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Edited Transcript of PB earnings conference call or presentation 24-Jul-19 3:30pm GMT

Q2 2019 Prosperity Bancshares Inc Earnings Call

Houston Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Prosperity Bancshares Inc earnings conference call or presentation Wednesday, July 24, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Asylbek Osmonov

Prosperity Bancshares, Inc. - CFO

* Charlotte M. Rasche

Prosperity Bancshares, Inc. - Executive VP & General Counsel

* David E. Zalman

Prosperity Bancshares, Inc. - Chairman of the Board & CEO

* H. E. Timanus

Prosperity Bancshares, Inc. - Vice Chairman

* Randy D. Hester

Prosperity Bancshares, Inc. - Executive VP & CLO

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Conference Call Participants

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* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day and welcome to the Prosperity Bancshares Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would like to now turn the conference over to Charlotte Rasche. Please, go ahead.

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Charlotte M. Rasche, Prosperity Bancshares, Inc. - Executive VP & General Counsel [2]

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Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Second Quarter 2019 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, Chairman and Chief Executive Officer; H. E. Tim Timanus Junior, Vice Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, President; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; and Bob Dowdell, Executive Vice President.

David Zalman with 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, Jake.

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 Bancshares 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 the actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including forms 10-Q and 10-K 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.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [3]

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Thank you, Charlotte. I would like to welcome, and thank, everyone, listening to our second quarter 2019 conference call.

For the second quarter of 2019, we showed impressive returns on average tangible common equity of 14.82% annualized and on average assets of 1.46% annualized.

Our earnings were $82.2 million in the second quarter of 2019 compared to $81.5 million for the same period in 2018, an increase of $661,000 or 80 basis points.

Our diluted earnings per share were $1.18 for the second quarter of 2019 compared to $1.17 for the same period in 2018, an increase of 90 basis points.

Our loans at June 30, 2019 were $10.587 billion, an increase of $441 million or 4.3% compared with the $10.147 billion at June 30, 2018. Our linked quarter loans increased $173 million or 1.7%, 6.7% on an annualized basis from $10.414 billion at March 31, 2019.

We saw loan growth in the second quarter reflecting consumer and business confidence.

Our deposits at June 30, 2019 were $16.888 billion, a decrease of $90 million or 50 basis points compared with $16.979 billion at June 30, 2018.

Our linked quarter deposits decreased $310 million or 1.8% from $17.198 billion at March 31, 2019.

This quarterly decrease was primarily due to seasonality. Historically, our deposit balances in the second and third quarters are generally lower due to large customer income tax payments, farming customers having declining balances as their crops have been planted, but not yet harvested as well as public funds having lower balances from using their tax dollars throughout the year.

When comparing the second quarter of 2019 to the same period in 2018, our core deposits are higher, but total deposits decreased slightly, primarily due to public funds investing in higher-yielding investments outside of the bank.

It should be noted that when comparing quarterly average non-interest-bearing demand deposits, they increased 8.4% on an annualized basis when comparing June 30, 2019 to quarter end March 31, 2019.

We are excited about our pending merger with LegacyTexas Financial Group, the parent company of LegacyTexas Bank. LegacyTexas Bank operates 42 locations in 19 North Texas cities in and around the Dallas Fort Worth area.

We look forward to partnering with Kevin Hanigan and the entire LegacyTexas team to build their premier Texas-based bank.

We had a number of opportunities, but believe that this strategic transaction provided the greatest opportunities for the combined organization at this time.

With the addition of LegacyTexas, we will have a significant and competitive position in Texas' 2 largest metropolitan areas.

Prosperity is fortunate to operate in vibrant and growing states. We continue to see employment growth and a tailwind from companies expanding in and moving to Texas and Oklahoma due to a business-friendly political climate and lower tax rates.

The Texas and Oklahoma economies continue to perform well with record low employment. Consumer confidence remains strong as evidenced by increase credit card purchases and businesses continue to do well as reflected by increased sales tax rebates to most cities and small towns.

We post a 6.7% annualized increase in loans for the second quarter of 2019, also reflecting confidence from business and consumers.

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.

We want to develop people to be the next generation of leaders, make every customer's 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 Osmonov, our Chief Financial Officer, to discuss some specific financial results we achieved. Asylbek?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [4]

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Thank you, Mr. Zalman. Net interest income before provision for credit losses for the 3 months ended June 30, 2019 was $154.8 million compared to $161.8 million for the same period in 2018, a decrease of $7 million or 4.3%. The decrease was primarily due to a lower loan discount attrition in the second quarter of 2019 and higher-than-normal collection on nonaccrual loans in the prior year.

The net interest margin on a tax-equivalent basis was 3.16% for the 3 months ended June 30, 2019 compared to 3.28% for the same period in 2018 and 3.2% for the quarter ended March 31, 2019.

Excluding purchase accounting adjustments and the higher-than-normal collection on nonaccrual loans last year, the core net interest margin for the quarter ended June 30, 2019 was 3.14% compared to 3.12% for the same period in 2018 and 3.16% for the quarter ended March 31, 2019.

Noninterest income was $30 million for the 3 months ended June 30, 2019 compared to $28.4 million for the same period in 2018.

Noninterest expense for the 3 months ended June 30, 2019 was $80.8 million compared to $83.6 million for the same period in 2018.

The efficiency ratio was 43.74% for the 3 months ended June 30, 2019 compared to 43.95% for the same period in 2018 and 42.94% for the 3 months ended March 31, 2019.

The bond portfolio metrics at 6/30/2019 showed a weighted average life of 3.64 years, an effective duration of 3.25 and projected annual cash flows of approximately $1.9 billion.

And with that, let me turn over the presentation to Tim Timanus for some detail on loans and credit asset quality.

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H. E. Timanus, Prosperity Bancshares, Inc. - Vice Chairman [5]

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Thank you, Asylbek.

Our nonperforming assets at quarter end June 30, 2019 totaled $41.558 million or 39 basis points of loans and other real estate compared to $40.883 million or 39 basis points at March 31, 2019.

This is an increase of $675,000 from March 31, 2019.

The June 30, 2019 non-performing asset total was made up of $38.883 million in loans, $670,000 in repossessed assets and $2.005 million in other real estate. Of the $41.558 million in nonperforming assets, $16.595 million or 40% are energy credits, all of which are service company credits.

Since June 30, 2019, $1.443 million in nonperforming assets had been sold. Net charge-offs for the 3 months ended June 30, 2019 were a negative $115,000 compared to net charge-offs of $1.049 million for the 3 months ended March 31, 2019.

$800,000 was added to the allowance for credit losses during the quarter ended June 30, 2019 compared to $700,000 for the quarter ended March 31, 2019.

The average monthly new loan production for the quarter ended June 30, 2019 was $287 million compared to $284 million for the quarter ended March 31, 2019.

Loans outstanding at June 30, 2019 were $10.587 billion compared to $10.414 billion at March 31, 2019. The June 30, 2019 loan total is made up of 38% fixed-rate loans, 38% floating rate and 24% variable rate.

I will now turn it over to Charlotte Rasche.

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Charlotte M. Rasche, Prosperity Bancshares, Inc. - Executive VP & General Counsel [6]

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Thank you, Tim. Before we take questions, we wanted to provide you with a brief update on our pending merger with LegacyTexas.

Last week, we filed the required regulatory applications with the FDIC and Texas Department of Banking, and we expect to file with the Federal Reserve in the next week or so.

We have also begun our operational integration efforts with the team at LegacyTexas. To date, we have had multiple meetings between the managers and key employees of various departments at both companies to discuss current processes, including deposit operations, loan operations, compliance, risk management, mortgage origination and IT and information security.

We are impressed with the LegacyTexas team members and look forward to working with them. We expect to close the merger in the fourth quarter of 2019, although delays could occur.

At this time, we are prepared to answer your questions. Jake, can you please assist us with questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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Well, I know last quarter we talked about the net interest margin kind of being flat if not up a little bit. We saw it slip a little bit this quarter, looks like it's from lower bond yields and some higher deposit costs. As we look forward and I know we're not looking at a couple of rate cuts and the yield curve is doing what it's doing, how do you foresee the net interest margin trending?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [3]

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This is David. Brady, again, the numbers I'm going to give you is really based on the bank as we are today. So a lot of this is going to change when legacy and us merge together, that if you look -- if you just check in the slides and look at the bank the way we are today, I'll give you 3 scenarios. With no changes or interest rates staying where they are at, we still see a net interest margin that increases pretty significantly, more significantly in the 24- and 36-month time frame. If you take another scenario and you look at say, interest rates go down 50 basis points, we see a slight dip of about 2 basis points in the 6- and 12-month categories, that increases back in the 24- and 36-month categories. And if you look at interest rates down 100%, you would see that we would have a net interest margin of about 3 basis points, maybe 3 or 4. Again, this doesn't count any increase in loans -- loan-to-deposit ratio, but if everything just staying exactly like it is, maybe 3 to 4 basis points.

So all in all, not a real little big change. Our best scenario, of course, is interest rates staying where they are at or going up, that helps us the most. But even going up 50 basis points in the longer term, we're still positive. But having said this, when you merge legacy bank and our bank together, you should see some pretty significant net interest margin increase.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [4]

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Yes, I will agree. This is Asylbek. I want to add on a little bit. If you look at for second half of the year, our loan or core loan yield is 504. Right now, we're putting the new loans at about 550, that would definitely help us in the margin aspect going forward. The wild card would be, of course, deposits, which -- cost of deposit went up by 3 basis points and that impacted our quarter. But what we saw this quarter that the cost of deposit stabilizing a bit, and we're seeing the slowdown in terms of the increases in cost of deposits compared to prior quarters. So that should help us going forward. But like Mr. Zalman mentioned, based on the model, our NIM should improve.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [5]

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And I think overall -- I mean, I think the pace at what the rate -- deposits increased over the past couple of quarters surprised everybody. I think we have seen a stabilization in those. And again, I think that 2 things working for us, when we put loans on, we're getting a better yield or where they're at right now. And when you are putting securities on, our security yield today is still only 2.36% and we're reinvesting them all today, we'd probably be hitting closer to 2.70%. So we have some gains in both categories. I think that we're probably better positioned than a lot of the other banks. It could be good or bad, I would say that we're more balanced. If we were strictly a commercial portfolio with floating-rate loans, we'd definitely be impacted more. It looks like we have about 1/3 of 1/3 and 1/3 of 1/3 big straights or floating 36% plus variable. So I mean, I think, we're pretty balanced overall.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [6]

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Okay. And then also the net premium amortization for security was a little bit higher this quarter versus Q1. I think Q1 was relatively low compared to historically. But I mean, going forward, I would expect really same level with...

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [7]

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Yes. And we saw a lot more refinancing this quarter with interest rates going down and that's just natural to expect I think.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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All right. That's helpful. And I know last quarter we talked about delevering the bond book a little bit. It looks like the bond book continue to come down again in the second quarter. Do you see that continuing to trend down? Or already to the point where those balances should be roughly stable going forward?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [9]

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There's 2 -- there's probably an answer in 2 parts to that question. One, how much do your loans grow because that's where your money would come from -- from your bond book. And then how much do your deposits grow? We're historically and seasonally low in this quarter and the third quarters. Historically, our deposits grow 2% to 4%, they were less the last year. So there's 2 thing that are going on in that category. But I would say that if you had -- if you look at it historically, you probably should still see both grow a little bit over time. I think you should see some growth in loans and you should still see the balance and the securities to grow out.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [10]

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I think that's exactly correct because we want to invest in loans if possible, but the decrease in the investments was -- is in line with decrease in other borrowing. Because overnight, rate is like 2.58% right now, so that's reasonably running off a little bit our bond portfolio. And that's you see the decrease in the both line items.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [11]

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And I don't think it makes a lot of sense, we've talked about this earlier, borrowing mainly at 2.5%.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [12]

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Exactly. All right. And it helps our margin as well around that management of balance sheet.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13]

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All right. That's helpful. And then just finally for me on the buyback. We repurchased a little over 1% of the company. If I look at that price per share, the $64.50, it looks like you repurchased kind of late in the quarter, maybe even after the LegacyTexas deal was announced. But maybe just thoughts on future buybacks going forward in back half of the year?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [14]

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Yes. You're exactly right. After we announced the legacy deal, our stock took a dive and we felt that it was underpriced. And we jumped in really and bought the maximum that we could buy almost every day until the day that we couldn't buy because of our earnings announcement. So we just felt that the price of the stock is really -- should be more and we jumped in and if it happens again, we'll do the same again. We like it. We have a lot of capital and the stock here will become disproportionate to where it should be, we'll be back in again.

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Operator [15]

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The next question comes from Jennifer Demba with SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

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Two questions. First, how does the new rate environment expectations now impact your accretion assumptions for the LegacyTexas transaction? And my second question is, what's your appetite for more M&A over the near term?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [17]

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I'd probably turn to first part of the -- the first question, Jennifer, to Asylbek, because he's done some kind of calculations on what net interest margins should look like and how they may affect. And I'll take the second question with regard to appetite on more mergers.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [18]

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Yes. Regarding the accretion to legacy. You're right. With the rates decreasing probably, we're not going to see much of a discount that we had in previous acquisition. That will definitely impact the accretion going forward.

But again, if you're talking about the SOP of credit discount, as was spoken I think previously that under CECL that the discount on the credit becomes the allowance, which will start on January 1. So going forward, we should not see any of those accretion income from the credit side of it. But with the rate environment slowing down or going down, I think the discount would be less than we've had with previous acquisitions.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [19]

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I think probably going to step further I think legacy on their own with rates going down would probably see a lower net interest margin. But again, we have such a great opportunity because they have a chunk of money that's more I guess purchased money on the Federal Home Loan Bank loan. The number 2, they probably have $800 million-or-so in, what we call, CDs that are -- what you call those CDs?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [20]

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Brokered...

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [21]

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Brokered CDs. I think that we can replace that money with our core deposit -- our core deposits. Our cost is what right now? Yes, our total cost...

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [22]

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Cost of deposit is 62 basis points.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [23]

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62 basis points where their overall was over 1%. So overall, the combination of our 2 banks together is real benefit for both as it increases our net interest margin, it also helps them dramatically.

So then we move to second part of the question about our appetite for more mergers and acquisitions. And I don't want to scare anybody, but, as I mentioned earlier, this is our first and foremost that we want to focus on the -- us and legacy together and make sure that everybody feels comfortable and that we're going forward. But as mentioned earlier too and I think that Kevin feels this way the same that I do. We want to build a premier Texas bank. And so I think that you will -- we will look -- we were looking at a couple of other transactions before we did the deal with the Legacy. It just seem Legacy was the right deal to do at this particular time. But there's still more step out there and I think that you will see us back in the market again.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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Follow-up to the first question. So when you announced Legacy, you said you thought 2020 earnings accretion would be a little over 10%. So you still feel that's achievable with some offsets?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [25]

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We do feel that it's going to be achievable and it's only improving with the acquisition of the 800,000 shares that we bought already in stock that helps our accretion as well too. And that's why we'd like going out. If you remember too the -- really, we wanted to really put about 25% cash down on the transaction, legacy really only wanted us to give them about 10%. I think we settled somewhere in the 15% category of cash down. So we do have excess money and if we can buy in the market -- the more we can buy in the market, will only add to that accretion. And I feel like the cost saves that we gave were really -- they were real but we really seem to do pretty good on that -- that into...

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [26]

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Yes. That's I agree. And 10% accretion -- 10-plus accretion assuming the full savings. But in 2020, probably, we're going to realize 50% savings and 2021 will be 100% savings.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [27]

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You're just saying that by the time the integration had -- you're just making a point that we won't get a 100% in the first...

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [28]

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Yes. Exactly, that's why I so want to clear that, that 10% accretion is not going to happen in 2020, but in '21.

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Operator [29]

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The next question comes from Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [30]

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Just looking at the legacy side this quarter, it looks like they had some negative migration this quarter. So I guess what I'm asking is, it looks like some of those loans are going to be resolved potentially by the time the deal closes. So could we expect the credit mark to actually come down?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [31]

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I would say no because the loans that you're seeing right now that have been reserved for or being charged off were loans that we were -- they -- first of all, they might have identified them, but more so than that, we identified them also in our due diligence. And so those were all identified in the due diligence and those were marked appropriately. I guess the mark -- I guess you could say it like this. I guess the mark would come down overall with the -- if they're charged off. But from our perspective, it really hasn't changed from what the original mark was. But it would -- I guess, I don't know if I am being very clear, but if they are charged off, you have a new mark, it will be down because it's already been taken into consideration.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [32]

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But I think the thing to emphasize is in the overall, we haven't seen anything and Legacy has not seen anything that would change the overall aggregate mark that we were talking about initially.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [33]

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Right. I think that everything that we're seeing right now and that what we know that they have, I think, they are aware of and we're aware of at the same time. There's nothing that was unexpected in this.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [34]

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Understood. And maybe just one more question as it relates to them. They had a pretty nice bump in their mortgage warehouse this quarter. We've kind of seen that across the industry. David, what's your view on that line of business? I know you guys haven't historically been in it, but would just love any thought on what you would expect to do with that business once the deal closes?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [35]

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Yes. I think it should get bigger. You take on different lines of business sometimes. I think that we've always been more conservative in nature. I think that Legacy is taking more risk than we have. I think that -- I think going forward, warehouse mortgage lending, Kevin feels very comfortable with it. And so we're looking at it. And I think that it's part of our -- when we went into this deal, it's part of something that we're going to keep. I can't tell you that we're going to expand it to -- from $1.5 billion to $2.5 billion or something like that, but where it's at right now, we feel comfortable with it.

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Operator [36]

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(Operator Instructions) The next question comes from Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [37]

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I want to circle back to the discussion around the margin. And I believe you said the new loan yields are coming on around 5.5%. Can you just clarify, is that the average rate of the new and renew loan yields in 2Q? And has that changed at all over the last few quarters?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [38]

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So 5.50% that we mentioned, that's what average we'd put in our books. But if you look at past few quarters, I think Q1 was on average also %5.50. It has not changed significantly. But with the rate -- expected rate change, we're not sure how it's going to impact. But right now what we see in our books putting as %5.50.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [39]

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I would say this, Matt, too that even when rates dropped extremely low, we still -- there was still kind of a base on what we were charging, especially on loans that we would fixed rate for 3 and 5 years. I don't know that we really ever dropped below 5% on a fixed rate. Randy, you might have some comments about it?

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Randy D. Hester, Prosperity Bancshares, Inc. - Executive VP & CLO [40]

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Probably in the mid-4s, 4.5% when rates were at their lowest.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [41]

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At the lowest, but...

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Randy D. Hester, Prosperity Bancshares, Inc. - Executive VP & CLO [42]

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But we've been above 5% for a while.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [43]

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Yes. I mean, I think there's -- you've been probably -- who knows what rates are going to be and I don't want to forecast that. But as you say, I think that we're well positioned where we're at because we have a certain amount of fixed rates and a certain amount of variable rates too.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [44]

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And then on the liability side, deposit cost still look great, especially versus the peers. But I was surprised to see incremental pressure on the CD cost. I think there were up 16 bps sequentially. Just trying to appreciate, is that pressure? Is that incremental pressure in the metro markets that you guys serve? Or is this new emerging pressure in the rural market set that you've avoid for the most part over the last few years?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [45]

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That's probably because of me. I saw that -- we really are just -- our CDs -- when I started in banking or when the banks started, we probably had around 30%, 35% ratio of CDs. And if we look today, we just have really dropped to what 10% or 12%.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [46]

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12%.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [47]

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12% of CDs. And we really felt like, okay, that's enough. So again, we're not leading the market, you didn't see us go out and offer 2.5% or 3% on a 1-year CD. But we did offer 2% on a 1 year and that was to try to keep our existing customers and not to lose. Not that we're trying to go after the higher rate CDs, but we didn't want to lose more from where were. And I guess it was maintaining where we're at, not going back much more on the CDs.

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H. E. Timanus, Prosperity Bancshares, Inc. - Vice Chairman [48]

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And let me add to that a little bit, David. We're seeing it across-the-board in all markets. I will say, in the major Metropolitan markets, we're not seeing it from the very large banks. But it's firstly, all financial institutions other than the very large ones. So we're seeing it in the smaller markets, we're seeing it in the larger markets both. It's just not coming from the Chase's and the Bank of America's and people like that.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [49]

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No. I think they're probably more regional smaller banks more than anybody else, they -- their loan-to-deposit ratios are just at a max of 100%. And they are doing whatever it takes to get money into the bank and paying very, very high rates.

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H. E. Timanus, Prosperity Bancshares, Inc. - Vice Chairman [50]

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That's correct. I will say for a while, we were seeing a fair amount of competition offering CD rates from 1 year going out I guess to as long as 5 years in the 2.5% to 3% range, every now and then, went a little over 3%. We're not seeing much at 3% anymore, but 2.5% is common place. I see it every day, so it's still out there.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [51]

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Overall, I think if you can -- I'm making a statement like this, I don't know that I can base it on something except for Asylbek's comments as well that we do see somewhat of the pressure on rates stabilizing and maybe coming down. I mean a year -- a few months ago, like you said Tim, you could see ads in the paper full page 3% plus and you're not seeing that anymore over time.

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H. E. Timanus, Prosperity Bancshares, Inc. - Vice Chairman [52]

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That's correct. For a while, I was probably getting 10 to 20 emails a day from banking centers having problems with customers wanting to move money to some of these very high rates. That's dropped down to maybe 3 or 4 or 5 a day. So it's still there, but it's not as prevalent as it was. That's exactly correct.

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Operator [53]

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The next question central Jon Arfstrom with RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [54]

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Question for maybe David or Tim, just on loan growth. You had a good -- just bigger picture good overall loan growth quarter. But does this feel like a good pace of growth for you? Would you call out anything as unusual in terms of the increase that you saw?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [55]

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As of this moment in time, I wouldn't say that there's anything unusual. From we -- from what we can tell, things are stable. I don't see any reason to expect any large swings. But we all get surprised in the business world, so there are no guarantees. But everything is still healthy in our markets. If there's any softness, it's typically in the office occupancies in Houston and Dallas, for example. But those are stable in terms of where they've been. So I think it's business as usual moving toward for a while.

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H. E. Timanus, Prosperity Bancshares, Inc. - Vice Chairman [56]

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And when I think overall, when you look at consumers and businesses, everything looks pretty healthy. I was going to qualify and say, when I looked at the first few days of the quarter, it looks like we were getting off to a slow start. However, when I looked last quarter, it started the same way. We actually were a slower start. We really came through at the end. So I don't see a whole lot of change.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [57]

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And the pipeline is still good.

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H. E. Timanus, Prosperity Bancshares, Inc. - Vice Chairman [58]

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The pipeline is still good.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [59]

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The pipeline is still good. And sometimes there is a bit of seasonality end of summer when everybody is on vacation, it drops off. This past quarter was reasonably decent for us. So we didn't see as much as a dropoff as we have in some years. So as of this moment, there's no reason to think it's not going to be stable and hopefully improving going forward.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [60]

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Okay. Good. Most of your loan categories look like they increase, but this is a small category in energy, but it looks like it was down a bit. And I'm not necessarily asking about the growth there. But curious, if you're seeing some opportunities and how you feel about the overall health of energy in general?

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [61]

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I don't know that we're seeing significant additional opportunities. I mean there certainly are some. I guess our take on energy is one of caution, I mean energy learning can be fine, but it is what it is. It's cyclical, always has been. I'm sure it always will be. You just have to be careful and not get overly enthusiastic when things look like they're improving a bit, because before you know it, they'll deteriorate a bit. So we're still in the energy business. We're still making loans out there. I would anticipate if that portfolio would be stable for a while. I don't see it declining significantly and I don't see it growing significantly either.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [62]

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Good. And then David or Asylbek, just in terms of the securities portfolio, you've talked about a little bit, but the rate environment obviously changed a bit over the last quarter or 2. I'm just curious if you're thinking about doing anything different with the portfolio? Or is it just the same methodical approach that you always take.

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David E. Zalman, Prosperity Bancshares, Inc. - Chairman of the Board & CEO [63]

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I would say the same methodical approach if anything. We're really reducing the bond portfolio. We've been putting the money into bonds really -- I mean, in the loans for the most part. That's what we -- and we really -- with rates being lower the last month or so, we really haven't -- there hasn't been any need to go out and try to borrow money from an online bank and even take higher rates for CDs or anything. So that's -- I think we're just sticking with the same strategy.

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Operator [64]

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This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche. Please, go ahead.

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Charlotte M. Rasche, Prosperity Bancshares, Inc. - Executive VP & General Counsel [65]

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Thank you, Jake. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our company, and we will continue to work on building shareholder value.

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Operator [66]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.