobile banking that have previously not been interested in doing so. The economy, the blue-chip consensus forecast estimates that fourth quarter 2020 GDP will end at a negative 5.6% compared with the fourth quarter of 2019. However, they are forecasting a positive 4.8% GDP for the fourth quarter of 2021 compared with the fourth quarter of 2020. They are also forecasting an unemployment rate of 9.4% for the fourth quarter of 2020 compared with unemployment rate of 6.9% for the fourth quarter of 2021. Based on these estimates, 2021 looks bright. We are positive about our company's future. While our operating environment and economy is changing frequently, we remain focused on addressing whatever comes our way and taking care of our customers and associates. Prosperity continues to focus on building core 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 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, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?