Bigger Loans Helping Houston's Prosperity Weather Energy Slump

Prosperity Bancshares has built itself, through acquisitions, into one of Texas' largest banks over the past decade and now it's beginning to reap the benefits that come with scale.

The $21.6 billion asset company said Friday that organic loan production hit a record $320 million in the quarter that ended Sept. 30 as it used its size advantage to make increasingly larger loans to bigger commercial borrowers.

"We're getting larger requests," Chairman and Chief Executive David Zalman said in a conference call with investors. "That's changing the dynamic more than anything."

Prosperity reported net income of $70.6 million in the quarter, of about 2% less than it earned in the second quarter and 8% from the third quarter of 2014. Its earnings per share fell 8.2%, to $1.01. Those declines, however, were attributable to purchase accounting adjustments for income from the sale of acquired loans. Prosperity said its core earnings per share totaled 92 cents, up nearly 10% from a year ago.

Total loans declined slightly year over year as Prosperity sold off certain loans it inherited in acquisitions, but they climbed 1% from three months earlier, to $9.2 billion. In a research note Friday, Hovde analyst Joseph Fenech called the increase "surprising," given the slump Texas' energy sector is experiencing. Though Fenech questioned whether the growth is sustainable, company officials said they're hopeful the trend accelerates, as more big deals reach its loan committee. Vice-chairman H.E. "Tim" Timanus Jr. said Prosperity is currently pursuing two $50 million credits and a $100 million deal.

Prosperity, which has made 18 acquisitions since 2005, certainly has room to grow. Its deposits totaled $16.9 billion on Sept. 30, making the bank's loan-to-deposit ratio 54.4%. The average loan-to-deposit ratio for banks with more than $10 billion of assets is 67.6% according to Federal Deposit Insurance Corp. statistics.

"I'm very excited about what we see in the pipeline," Zalman added. "If it all comes through, the bank is going to look pretty good."

Of course, the downside of big-dollar credits is if one goes south, it tends to skew the balance sheet. Prosperity's nonperforming loans jumped from $35.1 million on June 30 to $48.6 million at the end of the third quarter, with virtually all the increase attributable to a single item — a $12 million participation in loan on a San Antonio medical complex. Both Zalman and Timanus said they were hopeful the credit would be moved off the books with minimal loss in the first quarter of 2016.

Prosperity also charged off three commercial loans totaling $5.3 million in the third quarter. All three loans, along with the hospital credit, came from banks it acquired, according to Zalman.

Prosperity is also bracing for additional deterioration in its $405.1 million energy portfolio if oil and gas prices continue to decline. Company officials said they don't foresee a significant increase in problem energy loans over the next few quarters, but if the price slide continues, "all bets are off," Timanus said.

To date, most borrowers have been able to use spare cash and hard assets to keep their loans in compliance, "but liquidity after a while runs off and free-and-clear assets after a while get pledged. You hit the bottom of the barrel at some point," Timanus added.

Whatever losses do occur will be added to a very low baseline. Prosperity's nonperforming assets amounted to 0.22% of total assets as of Sept. 30. Close to half of the company's nonperformers, about $21 million, were energy credits, though.

Prosperity investors seemed pleased with the company's third quarter results. Its shares were trading up nearly 4% late Friday, to $51.35.