Earnings call transcript: Prosperity Bancshares Q2 2025 earnings beat estimates

Prosperity Bancshares reported its Q2 2025 earnings, revealing a slight earnings surprise with an EPS of $1.42, surpassing the forecast of $1.41. Despite this, the revenue fell short of expectations at $310.7 million compared to the anticipated $314.98 million. The stock experienced a pre-market uptick of 1.25% after closing at $72.89, although it remains down 3.99% from the previous close. Trading at a P/E ratio of 13.4, the bank appears attractively valued relative to its growth prospects. InvestingPro analysis reveals the stock is currently undervalued, with additional metrics and insights available to subscribers.

Key Takeaways

• Earnings per share exceeded forecasts by a narrow margin.
• Revenue missed expectations, leading to investor caution.
• Pre-market trading showed a positive reaction with a 1.25% increase.
• Strong net income growth, up 21% year-over-year.
• Continued strategic expansion through mergers.

Company Performance

Prosperity Bancshares demonstrated robust performance in Q2 2025, with net income reaching $135 million, marking a 21% increase from the same period last year. The company’s strategic focus on expanding its market presence through mergers, such as the agreement with American Bank Holding Company, has been a key driver of growth.

Financial Highlights

• Revenue: $310.7 million, a decrease from the forecasted $314.98 million.
• Earnings per share: $1.42, up from $1.17 year-over-year.
• Net interest margin: 3.18%, an improvement from 2.94% the previous year.
• Return on average tangible common equity: 13.44%.

Earnings vs. Forecast

Prosperity Bancshares posted an EPS of $1.42, slightly above the forecast of $1.41, resulting in a surprise of 0.71%. However, revenue fell short by 1.36%, which may have tempered investor enthusiasm despite the earnings beat.

Market Reaction

The company’s stock responded positively in pre-market trading, rising by 1.25% to $73.8. This reaction reflects a cautious optimism among investors, considering the stock’s recent decline of 3.99% from the last close. The stock remains within its 52-week range, indicating room for recovery.

Outlook & Guidance

Looking ahead, Prosperity Bancshares projects continued net interest margin expansion, expecting it to reach 3.35% in six months and 3.48% in a year, assuming no rate changes. The company anticipates single-digit loan growth and remains open to further merger and acquisition opportunities. InvestingPro data shows strong financial health scores, particularly in profitability (2.78/5) and cash flow (2.57/5), suggesting solid fundamentals to support these growth initiatives.

Executive Commentary

CEO David Zalman expressed excitement over the merger with American Bank Holding Company, highlighting Texas’s appeal as a business hub. He emphasized the company’s readiness to pursue additional transactions if opportunities arise.

Risks and Challenges

• Economic fluctuations could impact loan growth and interest margins.
• Integration risks associated with mergers and acquisitions.
• Competitive pressures in core markets like Texas and Oklahoma.
• Potential regulatory changes affecting the banking sector.
• Dependence on regional economic conditions.

Q&A

During the earnings call, analysts inquired about the impact of the American Bank acquisition on net interest income, which is expected to add $85-90 million annually. There were also questions regarding commercial loan utilization, with management optimistic about continued improvement.

Full transcript - Prosperity Bancshares Inc (PB) Q2 2025:

Conference Operator: Good morning, and welcome to the Prosperity Bancshares Second Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press then 2.

Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Second Quarter twenty twenty five Earnings Conference Call. This call is being broadcast live over 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 Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer H.

E. Tim Tamanis Jr, Chairman Asylbek Osmanov, Chief Financial Officer Eddie Safadi, Vice Chairman Kevin Hannigan, President and Chief Operating Officer Randy Hester, Chief Lending Officer Mays 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 Oslo Bek Osmanov, who will review some of our recent financial statistics and Tim Timanis, 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

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Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares: 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 or performance of Prosperity Bancshares 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 Q and 10 ks and other reports and statements we have filed. All forward looking statements are expressly as qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter twenty twenty five conference call. I’m proud to announce that we entered into a definitive agreement with American Bank Holding Company and Corpus Christi to merge. We have followed American Bank closely for more than two decades and have tremendous respect for the bank and for the people that have contributed to its success. Our banks have a complementary footprint and we are familiar with and remain committed to the communities that American Bank serves, including with both financial products and community support.

This combination will strengthen our presence and operations in South Texas and surrounding areas and enhance our presence in Central Texas, including in San Antonio, a highly desirable high growth area. With regard to earnings, our net income was $135,000,000 for the three months ending 06/30/2025, compared with $111,000,000 for the same period in 2024, an increase of $23,000,000 or 21%. The net income per diluted common share was $1.42 for the three months ending 06/30/2025 compared with $1.17 for the same period in 2024, an increase of 21%. Net income for three months ending 06/30/2024 included the impact of a merger related credit loss provision and merger related expenses from the Lone Star transaction, the FDIC special assessment, a net gain on the Visa Stock Exchange and the Sullivan Investment Securities. Excluding these one time items for the three months ending in 06/30/2024, the net income was $116,000,000 and earnings per share was $1.22 When comparing these results with the quarter ended 06/30/2025, net income increased $18,000,000 to $135,000,000 or 16%, and our earnings per share increased $0.20 or 16.4%.

Our annualized return on average assets and average tangible common equity for the quarter ending 06/30/2025 compared with the same period in 2024 were a 1.41% return on average tangible on average assets and compared with 1.1713.44% return on average tangible common equity compared to 12.34%. The net interest margin on a tax equivalent basis was 3.18% for the three months ending 06/30/2025, compared with 2.94% for the same period in 2024 and with 3.14 for the three months ending 03/30/2025. As mentioned on prior calls, these are the results we expected and we anticipate these tailwinds should continue to be positive for the near future. Loans were $22,100,000,000 at 06/30/2025, a decrease of $123,000,000 compared with $22,300,000,000 at 06/30/2024. Our linked core loans increased $219,000,000 or 4% annualized from $21,900,000,000 at 03/31/2025.

Overall, the bank grew loans by $220,000,000 in the 2025 or 4% on an annualized basis, with most of the growth attributable to the seasonal strength of the mortgage warehouse business. However, we remain positive on our ability to grow loans in the second half of the year. We saw consistently higher monthly new production numbers in the second quarter and core commercial loans excluding mortgage warehouse loans were up $73,000,000 or 2.4% annualized. We have been focused on using our liquidity to fund commercial loan growth and we are starting to see progress. Deposits were $27,400,000,000 at 06/30/2025, a decrease of $459,000,000 or 1.6% when compared with $27,900,000,000 at 06/30/2024.

The linked quarter deposits decreased $553,000,000 or 2% from $28,000,000,000 at 03/31/2025, primarily due to decreases in public fund deposits, higher cost deposits acquired in the recent acquisitions and business deposits and disciplined deposit pricing. Prosperity generally experiences seasonality with its public fund deposits as public funds customers use the tax dollars that they receive in December and January throughout the year, resulting in lower deposit balances in the second and third quarters of the year. Our bankers focus is on building core deposits. Our non interest bearing deposits represented 34.3% of our total deposits at 06/30/2025. With regard to asset quality, our non performing assets totaled $110,000,000 or 33 basis points of quarterly average interest earning assets at 06/30/2025 compared with $89,000,000 or 25 basis points of quarterly average interest earning assets at 06/30/2024 and $81,000,000 or 24 basis points of quarterly average interest earning assets at 03/31/2025, with a significant portion of the balance for each period attributable to the acquired loans.

At 06/30/2025, the allowance for credit losses and loans was $346,000,000 and the allowance for credit losses on loans and off balance sheet credit exposure was three eighty three million The allowance for credit losses on loans was 3.47 times the amount of non performing assets. We were very excited about our pending merger with American Bank Holding Company and American Banking Corpus Christi. We also continue to have conversations with other bankers considering strategic opportunities. We believe that higher technology and staffing costs, costs, staffing costs and funding costs, loan competition, succession planning concerns and increased regulatory burden all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company’s long term future and increase shareholder value.

Texas was rated as a second best state for business in 2025 by CNBC. However, we believe it should have been number one. That’s just a little humor guys. Continues to shine as more people and companies move to the state because of the business friendly political structure and no state income tax. 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. 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 Asselbeck Osmanov, our Chief Financial Officer to discuss some of the specific financial results we achieved. Asselbeck?

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended 06/30/2025, was $267,700,000 an increase of $8,900,000 compared to $258,800,000 for the same period in 2024, an increase of $2,300,000 compared to $265,400,000 for the quarter ended 03/31/2025. Fair value loan income for the second quarter twenty twenty five was $3,100,000 compared to $3,300,000 for the first quarter twenty twenty five.

The fair value loan income for the third quarter twenty twenty five is expected to be in the range of 2,000,000 to $3,000,000 The net interest margin on a tax equivalent basis was 3.18% for the three months ended 06/30/2025, an increase of 24 basis points compared to 2.94% for the same period in 2024, an increase of four basis points compared to 3.14% for the quarter ended 03/31/2025. Excluding purchase accounting adjustments, the net interest margin for the three months ended 06/30/2025, was 3.14% compared to 2.86% for the same period in 2024 and three point one percent for the quarter ended 03/31/2025. Noninterest income was $43,000,000 for the three months ended 06/30/2025, compared to 41,300,000.0 for the quarter ended 03/31/2025, and 46,000,000 for the same period in 2024. The prior year noninterest income included 10,700,000.0 in net gain on sale of securities. Noninterest expense for the three months ended 06/30/2025, was 138,600,000.0 compared to 140,300,000.0 for the quarter ended 03/31/2025, and $152,800,000 for the same period in 2024.

The prior year noninterest expense included $4,400,000 in merger related expenses and $3,600,000 in FDIC special assessment. For the third quarter of twenty twenty five, we expect non interest expense to be in the range of 141 to 144,000,000. The efficiency ratio was 44.8% for the three months ended 06/30/2025, compared to 45.7% for the quarter ended 03/31/2025, and 51.8% for the same period in 2024. The bond portfolio metrics at sixthirtytwenty twenty five have a modified duration of 3.8 and projected annual cash flows of approximately $1,900,000,000 And with that, let me turn over the presentation to Tim Kimenes for some details on loan and asset quality. Thanks.

Tim Kimenes, Executive, Prosperity Bancshares: Thank you, Asselbeck. Nonperforming assets at quarter end 06/30/2025 totaled $110,487,000 or 50 basis points of loans and other real estate compared to $81,419,000 or 37 basis points at 03/31/2025. This is an increase of $29,068,000 on a linked quarter basis. Since 06/30/2025, dollars 1,138,000 of nonperforming assets had been put under contract for sale. At 06/30/2025, nonperforming asset total was made up of $102,607,000 in loans, dollars 6,000 in repossessed assets and $7,874,000 in other real estate.

Net charge offs for the three months ended 06/30/2025 were $3,017,000 compared to net charge offs of $2,704,000 for the quarter ended 03/31/2025. This is an increase of $313,000 on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended 06/30/2025. No dollars were taken into income from the allowance during the quarter ended 06/30/2025. The average monthly new loan production for the quarter ended 06/30/2025 was $353,000,000 compared to $317,000,000 for the quarter ended 03/31/2025.

This is a $36,000,000 increase on a linked quarter basis. Loans outstanding at 06/30/2025 were approximately $22,197,000,000 compared to $21,978,000,000 at 03/31/2025. The 06/30/2025 loan total is made up of 36% fixed rate loans, 34% floating rate loans and 30% variable rate loans. I will now turn it over to Charlotte Rasche.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.

Conference Operator: We will now begin the question and answer session. To withdraw your question, please press then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose, Analyst, Raymond James: Hey, good morning everyone. Thanks for taking my questions. Good morning, Michael. Good wanted to get some color. It looks like there were some purchased loan decline this quarter.

But can we just get an update on any sort of revised expectations for loan growth ex warehouse? It seems like the industry is starting to pick up a little bit here. Assume you had some pay downs as well that were kind of impacting this quarter’s growth. I did sense some optimism at the front of the call. So just trying to get an update there.

And then if Kevin’s there, we’d love the update on the warehouse. Just it looks like it did a little bit better on average than what he talked about last quarter. Thanks.

Kevin Hannigan, President and Chief Operating Officer, Prosperity Bancshares: Yeah, thanks, Michael. I’ll try to tackle both and see if anybody wants to add on. I think in terms of loan growth, the quarter has started off a little better than the prior quarters. We do have some loan growth, not a ton, call it $40,000,000 worth so far for the quarter. Pipeline looks pretty good.

So I think single low single digit growth for the rest of the year is probably achievable. Just as a side, we’ve also had some okay core deposit growth, I think almost maybe $90,000,000 so far for the quarter. Both of those seems to have stabilized a bit. Loan demand’s okay. If there’s been another point of weakness, it’s been usage on corporate or middle market kind of revolvers.

Usage is down quite a bit from where it had been with people taking excess cash and paying down debt rather than growing their balance sheets, we’ll see whether that shifts around or not. I think a lot of that was tariff related. On the warehouse, just by way of background, we averaged for the last quarter $1,179,000,000 We thought it would be about $1.15 so we’re just slightly ahead of what we were thinking. So far for this quarter, Michael, through last night, we have averaged $1,307,000,000 be exact. And last night we closed out a little lower than normal at $1.226 That’s not unusual for this time of the month.

We get a lot of Ginnie Mae settlements in the twentieth, twenty first, twenty second of every month. On balance, I think we will probably average a little better this quarter than last at $1.25 Typically, our third quarter is our best quarter in normal times, and these are more kind of normal times. So I do expect it to be a little bit better, close to 100,000,000 better on average than Q2. Yeah, I

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: think the thing that we liked about it too, rightly or wrong, that we really saw commercial, our commercial loans pick up and mortgage loans went down. Again, we have so many mortgage loans that we’ve seen that the $73,000,000 more in commercial loans increase that I think that was good. We do seem to see a lot of, I don’t know, I wouldn’t call it production, but there’s a

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: lot of stuff going through

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: the loan committee now. Things look pretty good, I think.

Tim Kimenes, Executive, Prosperity Bancshares: Michael, this is Tim. Yes, with regard to what David just said and I do see coming up the next handful of months basically the same way that Kevin does. So I think he’s spot on.

Michael Rose, Analyst, Raymond James: Very helpful. And then maybe one for Aslbeck, just on margin, not as much momentum there, I think, as we would have thought. You have the range that you talked about, 3,250,000,000.00 to 3,300,000,000.0 I noticed that interest bearing deposit costs were flat. So maybe just walk us through some of the puts and takes as we think about the next couple of quarters, bond portfolio repricing, pickup, further ability to lower deposit costs, CDs maturing, kind of etcetera, and just how we should think about the trend relative to what you talked about earlier this year? Thanks.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: Michael, let me just start. Have kind of the model in front of me and just to kind of give you some color. Mean, our net interest margin continues and Mike, it continues to grow. I think we’re showing with no change in interest rates at 3.35% net interest margin in six months. If interest rates go down 100 basis points in that six months, it’s at 3.3%.

On a twelve month timeframe with no change interest rates, we get to 3.48% and with 100 basis points down in twelve months, we’re at 3.4. Twenty four months, and I won’t go past that, we’re at 3.76% with no change in our net interest margin and 3.61% with 100 basis points down. So our models still continue to show great expansion in the net interest margin over a period of time. Sorry to jump in on you.

Tim Kimenes, Executive, Prosperity Bancshares: No, that’s absolutely right

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: and just give you a little bit of a color on the question why we’re achieving these numbers. If you look at our model, our cost of deposit model shows it’s going to continue to stay as is. You know, there’s not much downward decrease on the cost of deposit. But what we see is the repricing of two things, right? First of all, it’s our bond portfolio.

As we mentioned, we have about $1,900,000,000 of cash flowing each year, and rate on that is about 2.15% of your take, give and take. So that’s gonna be repricing at least, you know, depending on if you put it on the loans, repricing at 300 plus basis points. But if you were going to put it on securities, it’s still more than 2.5%. On the loan side, we have about $5,000,000,000 cash flow coming in. So out of that, about 60% or $3,000,000,000 it’s more like fixed variable rate that’s going to reprice higher than what we put in currently on the loans.

So those drivers showing in our model that it will help us to continue to increase the margin and net interest income. So I think we are our model still continues to show that we should be on average for the year to be the range we provide to I mean, point two five to 3.3 NIM for the year.

Michael Rose, Analyst, Raymond James: Okay. I appreciate all the color everyone. I’ll step back. Thanks.

Conference Operator: The next question is from Catherine Mealor with KBW. Please go ahead.

: Thanks. Good morning. Just Good Lauren. Want to follow-up on the margin with just the size of the balance sheet as we kind of think about, yes, saw that the cash and average earning assets kind of came down. Just your How should we be thinking about just the size of the bond book and the size of cash in the next couple of quarters?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: Again, I’ll start off. I mean, I think the balance sheet size, if you look year over year, we were down 1.6% on the deposit side And then you looked at this quarter as mentioned earlier, this is seasonally a time when we do lose deposits. So we think that the deposits probably are perhaps stabilized and so I think that you’ll probably see probably the third quarter still kind of, I guess just, I guess where we’re at kind of right now, but should start picking up in the fourth quarter for sure. So we should see fourth and first quarter pickup in that. And I think that a lot of it depends on interest rates, I think in general, I mean, if we really wanted to build the balance sheet, and we weren’t as disciplined as we were, you could easily, I mean, we don’t have any broker deposits.

We could easily bring in a bigger balance sheet if you’re willing to pay the 5%, 4.5%, 4.5% rate. So you can build the balance sheet, but we’ve been trying to be very disciplined and really manage our net interest margin. That’s kind of where we’re at right now. But overall to answer your question, I think that we have stabilized and I think you will see growth going forward, not tremendous growth. Yes.

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: I agree. That’s exactly right. And I would just say on the model, fundamental nothing changed from us. It just was the deposit drop off we saw in the second quarter impacted NII as we saw it. But fundamentally, our model is still showing that the continued expansion in the margin and net interest income.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: You also reduced your borrowings from the Federal Home Loan Bank compared to last year where we were at 3.9 last year.

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: Yeah, the beginning of 3.9 and we’d reduced to 2.9 this year in November.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: And again, we again, that was a big drop in the asset size. They shouldn’t affect the net interest income, just a big drop in the asset size. Correct.

: Got it. Okay. That’s helpful. And then on loan yields, also I feel like mix shift just within your balance sheet is what’s driving the margin expansion, but curious if you see some more upward momentum in loan yields as maybe growth improves into the back half of the year as well.

Kevin Hannigan, President and Chief Operating Officer, Prosperity Bancshares: I’d say yes, a couple of things is mix, mortgage, more commercial. So I think we’ll pick it up there, as Asabek said, shift out of bonds and into loans also improves. And as we look at it, you probably someone mentioned early in the early reports this morning that loans held for investment, yield was down a basis point, and that’s really just in terms of inside baseball, we always have, not always, but typically have some non accrual pickup income in the quarter. We had more than usual last quarter, maybe 2.3, 2,400,000 and we had 400,000 this quarter. And that, but believe it or not, on the overall loan yields that changed loan yields to minus one basis point versus up two or three.

So that’s just a small inside baseball piece of it. So this quarter, maybe last quarter wasn’t quite as good as it was advertised or written, and this quarter is not as bad, just a couple of basis point difference. But we don’t see that number being down this quarter. It’s an aberration, not a trend.

: Okay, that’s very helpful. So still upward momentum in loan pricing as expected. Yes. That’s great. Okay, great.

Thank you.

Conference Operator: The next question is from Anand Ghosalia with Morgan Stanley. Please go ahead.

Tim Kimenes, Executive, Prosperity Bancshares: Hey, good morning all.

Stephen Scouten, Analyst, Piper Sandler: Good morning. Morning.

Anand Ghosalia, Analyst, Morgan Stanley: I wanted to focus on the acquisition and specifically on the NII accretion from the acquisition. Can you comment on, I guess, what sort of NII you think you can get from the acquisition? Are there any revenue synergies that you’re building in? Is there any benefit on the deposit cost side? And if there’s any loans that you might want to run off after completing the acquisition?

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: Okay. I’ll take that one. And I’ll start off with deposit. And what we noticed in American West has really good deposit base and very similar to ours. That’s what attracted us to American Bank.

And if you look at their cost of deposit, this was 1.66%, very close to ours, compare if you look just overall industry, very low. That was they have very strong deposit base. On the loans, they yield in higher than ours. I think their loan yield about 6.43. So both of them taking those is very going to be accretive to our margin.

If you look overall on dollar wise, I think on an annual basis, it’s going to bring if you just take the run rate, it’s about 85,000,000 to $90,000,000 on NII on by themselves. But in addition, we’re going to be having some markups on those loans to the fair value. And also we’re going to have AOCI adjustment on their bond, which kind of generate additional $15,000,000 per year, dollars 15,000,000 to $16,000,000 So combining those, know it’s going to be pretty strong expansion on our net interest income. If you look at on margin ones, if we calculate it, it gives about mid single digit on the margin increase overall.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: I think you could say also back also that American Bank is very similar to us. If you look at our cost of deposits, their cost of deposits were very close. And again, I don’t think you’re going to see with some banks that join us, know going in that there’s going to be pretty good loan runoff and a pretty good deposit runoff. We don’t see that in American Bank. We feel comfortable.

They’re very much like we are and I don’t see, I think it’s just a good core bank. Really, it’s a peach.

Anand Ghosalia, Analyst, Morgan Stanley: That’s helpful. And then maybe on capital deployment priorities from here, I I think you mentioned in your opening comments that you continue to have conversations. It looks like you’re open to more M and A. But this is also an all stock acquisition. Is there any ability to maybe buy back some of the stock you issued in the open market once the acquisition closes?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: Right now, there’s a lot of activity in M and A. And again, I suspect that we’ll be using some of that capital that we have going forward probably in M and A.

Anand Ghosalia, Analyst, Morgan Stanley: Got it. Thank you.

Conference Operator: The next question is from Peter Winter with D. A. Davidson. Please go ahead.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: Good morning. I wanted to ask I wanted to ask about the Lone Star portfolio. Loans were down about $180,000,000 year over year and deposits were down about $250,000,000 year over year. So are you nearing a bottom? And then maybe if you can talk about the quality of American Bank’s loans and deposits, would you expect some runoff once

Michael Rose, Analyst, Raymond James: you close that deal?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: I’ll start. The Lone Star deal, Lone Star Bank did have a lot of higher cost deposits. So we’re not rattled by that amount of deposits and they were extremely high cost, sometimes a 100 basis points more than what we were paying. We suspected that. As far as the loan side, somebody may be able to help me with the loan side.

I think overall the loan quality was really pretty good. We have one large loan that got thrown into the non performing assets that was 13,000,000 or $14,000,000 but again, it’s well securitized. I don’t think that we see any loss in that. Their underwriting at Lone Star Bank was very good I think. I mean, with the exception of this one credit that we have, think they were very good.

Going forward with American Bank, again, a little bit different in some underwriting, I think if anybody came and looked at us from another bank, they would think we’re different than them. I think overall, I don’t see the deposit loss or the not as, it always be some, but I don’t see the deposit loss or loan loss in the American deal. I think it’s just a really good core bankers. It’s hard to find real good core banks like this and this is really a good core bank.

Tim Kimenes, Executive, Prosperity Bancshares: And David, one thing I would mention, I do think that Lone Star has stabilized in terms of loans and deposits both. The future will tell us, but I do feel like they’re stabilized.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: But we knew going in there was a certain portion, they were about 100%.

Kevin Hannigan, President and Chief Operating Officer, Prosperity Bancshares: There were some 5% CDs that were going to go.

Tim Kimenes, Executive, Prosperity Bancshares: That’s correct. And from day one, they have worked very closely and very well with us to address those issues and deal with them.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: We knew that even going in, so it wasn’t anything none of us expected, let me say that.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: That’s correct.

Kevin Hannigan, President and Chief Operating Officer, Prosperity Bancshares: Yeah, by recap, I think we’re done or near done with Lone Star shrinking and I think American Bank is just a different animal. It’s been around fifty plus years, really, really solid deposit franchise. Mean, very solid. Credit quality, good, maybe underwriting a little different than us, but the credit quality, very good. Does that mean there’ll be zero runoff?

No, but it’s gonna be very mild, very, very mild. This is not a big shift in terms of what they’re paying on deposits versus us. It’s a high quality franchise, we’re lucky to get it.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: Yeah, I think the American Bank deal makes, we have a big strong position in Houston market, we have a strong position in the Dallas market and a good position in the Austin market, but again, along the Gulf Of America, we have Victoria. And again, it was such a great merger with us. I mean, they joined us and we became the number one market share in that whole second tier market. But right down the road is Corpus Christi and this gives us the number one market share in Corpus Christi. And I mean, so we really have become number one market share or major market shares in these second tier markets like Victoria, like Corpus Christi, like Odessa, Lubbock, Midland, Bryan College Station and those are really great markets and this fits in just perfectly with that, not to mention that it gives us, we really needed some locations in the San Antonio market where we only had one and I think this gives us what four more locations in the San Antonio market.

So it really helps us get a jump in the San Antonio market as well. So we’re really excited about that.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: Thank you for all that detail. If I could ask on credit, I’m certainly not worried about credit with you guys, but just curious about the what drove the increase, dollars 29,000,000 increase

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: in non performing assets?

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: And then just what’s the outlook for non performing assets going forward? Just given the comment, most of it is acquired loans, which you have reserves against. But I’m just wondering when those should start to decline.

Tim Kimenes, Executive, Prosperity Bancshares: I think I can address that for you. The increase is really made up of three buckets, so to speak. One is a $13,000,000 loan that David referred to a minute ago from Lone Star State Bank. It’s real estate secured. We think we’re probably not going to lose any money from that loan.

Time will tell, but that’s our forecast right now. So that’s 13,000,000 There’s another one, dollars 19,000,000 that’s from the Legacy Texas portfolio. It’s secured by notes on used vehicles. We do think there’s a bit of a loss there, but it’s fully reserved. So we don’t see any negative impact from that standpoint.

The biggest change is we’ve got about $51,000,000 in single family homes included in the non performing. We made efforts starting a couple of years ago to increase our minority home loans and the result is we’ve taken several homes back. The good news is as we are able to foreclose on them, we’ve been able to sell them all relatively quickly. So we think this is something that we’re going to work through over the course of the next year. But if you look at those three buckets, one is $51,000,000 one is $13,000,000 and one is $19,000,000 That’s a huge percentage of the total non performing assets.

So we think we’re dealing with all those

Kevin Hannigan, President and Chief Operating Officer, Prosperity Bancshares: effectively. Yeah, and just to add to the, what we see in the future, you never know what’s gonna happen in the future, but we don’t see anything in our commercial loan system that’s particularly worrisome at this stage of the game. I would say that there is a chance, maybe even a likelihood, that we continue to tick up just a little bit on the single family mortgage portfolio from that $51,000,000 that it’s at today. Fortunately, that asset class is a very low loss given default. And I think the bottom line is as we sit here today, obviously we went through all of this in our reserve analysis at the end of the quarter for quarter end and concluded we didn’t need to add the reserves and we’ll see where we are next quarter, but I don’t see anything on the horizon that’s going to change that.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: We also cut the product off that this was a product that was designed just for minority lending, low income lending, that again, there’s not much money down and even get some walking around money with you when you go. And this was to help with fair lending. And again, it’s kind of a catch 22, if you don’t produce a certain amount of this kind of production, then if you really want to expand and grow, you’re out of the game also. So it’s just part of the deal, but again, I think that we’ve got all under control and the good news is that as we repossess this stuff, we’ve gotten out of it pretty quick with very little loss.

Tim Kimenes, Executive, Prosperity Bancshares: That’s right. And we did discontinue that type of loan actually over a year ago. Right, over a year ago.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: Got it. Thanks for taking the questions. I appreciate it.

Conference Operator: The next question is from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten, Analyst, Piper Sandler: Yes. Thanks everyone. Appreciate it. Just going back to American Bank and David, noted the four additional branches in San Antonio. Given that that’s I think you guys said the third largest MSA in Texas.

Do you look to deepen that franchise further in San Antonio beyond this acquisition? Could you look at new hires or could incremental M and A in that market be in the cards?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: I guess I should just say stay tuned, guess.

Stephen Scouten, Analyst, Piper Sandler: Okay, fair enough. And then maybe on pricing around the deal, I mean, three year earn back feels like maybe towards the longer end of what we’ve seen from you guys. Would you say that that was kind of pushing the limits of what you would want to do from an earn back perspective on a deal?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: That three year, Cullen help me, that three year include the way it was priced, it looks like it was priced higher than some of the other deals at 2.2 times.

Michael Rose, Analyst, Raymond James: A little

Kevin Hannigan, President and Chief Operating Officer, Prosperity Bancshares: over two times.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: But again, when we looked at the bank and you added back the AOCI, the price was like 1.8 times, which for a bank like that we thought was a very, very good deal. So that three year was that based on the It does include that, yeah. It does include that. But again, think for a bank that’s a quality bank like this, three years is not unreasonable at all and I’d do it again tomorrow if we get into the bank like that. It’s really a sweet bank.

Stephen Scouten, Analyst, Piper Sandler: Okay, great. And then just as you think about future targets, I mean, I know the last three deals have been maybe towards the smaller spectrum. Do you think about maybe a more meaningfully sized deal? And additionally, would you look at anything outside of Texas and Oklahoma today? Or do you want to continue to deepen that footprint in the strength of those markets?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: I guess I’d just say stay tuned. I mean, there’s a lot of activity going on right now and hard to give. Again, I can repeat what we’ve said in the past that we always like Texas and it’s always a fill in and because if you’re in a car and you drive thirty minutes anywhere, you’re going to see one of our banks. And so when we can fill in, I don’t think we’re in the valley, that may be the first part of the valley and probably El Paso, anywhere else you go to Texas, you’re going to see us wherever you go. So I think that our first and foremost is always in Texas and we’re then Oklahoma too if something developed there.

But again, a certain asset, we’re outside the state. Again, we’re not going to go outside the state for a $2,500,000,000 deal. But again, if it’s a deal that really has true market share and that we can it’s really helpful and it helps us from a strategic point of view from where we’re going and where we’re going to be with the answer to that would be yes.

Stephen Scouten, Analyst, Piper Sandler: Great. And maybe one last point of clarification on the NIM trajectory you talked about David, think you said three thirty five could happen in six months, three forty eight over twelve months, etcetera. Does that include the mid single digit impact to the margin from American Bank or is that kind of on your existing balance sheet?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: No, this is just our existing balance sheet. So that should help. No question.

Stephen Scouten, Analyst, Piper Sandler: Perfect. Thanks for the clarification. Thanks for the time today.

Conference Operator: Yes. The next question is from Ebrahim Poonawala with Bank of America. Please go ahead.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: Hey, everyone. This is Eric on for Eby. Just had one on the fee income line. It has been running above. I know previously you’ve talked about 36,000,000 to $38,000,000 as kind of the run rate that you view, but it’s been above that for several quarters now.

Is the run rate in your mind higher now? Like how should we think about that kind of moving forward?

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: Yes, Eric, I agree. I think the I would probably update our run rate to 38,000,000 to $40,000,000 now because what we’ve seen very strong, our service fees and debit card fees overall has increased because of the volume. So yes, we see increase on overall non interest income. So I would say I would update range to 38,000,000 to 40,000,000

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: Okay, that’s helpful. And then maybe one more on M and A. David, based on everything you’ve said, I have a guess of what you’ll say. But does the American deal limit the ability to complete any other deals until that closes or are you still very active?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: No, we’re still very active.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: Got it. Okay. That was it for me. Thank you.

Conference Operator: The next question is from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares1: Hey, thanks. Good morning.

Aslbek Osmanov, Chief Financial Officer, Prosperity Bancshares: Good morning, Hey,

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares1: just to follow-up on that. I know you guys had a tough time with the last deal getting it closed on time. Any evidence of less regulatory pressures, David? I mean, I don’t think you’re going to get into that situation again, but any evidence of that?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: I hope so. You saw the Cadence deal closing just a few months. Again, we understand that that bank, industry bank, they wanted to get that off of their books before something else happens. But everybody else that we’ve talked to so far, it looks historically we used to get a bank deal done in three months and I’m hoping that Charlotte may jump in, I’m still thinking that we’re going to go back to those three to four months. I think that’s what we’re looking at.

That last deal, it started off with the DOJ in a town of 10,000 people that we were a big bank and I mean, were so many miles from title or something. I don’t want to get into all the details. And then it was another deal after that. From what everybody tells me, they’re more focused on substance instead of form right now and that unless something changes in the administration, which I don’t see happening right now, I think it seems to be a lot much cleaner and clearer path where we’re going. I think everybody kind of knows where they’re going right now.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares1: Okay. And then you kind of alluded to this, I have two more questions here, you kind of alluded to this, but you feel like you have enough branch density in some of your larger markets. And then also curious about some of the faster growing outer suburbs of the big cities in Texas. Do you feel like you have density there or is that a target for you?

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: Well, that’s what we’re building right now. I mean, I do think if you look at Houston, Dallas, Austin, probably the only place that we don’t have enough storage or locations is probably the San Antonio market, which we would much like being much bigger there. And anytime we can move into a market and be a number one market share in the second tier like Corpus Christi, that’s just stuff we love. And I mean, we’ve done that Victoria, Corpus, Midland, Odessa, Lubbock area, Bryant College Station. So whenever we can do that, that’s really a sweet spot for us really.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares1: Okay. And then, Kevin, one for you, a follow-up from very early. You talked about revolvers being down a bit, and you thought it was maybe just, you know, maybe from some of the uncertainty last quarter. But anything else in your mind driving that change, and do expect that to stabilize?

Kevin Hannigan, President and Chief Operating Officer, Prosperity Bancshares: I do. I do. We spent the better part of a couple of days digging into it here last week and this week and talking to clients. Think it’s not only going to stabilize, it’s probably going to

Michael Rose, Analyst, Raymond James: go the other way.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares1: Okay. And you feel like it’s starting to turn now?

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares0: It is. Okay.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares1: Thank you very much.

David Zalman, Senior Chairman and Chief Executive Officer, Prosperity Bancshares: Thanks, John. This

Conference Operator: concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

Charlotte Rasche, Executive Vice President and General Counsel, Prosperity Bancshares: Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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