Prosperity Bancshares, Inc.

Good day and welcome to the Prosperity Bank Share second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note today's 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 Bank Shares' second 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, General Counsel of Prosperity Bank Shares, And here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tims Manish, Jr., Chairman, Osobek Osmanov, Chief Financial Officer, Eddie Saffity, Vice Chairman, Kevin Hannigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Merle Carnes, Chief Credit Officer, Maze 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 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. 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 the 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 Dolman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2023 conference call. I'm pleased to announce that on May 1st, 2023, Prosperity completed the merger with First Bank Shares of Texas and its wholly owned subsidiary, First Capital Bank, headquartered in Midland, Texas. First Capital Bank operated 16 full-service banking offices in six different markets in West, North, and Central Texas areas, including its main office in Midland and banking offices in Midland, Lubbock, Amarillo, Wichita Falls, Burke-Burnett, Byers, Henrietta, Dallas, Horseshoe Bay, Marble Falls, and Fredericksburg, Texas. For the second quarter of 2023, Prosperity's net income was impacted by merger-related charges. Excluding those charges, our earnings remain strong but are lower than previous quarters, primarily because of the timing differences and that our cost of funds has increased faster than our earning assets have repriced. The good news is that based on our models, we show our net interest margin improving in a 12-month and 24-month time period to more normal levels. However, if rates increase more than we anticipate, this could change. Together with our model projections, our strong capital position, our liquidity, earnings, strong cost controls, and sound asset quality, we believe opportunities remain for our continued growth and expansion. I would like to welcome our new associates and thank our current associates for all the hard work and integrity they show every day taking care of our customers. On a lean quarter basis, net income was 86.9 million for the three months ending June 30, 2023, compared with 124.7 million for the three months ended March 31, 2023. The change was primarily due to the merger. Net income for diluted common share was 94 cents for the three months ending June 30, 2023, compared with $1.37 for the three months ended March 31, 2023. During the second quarter of 2023, Prosperity incurred a merger-related provision for credit losses of $18.5 million and merger-related expenses of $12.9 million. Excluding these charges, earnings per diluted common share was $1.21 million. for the second quarter of 2023. Excluding the merger related provision and expenses net of tax, the annualized returns on average assets and average tangible common equity for the three months ended June 30, 2023 were 1.14% and 12.43%. Prosperity had strong loan growth for the quarter. Loans at June 30, 2023 were $21.6 billion, an increase of $2.3 billion or 12% from $19.3 billion at March 31, 2003. Excluding the loans from the first capital acquisition, loans increased $729 million or 3.7%, 15% annualized. Excluding warehouse purchase program loans and first capital loans, the organic loans increased 8% annualized. Our deposits at June 30, 2023 were $27.4 billion, an increase of $376.7 million, or 1.4%, compared with $27 billion at March 31, 2023. Excluding the deposits from the first capital acquisition, deposits decreased 1.1 billion during the quarter ended June 30, 2023, compared with the quarter ended March 31, 2023. Historically, we generally experience a decrease in deposits in the second quarter, primarily due to public fund accounts using their funds. However, this year, we also saw a decrease in core deposits. However, over the last three weeks, the decrease in core deposits has stabilized. We have not purchased any broker deposits to offset the deposit loss, and we do not currently intend to do so. Our focus is on building core deposits. Our non-interest-bearing deposits represented 37.9% of our total deposits at period in June 30, 2023. Our non-performing assets totaled 62.7 million or 18 basis points of quarterly average interest earning assets at June 30, 2023, compared with 22 million or seven basis points of quarterly average interest earning assets at June 30, 2022, and 24.5 million or seven basis points of quarterly average interest earning assets at March 31st, 2023. Over 20 million of the increase was due to the acquisition. In prior transactions, the amount of non-performing assets that would be reflected as a non-performing asset was the loan balance net of the mark. Under the new accounting rules, the full loan balance of all acquired non-performing assets must be reflected, regardless of the amount of the reserve. In this case, we have accrued an approximate 70% reserve for these acquired non-performing loans. Additionally, there were two other loans totaling $14 million placed on non-accrual status, one of which is under contract for sale. After the merger adjustments, the allowance for credit losses on loans and off-balance sheet credit exposures was $381.7 million at June 30, 2023, compared with $312 million at March 31, 2023. Further, the allowance for credit losses on loans to total loans, excluding the warehouse purchase program loans, increased to 1.68%. Our merger with Lone Star State Bank shares is pending regulatory approvals and is expected to close during the third quarter of 2023, although delays could occur. We continue to have conversation with other bankers considering opportunities. 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. Texas and Oklahoma continue to shine as more people and more companies move to the state's because of business-friendly political structure and no state income tax. 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. 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 Osobek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Osobek.