PRSP Reports $0.77 vs. $0.69 in Q3-10     PRNewswire 10-22
    Houston's Prosperity Bancshares reported Q3-11 net income of $36.373 million [$0.77/share] compared with $32.166 million [$0.69/share] for Q3-10. ROAA was 1.52%. ROAE was 9.51%. Book value was $32.87. Tier l Risk Based Capital was 15.47%. Tier 1 Leverage Capital was 7.70%. Total risk-Based capital was 16.69%.
    Net interest income before provision was $82.538 million compared with $96.247 million during Q3-10. The provision for credit losses was $0.950 million compared with $3.000 million in Q3-10, resulting in NII after provision of $81.588 million compared with $77.267 million in Q3-10. [The provision to NII ratio was 1.15% compared with 1.67% last quarter.] The FTE net interest margin was 4.02% compared with 3.97% for Q3-10. Total interest earning assets of $8.237 billion earned $93.189 million at an average yield of 4.49%. Total interest bearing liabilities of $6.135 billion cost $10.651 million at an average yield of 0.69%. PRSP has $2.314 billion in CDs and time depositis costing $5.348 million at a yield of 0.99% and $0.085 million in junior subordinated debentures costing $0.607 million at a yield of 2.83%. At the end of Q3-10, PRSP had $3.694 billion in loans that generated $54.471 million in income with an average yield of 5.85% - and $4.524 billion in investment securities that generated $38.714 million in income with an average yield of 3.42%.
    Non-interest income was $14.581 million compared with $13.654 million for Q3-10. The 'gain on the sale of OREO was $0.095 million compared with a loss of $1.364 million in Q3-10. Non-interest expenses were $41.151 million compared with $42.593 million in Q3-10. 'OREO expenses' were only $0.235 million compared with $1.053 million in Q3-10. FDIC insurance fell to $1.488 million from $2.817 million in Q3-10.
     Earnings up 13.7% over Q3-10. 35% reduction in NPAs. 30-89 days past due are also decreasing significantly. PRSP continues to see strong increases in non-interest bearing deposit accounts. Loan demand was very low in August, but good in September. PRSP expanded in Austin market with acquisition of Texas Bank. Austin is a fast growing market. PRSP has 175 banking locations.
     The loan portfolio had a weighted average during of 2.6 years - and a weighted average coupon of 4.2% - and had $1.4 billion in cash flow. Bond 3.42% - with current yield of 2.01% - and this is a challenge to the margin. Current CD rates are half the current yield on existing CDs. That will help going forward.
     $3.048 million of the NPAs that we ended Q3-11 are under contract for sale. Average monthly new loan production for the quarter was $98 million. 9.7% annualized loan growth YTD. Of the loan portfolio, 45% were in fixed rate loans; 25% floating; and 35% variable rate loans.
     Ken with Morgan Stanley - Your time deposits were down. At the same time, their cost is coming down. But are CDs a good funding source? PRSP: We still have a lot of CDs rolling off from Franklin Bank acquisitions. PRSP believes it is still worth going after CDs - mainly to serve our customers. But we are not interested in going after CD rate chasing customers. But rates are so low, people like having access to the funds rather than getting low rates and having the money locked up.
    What was different this quarter that will change - and thus not decrease your NIM [as happened this quarter]? PRSP; Part of it is timing. We were slow to invest funds this quarter. We have a large bond portfolio - and it is rolling off at a billion per year. There were times when we purchased bonds in advance of the maturity of a bond we need to replace. But bond yields became so low during the quarter that we stopped buying. Bond yields are now back up.
     Brit with Stern Aggie - trade off of growth vs. margins? PRSP: What will we do with deposit growth and will growth hurt margins? That is the key question. We will try to do both - grow and keep the margins. We have done several M&A transactions - all have helped EPS, but some have hurt margins. We expect M&A to pick up - and Texas banks will consolidate. We are shareholders - and we want to grow earnings more than protect margins.
     Lots of fixed rate stuff going on in Texas - what are loan rates? PRSP: Rates are low by historical standards, so we are trying to hold down the durations. Three to five years. And then flip to floating rates after that first term. There is a spike in loan competition. The pipeline of loans is still good - except for August. The Texas economy is reasonably good. We expect to move money from securities to the loan portfolio. We are not going to maintain 5.85% loan average yield - those rates will go down - with current floating rate loans at 3%. Example - we have a new customer wanting a $3 million line of credit. We offered at 3%. Customer wanted prime minus a quarter. And we do these deals one at a time. Sometimes, we want to gain the customer and the relationship.
     John with RBC Capital noted that PRSP's 1-4 family residential loans numbers appeared high. PRSP: 26% of book - and it has been as high as 45% two years ago. But a lot of that is short term. Our goal is a portfolio with three to six year duration. Home loans tend to be relationship loans - we also get their deposits. Our commercial loan size is getting bigger. But we have a lot of relationship. $114K for 30,000 loans in the total portfolio - but we are growing the one million dollar loans.
     Scott with FBR - Concerning the MBS book, there is some talk in Washington of a new refi program. PRSP: Most of the loans originated at 3% or more. 4.12% is our average coupon on MBS.
     With the Federal Reserve keeping rates low - are more banks throwing in the towel? RPSP: The Austin Bank - if you are in major metro area and you are not at a certain size, you have to do something. We will definitely see consolidation. The smaller you are, the less options you have. Several of our competitors in acquisitions are gone. We are in a good position.
Any with B Riley: loan production for September? PRSP: Loans outstanding have grown every month but August. We are booking loans in all types. We are focused on CNI and CRE.
    What amounts of CDs are maturing? PRSP: Roughly 51% rolls over on a six month period. 25 bps on 6 month CD - we are still higher than some national banks - but lower than the mom and pop banks. We do not expect to be over $10 billion in size, thus Durban rolls will not hit us this year.
     On the changes of moving up you market share - is that getting harder to move? PRSP: Larger banks have seen stability. Some accounts are moving from problem banks - and could move due to acquisitions [like Comerica buying Sterling).
    FIG Partners: Is the external market on M&A getting better? PRSP: Is the market to market getting better - a little bit. But the marks will be what they are. The banks we are talking to, they are taking the bull by the horns - and selling their NPAs. So the potential acquisition banks are improving their asset quality.
    Would you expand out of state? PRSP: If there is a community that is not being served, then yes. But there is so much opportunity in our existing footprint in Dallas, Houston, San Antonio.
    Jennifer with Sun Trust Robinson: on margins - what is you confidence and what is the risk that you will not meet that guidance? PRSP; We have to have the loan growth, and the better the loan growth, the better the margins. And there is a risk that the economy could fall off a cliff. Our assets are growing 4% to 6%. We can get CDs are 0.25% and lend it at 4.5% - so even in this environment of low rates; we can get 4% net interest margins.
    NPAs had a small increase - was that just noise? PRSP: A better perspective is looking at the numbers year over year is better than quarter over quarter. And NPAs are falling. The changes in Q3 were meaningless.