Prosperity Bancshares, Inc.

Hello and welcome to the Prosperity Bank Fair's third 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 from the question queue, 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' third quarter 2023 earnings conference call. This call is being broadcast 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 Bank Shares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tim Tamanis, Jr., Chairman, Alsobek Osmanov, Chief Financial Officer, Eddie Saffody, 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 Asilbek Osmanov, who will review some of our recent financial statistics, and Tim Comanis, 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 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 our filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q 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 Solman.

Thank you, Charlotte, and good morning to everyone. I would like to welcome and thank everyone listening to our third quarter 2023 conference call. I'm pleased to announce that the Board of Directors approved raising the fourth quarter 2023 dividend to 56 cents per share from 55 cents per share that was paid in the prior four quarters. The increase reflects the continued confidence the board has in our company and our markets. The compounded annual growth rate in dividends declared from 2003 to 2023 was 11.5%. 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 $243 million from September 30, 2022 to September 30, 2023. This is the amount Prosperity retained after paying $203 million in dividends and repurchasing $72 million of our common stock during this period, reflecting Prosperity's stable earnings. Prosperity reported net income of 112 million for the quarter ended September 30, 2023, compared with 135 million for the same period in 2022. Our net income per diluted common share was $1.20 for the quarter ended September 30, 2023 compared with the $1.49 for the same period in 2022. Prosperity's earnings were primarily impacted by a lower than normal net interest margin. Although our net interest margin is lower than we would like, 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 our more normal levels. as our assets reprice to market rates. However, if rates increase more than we anticipate, this could change. The net interest margin on a tax equivalent basis was 2.72% for the three months ended September 30, 2023, stable when compared with 2.73 for the three months ended June 30, 2023. Prosperity continues to exhibit solid operating metrics with annualized returns on tangible equity at 12.58% and on assets of 1.13% for the third quarter of 2023. Our loans were 21.4 billion on September 30, 2023, a decrease of 221 million or 1% from the 21.7 billion at June 30, 2023. Our loans increased 2.9 billion or 15.8% compared with 18.5 billion on September 30, 2022. Excluding the loans acquired in the first capital acquisition and new production by the acquired lending operation since May 1, 2023, and the warehouse purchase program loans. Loans on September 30, 2023 grew $111 million or 2.3% annualized compared with June 30, 2023 and grew 1.4 billion or 8.2% compared with September 30, 2022. Interest rates have continued to increase and there are signs of the economy slowing and low growth moderating as intended by the Federal Reserve's actions. Deposits were 27.3 billion on September 30, 2023, a decrease of $68 million or two basis points compared with 27.4 billion on June 30, 2023. Deposits decreased 2 billion or 6.8% compared with 29.3 billion on September 30, 2022, primarily due to a decrease in business deposits and public fund deposits, partially offset by an increase in merger-acquired deposits. After a more challenging time in the first quarter of the year due to large bank failures outside of prosperity's markets, our deposits stabilized during the third quarter. Total deposits, excluding public funds, increased $216 million during the quarter. Importantly, this was achieved without the purchase of any broker deposits. Our non-interest bearing deposits represented a strong 37.6% of total deposits. Our non-performing assets totaled $69 million or 20 basis points of quarterly average interest earning assets on September 30, 2023, compared with 62 million or 18 basis points of quarterly average interest earning assets on June 30, 2023, and 19.9 million are six basis points of quarterly average interest earning assets on September 30, 2022. The increase during 2023 was primarily due to the merger and an increase in other real estate. Our asset quality remained sound, and the allowance for credit losses on loans and off-balance sheet credit exposure was $388 million on September 30, 2023. As mentioned in our last conference call, the accounting for acquired loans has changed. Under the new accounting rules, the full loan balance of each acquired loan is booked at closing and reserved as needed is set aside. Our non-performing assets include approximately $23.7 million from the first capital acquisition. The bank appropriately reserved for these loans at closing based on day one accounting. However, we are now doing a deeper dive into the collateral values and liquidation alternatives for these loans. If appropriate, Charge downs to the allowance for credit losses may occur in the next several quarters. Again, these loans are fully reserved for. Our acquisition of Lone Star Bank shares is pending the receipt of regulatory approvals. We are committed to the transaction and continue to work together with Lone Star in anticipation of the closing. The parties have extended the termination date in the merger agreement to March 31st, 2024, and are prepared to complete the transaction as soon as possible following receipt of regulatory approval. Our operational conversion date is set for second quarter 2024. We continue to have conversations with bankers considering opportunities. We believe that higher technology costs, salary increases, loan competition, funding costs, succession planning concerns, and increased regulatory burden all point to continued consolidation. 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. Although there are signs of the economy slowing, and loan growth moderating, I believe our bank is located in two of the best states we can be for future growth and continued prosperity. Thanks again for your support of our company. Let me turn over our discussion to Ossilbak Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.