Prosperity Bancshares Inc (PB) 2003 Q1 法說會逐字稿

Please stand by. The call is about to begin. Good day. All sites in on the conference line. I will turn the conference over to your conference moderator, Dan Rollins.

Good morning and welcome to the Prosperity Bancshares conference call.

This is being broadcast life over the Internet at www.prosperitybanktx.com and will be available for replay at the same location for the next few weeks.

I'm Dan Rollins, senior vice-president of Prosperity Bancshares and with me is David Zalman, president and CEO, H. E. Tim Timanus, junior executive vice president and COO, and David Hollaway, our chief financial officer.

This morning, David Zalman will lead off with a review of our financial results for the first quarter of 2003. He will also address some of the key factors impact are our performance as well as the significant mile stones of the quarter. He will be followed by David Hollaway who will be reviewing our financial statistics. Tim Timanus will discus our asset quality and I will provide an update on the progress on the operational integration of our recently completed impending acquisitions.

Finally we will open the call for questions.

During the call interested parties may participate live by following instructions provided by our call moderator, Tanya or e-mail questions to contact us at www.prosperitybanktx.com

I assume you have all received a copy of the earnings announcement that we released earlier this morning. If not, call Trisha Green at 713-693-93O8 and it will be faxed to you.

Before we begin, let me make the disclaimers. Certain matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities law and may involve known and unknown risks and uncertainties and other factors which may cause the actual results, performance or achievement of Prosperity Bancshares to be materially different from different 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 Bancshares' filings with the Securities & Exchange Commission on forms 10-K. All forward-looking statements are expressly qualified in their entirety by these caution area statements.

Now let me turn the call over to David

Thank you, Dan.

I would like to welcome everyone joining us today for our first quarter 2003 earnings announcement.

It is exciting for me to be able to share the higher benchmarks that Prosperity Bancshares has been able to achieve year after year and quarter after quarter. Prosperity Bancshares has again hit a new high water mark earning, $6,389,000 during the first quarter of 2003.This is the highest quarterly earnings we have ever achieved.

We have also seen tremendous growth in loans and deposits. Loans increased 60 % from March 2002 and deposits increased 43 % from March 2002.

Our motto remains -- I'm sorry, our model remains simple. Real bankers offering personalized service with big bank capabilities.

We continue to focus on superior asset quality, strong cost controls, and a growing team of professional bankers. Exceptional asset quality continues to be the core strength and priority of our company.

With that said, let me highlight some of the results for the core quarter. The first quarter earnings per share were up 22 % over the same period last year. Diluted earnings per share were 33 cents for the quarter compared to 27 cents in the same quarter last year. Our return on average equity was 16.68%.

In addition to these numbers, I would also like to mention that Prosperity Bancshares' board of directors has had ongoing discussions concerning the expensing of options. At this month's board meeting, a proposal will be voted on to begin expensing options that are issued in 2003 and there after. The expense for options during the first quarter was zero. Since no options were issued during the quarter.

Some of the events during the quarter first quarter -- after having completed five acquisitions last year, we continue to find quality opportunities to expand our franchise. As you know, we have already announced two deals this year. The proposed acquisition of Abrams Center National Bank and the proposed acquisition of Bank Dallas, both located in Dallas, Texas.

With these acquisitions, we again bring a very experienced group of bankers on to our team. Ed Henry (ph) and his team at Abrams Center along with Mark La Born (ph) and his team at Bank Dallas. Mark will serve as our Dallas chairman responsible for recruiting and focusing on additional opportunities in the Dallas market. Mark is a life long Dallas banker following in the foot steps of his father who was also a career banker in Dallas. These acquisitions strategically position us with banking centers in the North, South, and Central areas of the city.

We continue to upgrade our facilities and technology. We are in the final construction phase of our new banking center in Meadville (ph). Meadville is located in Fort-Bend County, one of the fastest growing in the country and contiguous to Harris County. We are weeks away from completing a face lift for our Houston memorial location. Our Dayton Banking Center's million dollars remodel project is on schedule. We recently completed a new drive-in facility in Beeville and we last year moved into the new Cypress banking center located in Northwest Houston.

Finally we are on schedule to be fully operational with our new in-house data processes system this summer. We expect to enjoy additional cost savings as well as better quality control upon completion of this computer conversion.

I would like to talk about loan production just a little bit. In an economy that is weakened by national and international events and war, I am excited and somewhat bullish noting that our monthly -- our month average monthly loan production has increased to $32 million in the first quarter from 18 million during the first quarter of last year.

Having said that, I realize that our total loans are $23 million lower than they were at the end of 2002.There are several explanations for this.

All of the loss in loan volume is from our recent acquisitions and was identified during due diligence. We continue to work in out-source loans that do not meet our credit criteria. We are not chasing long-term fixed rate commercial loans. And we are actively working to reduce our spec construction exposure. Construction loans alone were down $10 million from year end. If you excluded locations that we acquired last year, you would not have seen a decrease in the loan volume in the first quarter.

A little bit about asset quality. I will go into it in depth. Non-performing loans continue to increase as anticipated. All of our non-performing loans are from recent acquisitions with the exception of one $140,000, one a four family home loan. We currently have contracts on these properties and continue to move them out as quickly as possible. We continue to market these loans traditionally as well as wholesale them. And Tim Timanus will discuss this in more detail.

Looking forward, after reviewing the first quarter results, and looking forward, we believe that our earnings for 2003 will fall within the range of a dollar 32 to a dollar 35, in line with analysts' estimates. Even if rates drop another 25 basis points, we are still comfortable with the analyst estimates. Our projections are based on the belief that we will experience a relatively stable economy and that we will not experience some national or international event that could cause further economic uncertainty.

Looking forward to 2004, we have not given any kind of estimates on that, we would say in a stable or rising rate environment with a stable or growing economy, our in-house analysis indicates that our earnings will fall within the range of $1.45 to $1.48 per share for 2004. In a falling rate environment, or a recessionary economy, our analysis indicates that meeting analyst estimates and even our own analysis would be a challenge without accretive acquisitions or strong internal growth. With that I'm going to turn it back over to David Hollaway.

Thanks, David. As David stated, net income did increase 42 % year-over-year and diluted earnings per share was up 22 % year-over-year. This resulted in a 140 return on assets and 16.7 return on average common equity.

What caused the increase in earnings? Average earning assets increased 460 million year-over-year, which was a 38% increase. This helped produce an increase in net interest income year-over-year of 34%. Non-interest income increased 77 % year-over-year, and this was primarily due to adding more deposit accounts which are up year-over-year about 49% or 36,000 accounts. We currently have about 110,000 deposit accounts.

The fee income increases included products that we sell aggressively. The income from debit cards was up 121 % year-over-year and the income on our fee-based royal checking account was up 16 % year-over-year.

Deposits increased to 1.63 billion, up 43 % year-over-year. For a 40 % on an average basis. Non-interest bearing deposits at 312 million were 19 % of total deposits. That was also up 74 % year-over-year, or 69 % on an average basis.

Period end loans were up 56 % to 657 million year-over-year. We also continued to maintain a low efficiency ratio at 51% %.

In terms of the tax equivalent margin ratio with we were at 4 % at the quarter compared to 4.15% for first quarter last year and 4.08 % in the fourth quarter. Based on the asset liability model as of 3/31, the bank is in a slightly asset sensitive position at 175 basis points. We see our margin running at about 3.95% range for the balance of the year.

I also want to reiterate a point that David made concerning earnings. We still are comfortable with our 2003 consensus earnings estimates even if we see another 25 basis points drop in rates this year. The reason we are bullish on earnings despite the compressed margin, we are able to significantly increase our earning assets. The increased earnings off the larger asset base plus the continued efficiencies derived from the 2002 acquisitions have allowed us to mitigate the effects of a lower margin.

With that, I'll turn it over to Tim for some more comments.

Thank you, Dave.

Non-performing assets at March 31, '03, were $3,459,000, or .53 % of loans, repossessions and other real estate, compared to $2,610,000 or .38 % at December 31 of '02.

The non-performing assets at March 31, 2003 were comprised of $55,000 in repossessed assets, $527,000 in other real estate, and $2,877,000 in loans. Of the non-performing assets, $2,902,000 or 84% were assets of banks acquired by Prosperity in 2002.

Since March 31, '03, of the $55,000 in repossessed assets, $5,000 has been received from sales, and we have an additional $30,000 receivable under a sale agreement. Of the $527,000 other real estate, $10,000 is under an earnest money contract and we are currently negotiating letters of intent ranging from $357,000 to $464,000 in additional sales.

Of the $2,877,000 in loans, $587,000 has been converted to other real estate, with $506,000 of such amount now under earnest money contracts. The majority of the remaining portion of the $2,877,000 is centered in two loans, one with a balance of $1,100,000 that we are negotiating a letter of intent on to sell the note. And another with the balance of $864,000 the debtor, who is in bankruptcy, is proposing a pay out plan on with additional collateral pledged with us. With that I'll turn it over to Dan Rollins.

Thanks, Tim.

I thought I would spend just a second talking about where we are on the operational integration with all the acquisition activity that we have had. As you know, we completed the operational integration last year of four of our five acquisitions from last year. Just a couple of weeks ago we completed the computer conversion and the name change and all of the other parts of an operational integration at our two offices at our Bank of the Southwest acquisition in Dallas. It has gone extremely well. The team we have in Dallas is doing a fantastic job. Those locations now are Prosperity Bank and in our system.

This years acquisitions as David said we are working on two. We have all the regulatory approvals for the Abrams Center National Bank acquisition and anticipate closing that within the next 30 to 45 days and anticipate we will also complete the operational integration very soon thereafter. We expect to do a computer conversion very close to the closing of that transaction. We are putting both of those Dallas banks and Bank Dallas on to the new computer system that David talked about earlier.

The final piece of the conversion on to the new in house computer system will happen early in the third quarter at which point we believe we will have a lot better handle on the quality control and services that we can provide to our customers.

At this time, operator, I would like to open up for questions.

At this time if you would like to register your site for a question, press star and one on the touch-tone phone. You may withdraw that question at any time by pressing the pound key. Once again, register the site for the question by pressing star and one on the touch-tone phone at this time.

We have a question from the site of Joe Steven (ph) at Steifel Nickolas (ph).

Good morning, guys. First, good quarter. Tell us, David, how business is going for you in Dallas versus Houston as far as your expectations for growth. That's number one.

Number two, with regard to the investment securities portfolio, can you give us some thoughts of how your durations right now, what type of strategies you are using? Obviously you stay pretty darn short. But is that an important part of the pie here? Thanks, guys. Again, good quarter.

With regard to Houston compared to Dallas, Houston is by far -- let me first of all say that we haven't had the Dallas operation that long. As Dan mentioned a few minutes ago, we finally just got to the point where we converted them and they are completely becoming in our systems now. We haven't had as much experience in Dallas so far. But with the Houston economy, despite everything that you read and you hear right now, it still is one of the best economies around. Home sales last year, believe it or not, was still about 5%. It's contrary to even what the economists predicted. They are still projecting this year home sales will still increase, I'd say probably another 5% or 6% this year.

So having said that, I think it's good. We are seeing some of the commercial customers that probably are just a little bit more apprehensive right now that are, have not started really to jump in and make the capital equipment purchases and things like that.

Overall, I think going forward that you are still looking at projection of 29,000 new jobs are forecast in 2003 for the Houston area. It still is one of the lowest cost of livings among the metropolitan areas with more than 1.7 million people. The housing cost is 45 % below average of the 27 largest metropolitan areas.

Even having said that, you know, Houston and Texas in general is still forecasted to be one of the fastest growing states in the nation over the next ten years. Where Houston is leading Dallas right now, going forward analysts predict the Dallas market will lead the state and out perform the others in the state. We are looking forward to the Dallas market .

With regard to your second question on the investment portfolio, such a large part of our portfolio is made up of mortgage backed securities. And basically you ask about the duration of the portfolio. The duration, the duration of the portfolio today stands at about 2.5 years right now. And we are still maybe not as asset sensitive as we were in the past. But we are still asset sensitive and going forward I think that we are still asset sensitive.

So we are still trying anything to protect ourselves on the down side, if rates continue to go down. So you know, I think the real risk going forward is always, you are tapping the by product today and it's not it. It's when interest rates go up, you will have a certain personal of that portfolio still in your portfolio, as rates go up. And probably have a two to three-year re-pricing issue with that. Even having said that, the models that we look at right now in the beta testing that we do, our earnings should increase even with the product that we are buying right now.

Thanks, David.

Thank you, Joe.

Once again to register your site for a question, press the star and one on your touch-tone phone.

We have a question from the site of Ron Peterson (ph) at Sandler O'Neill.

With respect to the loan growth, the pre-payment activity was pretty heavy in the quarter. Could you give a little guidance on whether you expect that to continue? What kind of loan growth you continue going forward.

Also with regard to the net charge-offs in the quarter, could you give a little background of the source of those charge-offs and what you that I think may be going on there in the future as well.

Let me see if I can get that. The net charge out was a hodgepodge of a little bit of everything, from commercial real estate to one to four-family real estate. We took write downs on personal vehicles. You know, overall, the $383,000 is still, I think that's six points or six basis points on the total portfolio.

When you look at our loan portfolio and the drop there, the construction loans are something we looked at. We didn't want to increase our exposure to speculative construction loans. You'll see that our construction portfolio dropped from 52 million at the end of the year to 42 million at the end of the quarter. That's, you know, a big hung of the drop in the loans that we saw. As David said, if you look at where the loan decrease was, it was all in the locations that we acquired last year.

So that talks about where it went and what happened. Coming forward, I think we said all along that we would expect as to see some loan growth. We want to be growing the loan portfolio. The loan machine is out there working. I think the number David gave you is on an average monthly loan volume coming through the system. Were at thirty-one million a month average in the first quarter, we were 18 million a month in the first quarter of last year.

That's a big increase. What that tells me is that we are not sticking. We are sailing into a good head wind of dwindle (ph). If that ticks up, that will begin to dwindle off.

Let me mention this on the charge off credits, the $300,000, all of the charge-offs really are due to the loans from the banks we acquired.

I think again when we look at all these banks, truthfully we felt like we may even have up to a couple million dollars in charge-offs from loans that are at these banks that we were acquiring. There is good and bad. The good thing is we haven't had as many charge-offs, although there still will be more. That's the good side of it. On the other hand we thought we would be able to keep the non-performing down to around $3 million. That's pumped up a little bit. That's the offset to that.

Does that answer your questions, Ron?

Yes, it does, thank you.

Thank you.

Once again, to register in the site, press the star and one on your touch-tone phone at this time.

We will go to Bain Slack (ph) with KBW (ph). Go ahead.

Hey, I wanted to ask, I guess if you could talk a little bit more about the non-interest comments. Sounds like good growth rates. It's overall down link quarter. With all the new branches coming on, what is the plan to leverage the new sites, customers.

Going forward, what kind of growth do you all expect out of the fee income in total?

Good question.

We were down for the quarter, Bain. That fourth quarter is always a high quarter for us. When you look at our fourth vs first numbers, we were down 8% last year. Last year, fourth quarter '01 to first quarter '02, we were down .07%. It is a seasonality issue. That has to do with NSF charges that seem to spike up in the fourth quarter of the year. I don't know why that would be.

But the going forward piece of the puzzle, we continue to push our fee-based products through. In fact, you heard David talk about the debit card product and what the fee-based growth has been there. We continue to see good growth in that product. Our all inclusive royal checking product line, we are just begun in April a product push through, some of the new locations we acquired last year. I would expect so see some good growth in the fee based income on that product line. We continue to have good hopes for our trust area, trust and investment area going forward.

I think you will see continued growth.

Great. Thanks.

Does that answer your question?

Yeah.

All right. It appears we have no further questions.

Okay. Well, if there's no other questions, I thank everybody for participating this morning. As always, we look forward to hearing from you. Thank you very much for your interest in Prosperity Bancshares.