Prosperity Bancshares Q4 2024 Earnings Results & Report

Prosperity Bancshares EPS Results

• Actual EPS: $1.37
• Consensus EPS: $1.33
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: N/A
• EPS Beat Rate: 7 of last 8 quarters

Prosperity Bancshares Revenue Results

• Actual Revenue: $273.55 million
• Expected Revenue: $303.21 million
• Beat/Miss: Missed by -$29.66 million
• YoY Revenue Growth: N/A

Prosperity Bancshares (NYSE:PB) is a bank holding company headquartered in Houston, Texas. Through its principal subsidiary, Prosperity Bank, the company provides a range of banking and financial services to individuals, businesses and institutional customers.

Prosperity Bank offers deposit accounts, commercial and consumer lending, mortgage and real estate loans, treasury management, cash management, online and mobile banking, and other related financial services. Its lending activities support businesses, agricultural customers, real estate projects and consumers.

Founded in 1983, Prosperity Bancshares has expanded through organic growth and acquisitions. The company serves customers through a network of banking locations across Texas and Oklahoma, with a presence in many metropolitan areas and communities throughout those states.

Prosperity Bancshares Q4 2024 Earnings Call Transcript

Key Takeaways

• Q4 net income was $130 million, up 36% year-over-year, and diluted EPS rose 34% to $1.37; excluding merger and FDIC assessment items, net income increased 16.8%.
• Net interest margin expanded 30 bps to 3.05% in Q4 and is projected to average 3.25–3.30% in 2025 as assets reprice.
• Total loans, including merger assets, grew 4.6%, but excluding merger-related balances loans were flat in 2024; management expects organic loan growth in 2025 if customer momentum holds.
• Deposits increased 4.4% to $2.84 billion with a low cost of funds of 1.44%, and 34.5% of deposits are non-interest bearing, underscoring a strong core funding base.
• The board approved a 5% share repurchase plan and indicates a favorable regulatory environment will support further mergers and acquisitions.

Presentation

[Operator]

Good morning, and welcome to the Prosperity Bancshares Fourth Quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Fourth Quarter 2024 earnings conference call. This call is being broadcast live 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 Timanus Jr., Chairman, Asylbek Osmani, Chief Financial Officer, Eddie Safady, Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Mays Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. Randy Hester, our Chief Lending Officer, is unable to join us today. David Zalman will lead off with a review of the highlights for the recent quarter.

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

He will be followed by Asylbek Osmani, 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. 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 or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements.

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

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-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.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Thank you, Charlotte. I would like to welcome and thank everyone listening to our Fourth Quarter 2024 conference call. Our net income was $130 million for the three months ending December 31, 2024, compared with about $95 million for the same period in 2023, an increase of $34 million, or 36%. The net income for diluted common share net income per diluted common share was $1.37 for the three months ending December 31, 2024, compared with $1.02 for the same period in 2023, an increase of 34%. The changes were primarily due to an increase in net interest income and a decrease in the FDIC special assessment. Excluding the merger-related expenses and the FDIC special assessment, each net of tax, net income was $111 million, or $1.19 per diluted common share for the three months ending December 31, 2023.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

When comparing earnings for the fourth quarter of 2024 with the fourth quarter of 2023, excluding the merger-related expenses and the FDIC special assessment, the net income increased $18.7 million, or 16.8%, and diluted earnings per share increased $0.18, or 15.1%, for 2024. As previously mentioned, as our assets continue to reprice, earnings and return on assets have increased. We expect this trend to continue in 2025. Our annualized return on average assets and average tangible common equity for the three months ending December 31, 2024, were 1.31% and 13.5%, respectively. Prosperity's efficiency ratio, excluding the net gains and losses on the sale, write-downs, or write-up of assets and securities, was 46% for the three months ending December 31, 2024. The net interest margin increased 30 basis points to 3.05%, compared with 2.75% for the fourth quarter of 2023.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

As previously mentioned, we expect a higher net interest margin for 2025 as our assets reprice, subject to certain assumptions. On January 21, 2025, Prosperity Bancshares announced a stock repurchase program under which up to 5%, or approximately 4.8 million shares of our outstanding common stock, may be acquired over a one-year period expiring on January 21, 2026, at the discretion of management. With regard to loans, the loans were $22.2 billion at December 31, 2024, an increase of $968 million, or 4.6%, compared with $21.2 billion at December 31, 2023, primarily due to the merger with Lone Star Bank. Excluding the loans acquired in the merger and new production at the Acquired Banking Center since April 1, 2024, loans at December 31, 2024, decreased $88 million, compared with December 31, 2023. Overall, when excluding the increase in loans due to the merger, loan growth was essentially flat in 2024.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

However, we did hear positive comments from our customers after the election. Time will tell, but we should experience organic loan growth in 2025 if our customers follow through with their positive momentum. We also disposed of or worked through a number of problem loans from the First Capital acquisition, which reduced total loans. With regard to deposits, deposits were $28.4 billion at December 31, 2024, an increase of $1.2 billion, or 4.4%, compared with $27.2 billion at December 31, 2023, primarily due to the merger. Linked quarter deposits increased $293 million, or 1%, 4.2% annualized from $28.1 billion at September 30, 2024. Excluding the deposits assumed in the merger and new deposits generated at the Acquired Banking Centers since April 1, 2024, deposits at December 31, 2024, increased by $108 million, compared with December 31, 2023.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Deposits started to normalize in 2024, with more deposits coming in than leaving the bank. Prosperity has a strong core deposit base with a low cost of deposits of 1.44% for the fourth quarter of 2024, compared with 1.53% for the third quarter of 2024, a decrease of 9 basis points. Additionally, we have non-interest-bearing deposits of $9.8 billion, representing 34.5% of our total deposits. With regard to asset quality, our non-performing assets totaled $81.5 million, or 23 basis points of quarterly average interest-earning assets at December 31, 2024, compared with $72 million, or 21 basis points of quarterly average interest-earning assets at December 31, 2023, and $89 million, or 25 basis points of quarterly average interest-earning assets at September 30, 2024. The allowance for credit losses on loans and off-balance sheet credit exposure was $389 million at December 31, 2024.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Prosperity continues to be interested in merger and acquisitions and will pursue a partnership when the transaction makes sense for the shareholders and associates of both institutions. Early indications show that banks are more open to merger transactions with the new administration, as it appears that the agencies responsible for transaction approval will be more favorable for entertaining merger proposals. We're excited about the growth and future of our company. The Texas and Oklahoma economies are some of the best in the country. Texas has no state income tax, and both Texas and Oklahoma have a business-friendly political climate. The Texas population grew more than any other state in 2024, with the addition of 563,000 people, bringing the total population to 31.3 million. Further, according to Forbes in their July 2024 issue, there have been 209 corporate relocations to Texas since 2018.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

All of this bodes well for our future growth. Prosperity has a strong capital position that provides opportunities to participate in mergers and acquisitions, repurchase stock, or fund organic growth without the need for additional capital. We believe that our net interest margin should continue to expand to a more normal ratio as our assets continue to reprice, thereby increasing our earnings per share. We also have strong core deposits, with 34.5% of our deposits in non-interest-bearing accounts. I would like to thank all our customers, associates, directors, and shareholders for helping build such a strong, successful bank. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmani, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended December 31, 2024, was $267.8 million, an increase of $6.1 million compared to $261.7 million for the quarter ended September 30, 2024, and an increase of $30.8 million compared to $237 million for the same period in 2023. For the full year 2024, net interest income increased $70.1 million from $956.4 million in 2023 to $1.026 billion in 2024. Fair value loan income for the fourth quarter of 2024 was $3.6 million compared to $4.8 million for the third quarter of 2024. The fair value income for the first quarter of 2025 is expected to be in the range of $2 million to $3 million. The net interest margin on a tax-equivalent basis was 3.05% for the three months ended December 31, 2024.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

This was a 10 basis point increase compared to 2.95% for the quarter ended September 30, 2024, and a 30 basis point increase compared to 2.75% for the same period in 2023. Excluding purchase accounting adjustments, the net interest margin for the three months ended December 31, 2024, was 3%, compared to 2.89% for the quarter ended September 30, 2024, and 2.71% for the same period in 2023. Non-interest income was $39.8 million for the three months ended December 31, 2024, compared to $41.1 million for the quarter ended September 30, 2024, and $36.6 million for the same period in 2023. Non-interest expense for the three months ended December 31, 2024, was $141.5 million compared to $140.3 million for the quarter ended September 30, 2024, and $152.2 million for the same period in 2023.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Higher non-interest expense during the fourth quarter of 2023 was primarily due to FDIC special assessment of $19.9 million. For the first quarter of 2025, we expect non-interest expense to remain flat and be in the range of $141 million-$143 million. The efficiency ratio was 46.1% for the three months ended December 31, 2024, compared to 46.9% for the quarter ended September 30, 2024, and 55.6% for the same period in 2023. The bond portfolio metrics at 12/31/2024 have a modified duration of four and projected annual cash flows of approximately $1.9 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality.

[Tim Timanus, Chairman at Prosperity Bancshares]

Thank you, Asylbek. Our non-performing assets at quarter end December 31, 2024, totaled $81,541,000 or 37 basis points of loans and other real estate, compared to $89,923,000 or 40 basis points at September 30, 2024. This is a 9% reduction in non-performing assets. Since December 31, 2024, $2,825,000 of non-performing assets have been put under contract for sale. The December 31, 2024, non-performing asset total was comprised of $75,836,000 in loans, $4,000 in repossessed assets, and $5,701,000 in other real estate. Net charge-offs for the three months ended December 31, 2024, were $2,592,000 compared to net charge-offs of $5,455,000 for the quarter ended September 30, 2024. This is a $2,863,000 decrease on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended December 31, 2024. No dollars were taken into income from the allowance during the quarter ended December 31, 2024.

[Tim Timanus, Chairman at Prosperity Bancshares]

The average monthly new loan production for the quarter ended December 31, 2024, was $333 million, compared to $259 million for the quarter ended September 30, 2024. Loans outstanding at December 31, 2024, were approximately $22.149 billion, compared to $22.381 billion at September 30, 2024. The December 31, 2024, loan total is made up of 39% fixed-rate loans, 31% floating-rate loans, and 30% variable-rate loans. I will now turn it over to Charlotte Rasche.

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator, Gary, will assist us with questions.

[Operator]

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today comes from Manan Gosalia with Morgan Stanley. Please go ahead.

[Manan Gosalia, Research Analyst of Banks Midcap at Morgan Stanley]

Hi. Good morning.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Good morning.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Good morning.

[Manan Gosalia, Research Analyst of Banks Midcap at Morgan Stanley]

I wanted to touch on the NIM trajectory from here. Can you update us on what your models are telling you? I know we've had a couple of cuts taken out of the forward curve. Long end is higher. So any thoughts on how you're feeling about NIM relative to last quarter?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I think that we're still on track to what we said last quarter. I don't remember exactly what I said in here, but I think we said somewhere between year-end, we should be around 325, 335. Is that right, Asylbek?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah, 325-330 on average for 2025, and it'll be a little bit higher at the exit in 2025.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Yeah. I mean, I think we feel good with the net. I mean, if everything goes, there's no black swan out there. I was sent some material from Jon Arfstrom this morning in an email where he said, "The Queen Mary has turned the corner, and we got the blinker switch on, and we're about to hit the Southwest Freeway." So we feel good about it.

[Manan Gosalia, Research Analyst of Banks Midcap at Morgan Stanley]

I appreciate that. And then maybe to talk about loan growth a little bit, can you expand on your comments that you are hearing more positive sentiment from clients and maybe what that means for loan growth over the next few quarters? I ask because your comments on the Texas market were fairly bullish. At the same time, rates are down, credits doing well. So what's stopping you from really leaning in here?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I'm going to let Kevin get in here in a minute too, but the bottom line, a lot of times, what's really hard for you guys to see too is that as we buy banks, we still, a lot of times, the loans that are in the bank may be not up to the same quality that we have, and so it takes us a while. Just for example, over the last acquisition, where you guys see just maybe a small loan increase, you don't see that maybe we outsourced or replaced probably $400 million in a previous bank that we bought, so that's the other side to it too. On the other hand, there has been a lot of growth in Texas, at least from a population standpoint, but overall, you still didn't see massive, massive growth, I think, from anybody on the loan side.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Again, we've never been a bank that's really been. I'd say we'd go after double-digit loan growth. That's not our deal. I mean, I think we're close to around a 78%-80% loan-to-deposit ratio. Again, I don't know that we'd ever want to be 100% loan-to-deposit ratio. So that's just some of the factors there. But Kevin, you may want to jump in.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Sure, David. Thanks. Look, and I appreciate the question given a little bit of shrinkage in earning asset growth in the fourth quarter of the year. As David said, on the First Capital acquisition alone, and if we go back and just look at the timing of that acquisition, at the time it closed, that bank had $1.640 billion, I think, in loans. And we have, David is able to say, outsourced, chased off, failed to renew, whatever we want to call it, almost a quarter of that portfolio, right at $400 million, maybe a shade over $400 million. It won't be nearly as bad in the case of Lone Star, much better credit quality bank, and a smaller footprint as well. It was $1.080 billion, I think, at the time we closed.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

So I think we're at the end of that process as it pertains to those two acquisitions, which gives us a little more leeway to show some growth and have it stick onto the balance sheet. I still don't think it's going to be robust. I do think it will be low to mid single-digit kind of growth. Things are improving. Customer sentiment is pretty good. It hasn't manifested itself yet, but I feel like it's coming.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Yeah. I think all of those are just, those are all comments. And even though you're still seeing a lot of growth at last year, business people still didn't feel as comfortable with the administration and all the regulatory burden that they were getting, and they just didn't feel as good. So we'll see. We already see loan committees, and what we're seeing, and Tim may comment on this, we're already seeing some of the loans pick up already, some of the demand. So we'll see. I mean, again, something could change, but it does seem to be the momentum and the people do want to grow and want to do something. And we seem to be at the right place at the right time.

[Tim Timanus, Chairman at Prosperity Bancshares]

That's all I have.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Yeah, Tim, I was going to add that I've seen a preview of what's coming in for loan committee tomorrow. I generally get a preview of what's coming in on a Tuesday, and we've got some nice things coming in, and particularly nice in that they're not all construction loans. They take a while to fund up. We do a construction loan, require all the equity to go in first, so we could approve a deal and may not fund under it for six to nine months until they put their equity in. We do have a couple nice expected to be highly funded revolvers coming in tomorrow, so it's a little more encouraging.

[Tim Timanus, Chairman at Prosperity Bancshares]

Yeah. I think all that is accurate. It's obviously very early in the year. We're not even to the end of January yet. So the positive sentiment has plenty of time to manifest itself as we go into the year. So we have a lot of conversations with existing borrowers that might want to do more and potential borrowers. So I'm optimistic that we should have pretty decent growth.

[Manan Gosalia, Research Analyst of Banks Midcap at Morgan Stanley]

That's all very helpful, Colorado. So maybe just to round out the discussion there between NIM and loan growth, to get to that 325-335 NIM that you have in your model, what kind of loan growth do you need to get there?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

For the model, we kept our balance sheet essentially static, but what tells when we have a few variables that have positive NII and NIM impact for us. First of all, we have about, well, what, $5 billion of loans that principal pay down each year. So we say about 60% is more at the fixed rate. And I think the average was around 525 or so. So if we reprice that 525 to 725 to 750 at the current rate, there's a pickup more than 200 basis points on that loan alone. On the second part of it, our securities, we have about $1.9 billion cash flowing from securities. The yielding is 2.06% for the Q4. So we either will pay down our borrowing, which would have around 4.5%. There's a pickup 2.5% there. Or we could reinvest in the bonds, which is at 5%.

[Tim Timanus, Chairman at Prosperity Bancshares]

So those things positively impact our NII and the margin.

[Manan Gosalia, Research Analyst of Banks Midcap at Morgan Stanley]

But the bottom line is those numbers we're giving you, that's based on static and no growth at all, right?

[Tim Timanus, Chairman at Prosperity Bancshares]

Yeah, but there's a shrinkage, and we're paying down our borrowing that we planned, so it includes paying down borrowing down to $2 billion of borrowing by end of the year.

[Manan Gosalia, Research Analyst of Banks Midcap at Morgan Stanley]

Right. Thank you so much.

[Operator]

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

[Jon Arfstrom, Managing Director and Financial Services Equity Research at RBC Capital Markets]

Thanks. Good morning.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Morning, John.

[Jon Arfstrom, Managing Director and Financial Services Equity Research at RBC Capital Markets]

Yep. I appreciate the shout-out, David.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Yeah. Here's my guy at 5:30 A.M. that emails me in the morning. I have one eye open anyway.

[Jon Arfstrom, Managing Director and Financial Services Equity Research at RBC Capital Markets]

Yeah. Yeah. All right. Just to follow up on the comments on the securities portfolio yield at 2.06, what do you think that looks like in a year? It's kind of been stubborn and stuck around the low twos. Do you expect that to climb over the next year with some of these reinvestments that you're making?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Yeah. I think for right now, at least on our projection, we want to continue pay down the borrowing a little bit this year. So from $1.9 billion, I think we're going to want to use about $900 million to pay down the borrowing to get the borrowing around $2 billion. So we're going to be reinvesting another $1 billion, or we're going to put that money to loan growth. So either way, it's going to be positive for us. I know what we did purchase a little bit in the Q4. We purchased about $150 million of security because we could get pretty good yield on it. I think we got about 5%. So you can do the math. If you put the billion back at around 4% or around 5%, that would definitely benefit our yield on the securities.

[Jon Arfstrom, Managing Director and Financial Services Equity Research at RBC Capital Markets]

Good enough. David, any thoughts on the repurchase appetite? Are you inclined to sit on capital and see what happens on M&A, or do you want to be more active on the repurchase?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I would rather wait. I think this is going to be. We've been waiting a long time. I would like to save the money for the M&A right now. I think there should be, I mean, it seems like there's people out there, the banks that have been waiting a long time. I think they're interested. Our stock is at a good price too. So I think there's more deals to be made. I think the regulators are out there that are more apt to approve deals. So I would like to wait and see. Now, having said that, if our stock price went the other way, we would definitely jump in and do something. But for the most part, I would like to save it for some M&A and increase dividends also.

[Jon Arfstrom, Managing Director and Financial Services Equity Research at RBC Capital Markets]

Yep. Okay. And you're saying the sellers are now coming to the table? I know the buyers are pretty excited, probably including you, but you're saying the sellers seem to be a bit more willing to come to the table now?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Right after the election, I had three phone calls. So stuff that we had worked on previously in some cases, and in some cases, new stuff. So again, you don't know that it's ever going to just jump out there, but it does seem like there's people on both sides that want to do something.

[Jon Arfstrom, Managing Director and Financial Services Equity Research at RBC Capital Markets]

Okay. All right. Thank you. Appreciate it.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Thanks, John.

[Operator]

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

[Catherine Mealor, Managing Director at KBW]

Thanks. Good morning.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Good morning.

[Catherine Mealor, Managing Director at KBW]

You've enjoyed a zero provision for the past two years. Is there a level where your reserve gets to where you feel like you need to start provisioning for growth, or your credit outlook has been so strong? Is this another year where it's feasible to still expect a zero provision in 2025?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

We've got—you can do the math. We have $389 million in the provision, and we have $81 million in non-performing. And of those non-performing, over half of that is in 1-4 family residential loans. So I'd say if things don't change, we're pretty reserved for a lot to go unless something changes or there's some kind of black swan.

[Catherine Mealor, Managing Director at KBW]

Okay. Great. And then on the margin, just back to deposit costs, is there a way to think about where you ended the quarter in deposit costs just as a gauge for where we may kind of start the first quarter of 2025?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Yeah. Our spot rate, I call it, for the deposit was 140. So it's 4 basis points less than our average for the quarter.

[Catherine Mealor, Managing Director at KBW]

Okay. That's great. All right. Thank you. Nice quarter, guys.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Thanks. Thank you.

[Operator]

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

[Peter Winter, Managing Director and Senior Research Analyst at D.A. Davidson]

Thanks. I was wondering, Kevin, you always provide good guidance for the mortgage warehouse. I was just wondering, one, where do you think it comes in in the first quarter, and then just how you're thinking about the outlook for the year versus the industry outlook, which is kind of assuming mid-teen growth? Yeah. We have been fortunate, I guess, and let's hope we can keep the trend going of being close to right on the warehouse. Just as a level set for everybody, we averaged in the fourth quarter $1.137 billion. And I think we said on the call somewhere we'd do somewhere between $1.05 billion and $1.1 billion. So it turned out just slightly better than the upper side of what we thought. In further context, I looked at the numbers through last night. Ye

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Yeah. We have been fortunate, I guess, and let's hope we can keep the trend going of being close to right on the warehouse. Just as a level set for everybody, we averaged in the fourth quarter $1.137 billion. And I think we said on the call somewhere we'd do somewhere between $1.05 billion and $1.1 billion. So it turned out just slightly better than the upper side of what we thought. In further context, I looked at the numbers through last night.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

And so quarter to date, the average is down to $952 million from that $1.137 billion of last quarter. And then last night, we closed at $805 million. So it's been a pretty weak January or latter part of January, in particular the last seven or eight days. I think that $805 million of last night goes lower before it gets higher. So I think for the quarter, we may average $825 million, and if things go well, $850 million. I do know we have a couple of new clients that are in the pipeline. Again, I looked at one of them on Tuesday. So we're hoping to add a couple of clients this year with some of the dislocations in the market and some of the folks who've gotten out. I think Independent Bank up the road with their merger closing, I think they've exited the business.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

So there have been some opportunities to grow it. It's really hard for me to go out much beyond a quarter. One of the things we do maybe that gives us a leg up on how we do it quarter to quarter, it takes from application volume, and we can keep track of application volume. From application to closing, these things are generally six or seven weeks. So you know where you stand, and it's pretty easy to project out six or seven weeks from now. The R-squared on that is really high based upon what we do. So out longer, it really depends on rates where the mortgage rates are. They're a little high. And I'd say if we look across our mortgage portfolio, and Eddie's on the call too, he might talk about how we're doing with our own single-family whole loan book. It's been tougher out there.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

So I expect it to be a relatively weak quarter, but that's not atypical for Q1. As a matter of fact, that's more the natural thing than anything else. But in general, the business has been a little weak.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Eddie, would you like to say anything?

[Eddie Safady, Vice Chairman at Prosperity Bancshares]

No, I agree with what Kevin says. The mortgage rates have stayed higher for longer than some people had assumed. I think anticipation of refinancing has been pushed out a bit more, but what we actually do see is a little bit of an increase in a cash-out refi, which seems a little counterintuitive, but as people are looking to consolidate debt, it's cheaper to go into the new mortgage than continue paying the credit card rates and the like, so I think this is the slow season, of course, and we'll have a better gauge of what's happening towards the end of the first quarter. Yeah. In general, I've always said in this business, and I've been around it for a really long time, things are generally weak between Thanksgiving and the Super Bowl, and then after the Super Bowl, it starts picking up again.

[Eddie Safady, Vice Chairman at Prosperity Bancshares]

So that's why I think it's going to continue to be weak for the next couple of weeks. And then we'll see if we get a little pickup in March, which would be pretty typical of the way the business has operated forever.

[Peter Winter, Managing Director and Senior Research Analyst at D.A. Davidson]

Got it. And I appreciate all the color. As a follow-up question, can you just talk about the outlook for deposit growth this year? And then secondly, if the Fed were to stop lowering rates, is there much more room to lower deposit costs? I mean, you guys did a very good job managing deposit costs on the way up. Thanks.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

I would say to start with the deposit costs, we never were where a lot of banks really went real far, started paying high rates. We never really went and paid really high rates. We paid what was a competitive rate, but we never did pay more than the market. So I would say from that standpoint, we really controlled our costs. We probably have one of the lowest costs of funds of any bank as core deposits. At the same time, a number of other banks were going out and buying broker deposits and even paying 5% for money. We never did that. So probably we lost some of that money that might have stayed with us. But I think what we have right now is a real good core book. We have good core customers.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

I would say that we probably couldn't go down as much as some of the other people could go down. But having said that, if rates do go down, we do have some room on the money market account. And we also offered a special CD, four-month CD that's at 4%. And so I think we have a couple of categories that we could cut. We just may not be able to cut as much as everybody else. As far as deposit growth, historically, in normal times, we always used to run 2%-4% organic growth rate. Again, we're just excited that the deposits aren't going out of the bank like they were, that they actually came back positive. I think this year we're using in our budget, what, 2% or 2.5%?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

2.5%.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

2.5%. So again, I'm hoping that we'll get there. We should. I'm hoping to get back to a more normalized deposit growth rate. And so that's kind of what we're looking for right there.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Just to add on that, even we don't have a rate cut coming in, but we do have a special CD rate that we did to cut the rates. We pretty much did 100 basis point delta on that. For each 100 Fed cut, we did 100 cuts, so those are going to be repricing over time, so we just saw some repricing happen in the fourth quarter. We'll continue to see that in the first quarter, but if you look at just for numbers purposes, we have about 77% of our CD going to mature within six months, and 92% of our CD going to mature within 12 months. So you can see there's still opportunity to reprice those special CD at lower rate because we did decrease it, so we're going to benefit our NII as well, even we don't see any Fed rate cut.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

We've kept the CD product short. We've not really offered rates on the real long term, so that should help us.

[Peter Winter, Managing Director and Senior Research Analyst at D.A. Davidson]

Got it. Thanks for taking the questions.

[Operator]

The next question is from Matt Olney with Stephens. Please go ahead.

[Matt Olney, Managing Director at Stephens]

Hey, thanks for taking the question, guys. On the investment securities portfolio, David or Asylbek, I think you mentioned earlier that the bank has been buying or is close to buying some newer investment securities. Any more color on those products that you're looking at with respect to yields and duration?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Historically, our portfolio, we've tried to—as long as I've been here for 25 years or so—the primary product that we buy is a 15-year fully amortized mortgage-backed security that has anywhere from a three-and-a-half-year life that extended to five as interest rates went up. Now the rates are extended, but we pretty much stay with that product. We'll also buy some other products for CRA and shake it up a little bit. But the majority of the product has always been we never tried to call rates. We just tried to put the money that we didn't have in loans into the portfolio. And so we made money as rates went down. When we had the mortgages, as rates gone up, we kind of sucked wind for the last couple of years.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

But now, finally, that's turning, and that's what you're seeing right now. We'll probably still keep that same strategy. It never looked good when rates went up and you had this loss in the portfolio, but we've been through two or three of these deals right now. And it is nice to see that it does work and it does come out over time. So if you stick with that strategy, you may not hit a home run, but you'll always be in the right place.

[Tim Timanus, Chairman at Prosperity Bancshares]

That's right. Matt, so we did buy $150 million in the fourth quarter. I think yields end up being average about 505.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

505.

[Matt Olney, Managing Director at Stephens]

Okay. That's helpful. Thank you for that color. And then going back to the expense commentary, I think also back you gave us a number for the first quarter to expect. Just beyond the first quarter, are there any other initiatives, technology upgrades, or any other projects that could add some incremental pressure to that beyond the first quarter? Or should we just continue to assume that low single-digit range we've seen now for a while?

[Tim Timanus, Chairman at Prosperity Bancshares]

Yeah. So if you look at beyond first quarter, during the second quarter, we usually have our annual merit increase. That's where you see some pickup on expenses. But we do constantly work on different projects. Technology is always evolving and improving, so it costs money to that, so I do see some expenses increase on the starting second quarter and maybe second half, I would say, of the year, and if I had to guess right now, based on our analysis, I think that on the second half, expenses are going to go up about 1%-2%, maybe 1%-1.5% in the second half. When I say that, I'm based on what 141-143 range that I'm providing. That's you can see 1 or 1 and a half up to 2% increase on the quarterly basis, more like on the second half of the year.

[Matt Olney, Managing Director at Stephens]

Understood. Okay. All right. Thank you, guys.

[Operator]

The next question is from Jared Shaw with Barclays. Please go ahead.

[Operator]

Hi, this is John Rowell. I'm for Jared. Good morning.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Good morning.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Just digging into loan growth a little bit more, seeing some pickup in demand and activity. What buckets of loan growth is that in? Is that commercial customers? Are there any pickup in CRE activity? And then just residential mortgage too. How's that doing with rates moving higher?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Kevin, you want to take that?

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Yeah. I'd say a lot of the current fundings where you can count on approving a loan and getting funding, that's usually going to be in the C&I or the mortgage buckets, right? Whereas the construction buckets take a while to fund up. So in terms of the activity level, I'd say it's across the board, but we've been much more cautious about adding on the single-family book. That book got to be a pretty good size relative to our balance sheet. Strategically, we kind of said we ought to slow that down. It got above $8 billion. I don't know, I didn't look at last night's number, but it's probably $8.2 billion or $8.3 billion. We did kind of slow that down. You don't ever stop it. It's not a business you can turn the spigot fully on or fully off.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

But I think in terms of the volume we add this year, it will be less single-family related. I don't know if Tim or Eddie want to add to that thought.

[Tim Timanus, Chairman at Prosperity Bancshares]

You're exactly correct. At least that's our attitude and our forecast at this point in time, and I don't see that changing.

[Tim Timanus, Chairman at Prosperity Bancshares]

Okay. Perfect. That's good color. And then just back on M&A, what are some hallmarks, I guess, of what you would be interested in in terms of the size, location, whether it's balance sheet metrics, capital levels, or loans and deposits, some of the potential targets that you're considering?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

I guess I could get an email, give you a list of them, I guess, but I really don't. We really don't look at it like that. I mean, we look at a bank or a potential M&A. First of all, we look at the bank. Is it a core bank? We look at the people. Are the people going to be with us? Are they going to stay with us? And can we make a deal that really is accretive so that we're not just building size, that it's going to be accretive for us and it'll be good for the people joining us at the same time? So again, I've always said that we always like Texas, or we're here, so we'll always like that the most. But again, we'll still look in other places. We'll still look in other places.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Again, I mentioned this before. We probably won't go to another state and buy a billion-dollar bank. If we go to another state, it has to be something where they're. I've always said, at least in the top five market share that they own that state because you just need that for advertising dollars and everything else. But we really look at the bank and the people and the core deposits more than anything else. In our opinion, you can always get loans. You can always hire some gunners, and you can go build as many loans as you really want. What we really like to see is a bank that's been around for some time that has core deposits and that the people are willing to grow with us. Did we lose you, John? We might lose you.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Oh, sorry. Just one other quick one from me. The fee income guidance for $38 million-$38 million range recently. Is there any upside to that in 2025, or should we expect similar level?

[Tim Timanus, Chairman at Prosperity Bancshares]

Yeah. I think it's going to stay the same. There might be one-off stuff happen during the quarter that we don't know. But we'll try to continue to grow our trust and brokerage fee. As you saw the past couple of quarters, couple of years, you saw the increase there. So we are focused on the trust fee. We like our trust business. So hopefully, we'll continue to grow our trust department and the fee on that.

[Tim Timanus, Chairman at Prosperity Bancshares]

Okay. Great. Thank you so much.

[Operator]

The next question is from Bill Carcache with Wolfe Research. Please go ahead.

[Bill Carcache, Senior Equity Research Analyst at Wolfe Research]

Hi there. Thank you for taking my questions. First, I wanted to follow up on your loan growth comments. Some of the bigger banks have suggested that tight credit spreads have been a constraint to loan growth as many borrowers have been accessing funding via debt capital markets, and I think there's this suggestion that loan growth could remain a little bit soft as long as capital markets remain this open. Can you give some color around what percentage of your customer base has been able to tap that capital markets for funding versus those that are largely reliant on bank lending and really have simply just not been borrowing?

[Kevin Hanigan, President and COO at Prosperity Bancshares]

I'll take this one. It's pretty rare for our customer base to be even thinking about accessing debt funds or other things. Now, there is a segment in the upper end of what I would call our middle market group. You might call that BBB- kind of larger credits and some smaller than that that do have access to debt funds. And that's a relatively small portion of our overall book of business. So they are active. We see and hear about how active they are, particularly from those larger clients we have. But it just isn't, it really isn't in the wheelhouse of most of our customers.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

I would also say, Kevin, I mean, a lot of people talk about capital markets and non-traditional banks getting into lending. But I don't think that we've ever lost a customer to a non-bank lender that we didn't want to. I may be wrong.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

We've lost a few that we wanted to.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

That's right.

[Bill Carcache, Senior Equity Research Analyst at Wolfe Research]

Yeah. That's really helpful. And so then, essentially, they just haven't been borrowing. And maybe would you characterize how much is essentially pent up? You talked about the optimism that you sense and expectations maybe after kind of the Super Bowl later in the year we'll get a little bit perhaps bounce in growth. Is much of that, would you say, pent up from sort of deferred or delayed borrowing?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

No, I don't think it's pent up, and just to be clear, the Super Bowl was related just to single-family mortgage and the mortgage warehouse business, not to other lines of business. What we're seeing is people buying out partners of their own business or expanding within their own business where they've been kind of on the sidelines themselves, and if anything, really ever since COVID, they've been more paying down than advancing up on lines of credit, and I think that's starting to shift around where we're seeing some inventory builds and some receivable builds, and so I think it's just good old blocking and tackling businesses is coming back.

[Bill Carcache, Senior Equity Research Analyst at Wolfe Research]

All right. It's helpful.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah. Tim and turn is better. Blocking and tackling business, that's what we're looking at.

[Bill Carcache, Senior Equity Research Analyst at Wolfe Research]

Yeah. No, that's great. Helpful color. And then finally, if I can squeeze in one last one, given the debt paydown and other moving parts that impact NIM and make it harder to kind of tell exactly what's happening from a revenue perspective, could you frame how to think about that 325-335 NIM range that you're expecting in terms of NII?

[Tim Timanus, Chairman at Prosperity Bancshares]

Yeah. I think we continue to see an increase in NII coming quarters. And I think the variables which I was describing early on, repricing our securities from 2.06% to around 4.5%-5%, our fixed loans that we're going to be maturing this year through prepayment or just maturity, they're going to be repriced 200 basis points. So all of those are going to continue to help us with NII standpoint, even our margin, including margin. But that's a tailwind. And I think last piece is the CD repricing. We talked about special CD that 77% of it's maturing in six months. They're going to be repricing lower on the CDs. So all of those are going to help with NII specifically.

[Bill Carcache, Senior Equity Research Analyst at Wolfe Research]

Got it. Very helpful. Thank you for your thoughts. Appreciate it.

[Operator]

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

[Charlotte Rasche, EVP and General Counsel at 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.

[Operator]

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

Participants

Executives

• Charlotte Rasche, EVP and General Counsel
• Eddie Safady, Vice Chairman
• Kevin Hanigan, President and COO
• David Zalman, Senior Chairman and CEO
• Asylbek Osmonov, CFO
• Tim Timanus, Chairman

Analysts

• Bill Carcache, Senior Equity Research Analyst at Wolfe Research
• Manan Gosalia, Research Analyst of Banks Midcap at Morgan Stanley
• Matt Olney, Managing Director at Stephens
• Catherine Mealor, Managing Director at KBW
• Peter Winter, Managing Director and Senior Research Analyst at D.A. Davidson
• Jon Arfstrom, Managing Director and Financial Services Equity Research at RBC Capital Markets
• Analyst at Barclays