Prosperity Bancshares, Inc.

Good day and welcome to the Prosperity Bank Shares first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rashi. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' first quarter 2023 earnings conference call. This call is being broadcast live over the Internet at ProsperityBankUSA.com and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bank Shares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tim Tamanis, Jr., Chairman, Osobek Osmanov, Chief Financial Officer, Kevin Hannigan, 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. Eddie Saffity, our Vice Chairman, is under the weather 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 Osobek Osmanov, who will review some of our recent financial statistics and Tim Tamanis, 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 provided by our call moderator. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws. and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of prosperity bank shares 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 Bank Shares filings with the Securities and Exchange Commission, including forms 10Q, 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, everyone. Each year, Forbes assesses the 100 largest banks in the United States on growth, credit quality, and earnings, as well as other factors for its America's Best Bank list. Prosperity Bank has been ranked in the top 10 since the list inception in 2010. We have twice been ranked number one, ranked number two in 2021, and ranked number six for 2023. It is a testament to Prosperity's performance, culture, vision, and consistency, and distinguishes us among most banks. I congratulate and thank all our customers, associates, and directors for helping us achieve this honor. On a lead quarter basis, the net income was 124 million for the three months ended March 31st, 2023, compared with 122 million for the same period in 2022. The net income per diluted common share was $1.37 for the three months ended March 31st, 2023, compared with $1.33 for the three months ended March 31st, 2022. For the three months ended March 31st, 2023, the annualized return on average assets were 1.31% the annualized return on average tangible common equity was 14.34% and the efficiency ratio was 43.68%. Loans on a linked quarter, linked quarter loans excluding warehouse purchase program loans increased $436 million or 2.4%. 9.6% annualized from 18.1 billion at December 31st, 2022. Excluding warehouse purchase program loans, loans at March 31st, 2023 were 18.5 billion compared with 16.7 billion at March 31st, 2022, an increase of 1.8 billion or 10.8%. Loan growth is helped by fewer loans being paid off early compared with previous quarters. We expect this to continue while rates remain at their current levels or increase. Deposits at March 31st, 2023 were 27 billion, a decrease of 1.5 billion or 5.4% from 28.5 billion at December 31st, 2022. Deposits decreased 4.1 billion or 13% compared with deposits of 31.1 billion at March 31st, 2022. The majority of all deposits lost in 2022 were public funds. These investment funds were an interest bearing transaction account at low rates because there was no yield to be found. As rates increased, public funds started investing their money in state funds such as textbook to obtain higher rates. Of the deposit decrease in the first quarter, 959 million or 63% of the 1.5 billion decrease occurred prior to March 10th. Historically, Prior to the pandemic in 2017 and 18 and 19, our deposits decreased seasonally in January, an average of 2.2%. We also saw 236 million of deposits flow into our wealth management group. As we all are aware, the market was flooded with excess funds the last few years during the COVID-19 pandemic. And most people kept their money primarily in checking and low interest bearing accounts because no one was paying much for money. Now that the rates are increasing, people are finding the best rate they can for their investment funds that were lying dormant. When we look at pre-COVID deposits at March 31st, 2020, we had 23.8 billion in deposits. And at March 31st, 2023, we have 27 billion in deposits. This represents a compounded annual growth rate of 4.3% annually. Historically, before the excess funds in the system, Prosperity had organic deposit growth rates of approximately 2% to 4% annually. So we are still averaging deposits on the high end of our historical growth rate. Our average deposit account was $34,000 at March 31st, 2023, and $36,000 at December 31st, 2022. Our uninsured and pledged deposits are 29%, 29.9% of our total deposits. We currently have 11.3 billion of liquidity available to draw on, which represents approximately $4 billion in excess of our uninsured and pledged deposits. With regard to the net interest margin, while most banks have experienced some of their best net interest margins recently, because of our large bond portfolio, our net interest margin always takes longer to adjust. Our models show our net interest margin improving to more historical levels in the next 12 to 24 months and even better in 36 months. Our average net interest margin from 2012 to 2022 was 3.37 compared with our current net interest margin of 2.93 as of March 31st, 2023. Our asset quality remains sound. Year-over-year non-performing assets decreased 9.9%. Non-performing assets totaled 24.5 million at March 31, 2023, compared with 27.5 million at December 21, 2022, and 27.2 million at March 31, 2022. Texas and Oklahoma continue to do well. Texas population, increased by 470,000 in 2022, continuing a steady uptick. From 2002 to 2022, the state gained over 9 million residents, more than any other state and almost 3 million more than Florida, the next largest gaining state. Texas and Oklahoma continue to benefit from strong economies and are home to 56 Fortune 500 headquartered companies. Texas now has more Fortune 500 companies than any other state, including New York and California. Despite the higher rates and a possible slower economy going forward, we believe that Texas and Oklahoma economies should outperform most other states. With regard to acquisitions, as we recently announced, we received all necessary regulatory approvals for our acquisition of First Bank Shares of Texas, Inc. and expect that transaction will be effective on May 1st, 2023. Our acquisition of Lone Star State Bank Shares is pending regulatory approvals and is expected to close during the second quarter of 2023, although delays could occur. We continue to have active conversations with other bankers regarding potential acquisition opportunities. although the conversations have slowed given the recent bank failures and the decline in stock prices. Overall, I want to thank all our associates for the helping create the success we have had. We've had a strong team. We have a strong team and a deep bench at Prosperity and will continue to work hard to help our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over our discussion to Osobek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Osobek?