Prosperity Bancshares Q1 2025 Earnings Report

Prosperity Bancshares EPS Results

• Actual EPS: $1.37
• Consensus EPS: $1.35
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $1.18

Prosperity Bancshares Revenue Results

• Actual Revenue: $306.68 million
• Expected Revenue: $307.17 million
• Beat/Miss: Missed by -$484.00 thousand
• YoY Revenue Growth: +10.70%

Prosperity Bancshares Announcement Details

• Quarter: Q1 2025
• Date: 4/23/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, April 23, 2025
• Conference Call Time: 11:30AM ET

Prosperity Bancshares (NYSE:PB) operates as bank holding company for the Prosperity Bank that provides financial products and services to businesses and consumers. It accepts various deposit products, such as demand, savings, money market, and time accounts, as well as and certificates of deposit. The company also offers 1-4 family residential mortgage, commercial real estate and multifamily residential, commercial and industrial, agricultural, and non-real estate agricultural loans, as well as construction, land development, and other land loans; consumer loans, including automobile, recreational vehicle, boat, home improvement, personal, and deposit account collateralized loans; term loans and lines of credit; and consumer durables and home equity loans, as well as loans for working capital, business expansion, and purchase of equipment and machinery. In addition, it provides internet banking, mobile banking, trust and wealth management, retail brokerage, mortgage services, and treasury management, as well as debit and credit cards. The company was incorporated in 1983 and is headquartered in Houston, Texas.

Prosperity Bancshares Q1 2025 Earnings Call Transcript

Key Takeaways

• Prosperity reported Q1 FY25 net income of $130 million, up 17.9% YoY, with diluted EPS of $1.37 and a tax-equivalent net interest margin of 3.14%, while improving its efficiency ratio to 45.7%.
• Total loans and deposits rose about 3% YoY to $21.9 billion and $28 billion, respectively, driven by the Lone Star merger, though core loan balances were flat sequentially after acquisition runoff.
• Asset quality remained stable with nonperforming assets at 0.24% of earning assets, net charge-offs of $2.7 million, and an allowance for credit losses of $386 million (nearly 4.7× coverage), resulting in no provision expense this quarter.
• Capital strength was underscored by an 11.2% tangible equity to assets ratio and a 13.2% annualized return on tangible common equity, supporting potential share buybacks or accretive M&A.
• The bank maintained a low cost of funds (1.66%) and cost of deposits (1.38%) with noninterest-bearing deposits at 34.5% of total deposits, positioning it to benefit as loans and securities reprice.

Presentation

[Operator]

Good day, and welcome to the Prosperity Bancshares First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. 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 VP & General Counsel at Prosperity Bancshares]

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' first quarter twenty twenty five 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.

[Charlotte Rasche, Executive VP & General Counsel at Prosperity Bancshares]

E. Tim Tamanis, Jr, Chairman Asylbek Osmanov, Chief Financial Officer Eddie Safady, 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 Asylbek Osmanov, who will review some of our financial statistics and Tim Timanis, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions.

[Charlotte Rasche, Executive VP & General Counsel at Prosperity Bancshares]

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. Additional information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10 Q and 10 ks 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 & CEO at Prosperity Bancshares]

Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter twenty twenty five conference call. We and others believe that Prosperity is doing the right thing. Prosperity has been ranked as one of Forbes' best banks since the list inception in 2010 and was ranked in the top 10 for fourteen consecutive years. Additionally, Prosperity was named the best overall bank in Texas by Money for twenty twenty four-twenty twenty five and was ranked among America's Best Regional Banks by Newsweek in 2025.

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

Prosperity continues to focus on long term relationships and our customer success while maintaining strong asset quality, solid earnings and a fair return to shareholders. Prosperity maintained a high tangible equity to tangible asset ratio of 11.2% with tangible equity of $3,900,000,000 Our net income was $130,000,000 for the three months ended 03/31/2025 compared with $110,000,000 for the same period in 2024, an increase of $19,800,000 or 17.9%. The net income per diluted common share was $1.37 for the three months ended 03/31/2025 compared with $1.18 for the same period in 2024, an increase of 16.1%. For the three months ended 03/31/2025, annualized return on average assets and average tangible common equity were 1.34% on average assets and 13.23% on average tangible common equity respectively and the efficiency ratio was 45.7%. These ratios all show considerable improvement compared with the same period in 2024.

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

Loans were $21,900,000,000 at 03/31/2025, an increase of $712,000,000 or 3.3% compared with $21,200,000,000 at 03/31/2024, primarily due to the merger with Lone Star State Bancshares. As of 03/31/2025, loans excluding warehouse purchase program loans and loans acquired in the Lone Star merger decreased $67,600,000 compared with 12/31/2024. The bank continues to reduce identified loans assumed in recent acquisitions in the amount of $434,000,000 in 2024 and $115,000,000 in the first quarter of twenty twenty five. Our deposits were $28,000,000,000 at 03/31/2025, an increase of $851,000,000 or 3.1% compared with $27,000,000,000 at 03/31/2024, primarily due to the merger. Linked quarter deposits decreased $354,000,000 from $28,300,000,000 at 12/31/2024.

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

The decrease in deposits was primarily due to seasonality. As previously mentioned, we have over 500 municipal customers such as cities, schools and counties that use the tax dollars they receive in December and January throughout the year. Prosperity has strong non interest bearing deposits of 34.5% of total deposits as of 03/31/2025 with a cost of funds of 1.66% and a cost of deposits of 1.38%. The net interest margin on a tax equivalent basis was 3.14% for the three months ended 03/31/2025 compared with 2.79% for the same period in 2024 and three point zero five percent for the three months ending 12/31/2024. Based on our models, we believe our net interest margin should continue to improve to a more normalized level as our bond portfolio and loan portfolio reprice.

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

Our non performing assets totaled $81,400,000 or 24 basis points of quarterly average interest earning assets at 03/31/2025 compared with 83,000,000 or 24 basis points of quarterly average interest earning assets as of 03/31/2024 and again $81,500,000 or 23 basis points of quarterly average interest earning assets at 12/31/2024. The allowance for credit losses on loans and off balance sheet credit exposure was $386,000,000 at 03/31/2025 compared with $366,000,000 at 03/31/2024. Our current non performing assets are higher than our historical levels, mainly due to acquired loans and accounting regulations for such loans that mandate we maintain loan balances on our books until they are resolved despite being reserved for during acquisition. Texas and Oklahoma continue to benefit from strong economies and are home to 58 Fortune 500 headquartered companies. The Texas economy continues to expand.

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

Employment growth was solid and sales tax revenue increased broadly according to the Federal Reserve Bank of Dallas, Texas Economic Indicators published 04/03/2025. The March 2025 Texas business outlook surveys showed continued expansion in wages and benefits all across all sectors. Despite the uncertainty with tariffs, our teams in Texas and Oklahoma are optimistic based on conversations with our customers about their outlook and plans. We continue to be opportunistic, work hard to stay close to our customers and their needs and maintain a quality loan portfolio. Although there is market volatility, we continue to have active conversation with other bankers regarding potential acquisition opportunities and remain ready to enter into a transaction when it is right for all parties and is appropriately accretive to our existing shareholders.

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

Overall, I want to thank all the associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity and we'll continue to work hard to help our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over the discussion to Ostlebeck Osmanov, our Chief Financial Officer to discuss some of the specific financial results we achieved. Ostlebeck?

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended 03/31/2025 was $265,400,000 an increase of $27,100,000 compared to $238,200,000 for the same period in 2024 and a decrease of $2,400,000 compared to $267,800,000 for the quarter ended 12/31/2024. The linked quarter decrease was primarily due to having two less days in the first quarter of twenty twenty five.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

The fair value loan income for the first quarter of twenty twenty five was $3,300,000 compared to $3,600,000 for the fourth quarter twenty twenty four. For the second quarter twenty twenty five, the fair value loan income 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 3.14% for the three months ended 03/31/2025, an increase of 35 basis points compared to 2.79% for the same period in 2024, an increase of nine basis points compared to 3.05% for the quarter ended 12/31/2024. Excluding purchase accounting adjustments, the net interest margin for the three months ended 03/31/2025 was 3.1% compared to 2.76% for the same period in 2024 and three point zero percent for the quarter ended 12/31/2024. Non interest income was $41,300,000 for the three months ended 03/31/2025 compared to $39,800,000 for the quarter ended 12/31/2024 and $38,900,000 for the same period in 2024. Non interest expense for the three months ended 03/31/2025 was $140,300,000 compared to $141,500,000 for the quarter ended 12/31/2024 and $135,800,000 for the same period in 2024.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

For the second quarter twenty twenty five, we expect non interest expense to be in the range of 141,000,000 to $144,000,000 The efficiency ratio was 45.7% for the three months ended 03/31/2025, compared to 46.1% for the quarter ended 12/31/2024, and forty nine point one percent for the same period in 2024. The bond portfolio metrics at threethirty onetwenty twenty five have a modified duration of 3.9 and projected annual cash flows of approximately $1,900,000,000 And with that, let me turn over the presentation to Tim Timanis for some details on loan and asset quality. Thank you,

[Tim Timanus, Chairman at Prosperity Bancshares]

Hasselbeck. Non performing assets at quarter end 03/31/2025 totaled $81,419,000 or 37 basis points of loans and other real estate compared to 81,000,005 and $41,000 or 37 basis points at 12/31/2024. This is basically flat with some non performing assets coming off and others coming on. Since 03/31/2025, '8 hundred and '90 '5 thousand '1 hundred and '60 '2 dollars of nonperforming assets have been removed or put under contract for sale. The 03/31/2025 nonperforming asset total was comprised of $73,378,000 in loans, dollars 29,000 in repossessed assets, and $8,012,000 in other real estate.

[Tim Timanus, Chairman at Prosperity Bancshares]

Net charge offs for the three months ended 03/31/2025 were $2,704,000 compared to net charge offs of $2,592,000 for the quarter ended 12/31/2024. This is an increase of $112,000 on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended 03/31/2025. No dollars were taken into income from the allowance during the quarter ended 03/31/2025. The average monthly new loan production for the quarter ended 03/31/2025 was $317,000,000 compared to $333,000,000 for the quarter ended 12/31/2024, and February for the full year 2024.

[Tim Timanus, Chairman at Prosperity Bancshares]

Loans outstanding at 03/31/2025 were approximately $21,978,000,000 compared to $22,149,000,000 at 12/31/2024. The 03/31/2025 loan total is made up of 38% fixed rate loans, 32% floating rate loans and 30% variable rate loans. I'll now turn it over to Charlotte Rasche.

[Charlotte Rasche, Executive VP & General Counsel at Prosperity Bancshares]

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

[Operator]

We will now begin the question and answer session. First question comes from Manon Gosalia with Morgan Stanley. Please go ahead.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Hi, good morning all.

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

Good Good morning.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Can you give us some more color on what you're seeing on the loan growth side? I know you noted $115,000,000 of deliberate reduction in acquired loans this quarter, but I guess even when you adjust for that loans were fairly flat. So can you talk about what you're seeing there and maybe your updated expectations for loan growth in 2025? I think you had previously spoken about somewhere in the low to mid single digit range. Is that still in line with how you're thinking about it?

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

Kevin, you want to start off on that question?

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

Sure. Thanks, David. Yes, I think we're still in the camp of low single digits for the year. David mentioned and as you mentioned, in last five quarters, we've had $549,000,000 worth of runoff between the Lone Star and the First Capital acquisitions. That runoff is about completed.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

I can think of maybe one other small deal that may run off out of the books and it's not big enough to even talk about. But I think that's about completed. And unlike the last at least three quarters when we were on this call, three weeks in the quarters, loans were down anywhere from $25,000,000 to $90,000,000 within the first three weeks of the quarter. Loans are actually up modestly the first three weeks of this quarter. And I do know, if I just look at the pipelines, we've got some loans, non construction related loans that are term loans, fully funded kind of term loans in our pipeline.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

So we may squeak out a little bit of growth this quarter and then we're optimistic as we look later into the year despite the tariffs and some other things as we sit down with our bankers across the footprint. So we're going to keep our guidance where it's been.

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

Yes. I'd add to that we usually have a quarterly management meeting where our Chairman and President come from all different parts of the states of Texas and Oklahoma and they're between Dallas, Houston, West Texas, on and on Oklahoma. And I asked that exact question, said, loans, the total loan dollars were down, but at the end of the meeting, I always ask what they're are they optimistic or pessimistic and 100% of all of our Chairman and Presidents across all of our different areas responded by saying they're still very optimistic and their customers are still optimistic, still holding back a little bit because of not knowing what to do, but they all seem to be extremely optimistic. Tim, do you want to add to that or?

[Tim Timanus, Chairman at Prosperity Bancshares]

I think that's accurate. I would describe it as being a little bit sluggish right now. The flow of loans that we've been able to look at has been good. Our loan committee meetings have been active. We've had good loans to take a look at.

[Tim Timanus, Chairman at Prosperity Bancshares]

Some of those I'm sure will move forward and end up being funded. But with all that's going on in the marketplace for a couple of weeks now, I think it's been a little sluggish. I think some borrowers are just maybe waiting another week to see what happens. We're not aware of any projects that have actually been taken off the map. They're all still scheduled to move forward.

[Tim Timanus, Chairman at Prosperity Bancshares]

So I think it's a matter of just letting some of these things

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

settle out and The good part is I think the customers are still pretty optimistic. Again, they're just uncertain of where things are going. They're still making money and they still see their position improving over time, especially with the regulatory environment like it is. But again, as you say, it's still sluggish because not knowing where everything is.

[Tim Timanus, Chairman at Prosperity Bancshares]

Yes. But people contacting us and asking about loans and telling us what they would like to do, that continues unabated. So I think there's reason to believe that all this will break loose a bit here fairly soon and move forward in a normal way.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

Yes. And since it's an important topic with the tariffs and everything else, we've listened to other calls or looked at other transcripts and folks saying that it could be bumpy for growth with tariffs if we don't get things resolved. The flip side of that is also, if that is in fact the case, my expectation is that payoffs that would normally occur could get slowed down as well. Projects that might get sold into a different market or have been built out and somebody's going to flip it, I think that will slow down as well if the tariffs become an issue.

[Tim Timanus, Chairman at Prosperity Bancshares]

That would be normal. I think you're right.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

That's all really helpful color. Thank you for that. If we if we think about the balance sheet, I think you have a couple of quarters where the balance sheet has gone down, the the opportunity to pay down some of the high cost borrowings. Should we expect that that near term here to the extent that loan growth is sluggish for a quarter or two?

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

We couldn't really understand anything that you said, Manon. It was kind of cutting in or out. I'm sorry. I don't know if it's on our end or your end.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Sorry. Can you hear me now?

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

We can. Yes.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Thanks.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

I was asking about the balance sheet here. We've had a couple of quarters where the balance sheet has been shrinking. And I think you've taken the opportunity to pay down borrowings when loan growth has been weak. To the extent that loan growth remains sluggish over the next couple of quarters, should we continue seeing the balance sheet moving lower?

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

Again, balance sheet we borrowed when COVID happened and a lot of deposits went out of the bank, think, whether we borrow up to what $3900000.0.03 point 9 billion we've reduced that now to about $2,700,000,000 We don't see it reducing a lot more. If you look historically our normalized times, we've always leveraged the bank by a couple of billion dollars plus a little bit because of the because again, we have so much liquidity coming from the bond portfolio. And so I think that you're I think you're pretty much going to see the I think we might reduce it maybe $200,000,000 but that's probably about it.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

Yes. And depending also as we discussed on the loan growth how the So if opportunity presents, we'll continue to pay down the borrowings. And also we what we start doing a little bit is buying securities yielding 5.25% or so, 5.5%. So we'll just see the market is doing and determine how much lower we want to bring our borrowing.

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

But historically, bottom line is we've always leveraged the bank a couple of billion dollars and probably you should still see that. So I would say the answer to your question is, yes, I think we're pretty much there.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

That's very helpful. Thank you.

[Operator]

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

[Catherine Mealor, Managing Director - Equity Research at Keefe, Bruyette & Woods (KBW)]

Thanks. Good morning. I know that M and A and really M and A and improved growth, but really M and A is a focus for capital deployment. But curious your thoughts on the buyback just given the where the stock price is today?

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

Yes. Again, if we could have been buying shares back through this recent downside when we started hitting around the $64 and stuff, we would have definitely been in the market. But again, we couldn't because of the earnings announcement, but we would have been buying back, no question.

[Catherine Mealor, Managing Director - Equity Research at Keefe, Bruyette & Woods (KBW)]

And even Amanda, we've had a little bit of a rebound since then. So even in the high 60s, is that a place where you would be active or would you wait for another pullback?

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

Right now, again, we're still saving our money I'd say for we really do want to do some M and A, some acquisitions. We have other opportunities that we're looking at. So again, I think I would just pause and say if there is another downturn, we will be back in the stock. But again, I know it seems like we have a lot of capital, but we do have plans to use that. So, but we will again, we will buy when there's another downturn into the stock price.

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

Yes, I think it's safe

[Tim Timanus, Chairman at Prosperity Bancshares]

to say, we're watching it daily and we'll see, we may buy back, we may not.

[Catherine Mealor, Managing Director - Equity Research at Keefe, Bruyette & Woods (KBW)]

Okay, great. And then maybe just any additional comments on M and A. It feels like it's on pause, but I know you've been active in discussions. So just kind of curious if you think this is an environment where we're able to do M and A and if you have a preference maybe with all of the volatility for maybe more of a small deal versus a large deal. I know your range is like two to 20, so it's a big range, but just kind of curious how you're thinking about that?

[Catherine Mealor, Managing Director - Equity Research at Keefe, Bruyette & Woods (KBW)]

Thanks.

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

Yes. Mean, we started off the year with everybody just being terribly excited with the regulatory environment really easing up and I think everybody got terribly excited. I think we had three calls. I think I mentioned even December. I think things did pause a little bit.

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

We are starting those same calls are starting to come back again right now. And so I think that I think you will see something. Think you will see some M and A coming forward again. I think people want to do something and again, you have all these tariffs and that kind of stuff. But for the most part, I think that those people that have made the decision to do something, they might have paused, but it hasn't left their mind and they are going to do something.

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

I suspect there may be in their minds a limited amount of time before the next administration. So I think we will see stuff get done by this year, by the end of the year for sure.

[Catherine Mealor, Managing Director - Equity Research at Keefe, Bruyette & Woods (KBW)]

Great. Thank you.

[Operator]

The next question comes from Michael Rose with Raymond James. Please go ahead.

[Michael Rose, Managing Director - Equity Research at Raymond James Financial]

Hey, good morning guys. Thanks for taking my questions. I don't know if you touched on this, but I think previously you talked about kind of a full year margin in the 3.25% to 3.3% range and given some longer term outlook in prior calls. Has any of that changed just with the rate backdrop at all in your forecast?

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

No, that's the beautiful part about our company. No matter if somebody wants to say that the world is not round anymore and all these ships are going to fall off of the planet. Our deal is not predicated on the growth, it's predicated on repricing and I think we're still sticking with the deal of the 02/1930.

[Michael Rose, Managing Director - Equity Research at Raymond James Financial]

Okay, perfect. And then just for Kevin, I usually ask the warehouse question. You guys did a little bit better than what you were thinking at this time last quarter. Kevin, any thoughts just based on where rates are and what you've seen so far in the second quarter? Thanks.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

Yes, Michael, thank you. You're right. This quarter we did I think we averaged $876,000,000 and our guidance was in the $850,000,000 range. So it was just slightly better than we had anticipated. Just as a catch up quarter to date, we ended last night with the average that was $876,000,000 up to 1.088 average so far for the quarter and we closed the book out last night at $1.148 So it's looking like typically the second quarter is good.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

The third quarter is usually our best quarter and then Q1 and Q4, Q1 and Q4 tend to be weaker quarters. So we're moving into a better time. I am a little bit concerned with where the rate environment is. So I think conservatively, I'd say $1,500,000,000 to $1.1 for this quarter. Just other color, Michael, we have we actually got two new clients.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

One, we boarded and started funding loans on for this month. It's a $75,000,000 commitment that's been funding up. The other new client we have is a $40,000,000 client that hasn't started funding up yet. I think they'll probably start funding up in the next several weeks. So those are going to be slightly helpful to whatever we've got going on.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

And then as we look in the next quarter, we're not that far out yet, but we've got a client that's got itself for sale and I think they'll sell that business and we'll have some impact on the third quarter, but we'll talk about that in July.

[Michael Rose, Managing Director - Equity Research at Raymond James Financial]

Very helpful. And if I could just squeeze one last one in. It looks like there was a bigger step down in NSF and debit card income than I might have expected, understanding that fourth quarter was pretty strong in NSF. Anything to read into that at all or just activity levels or just any color would be helpful.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

So Michael, I think there's just a seasonality. If you look at back in Q1, it's a slower quarter for us from the standpoint. So it wasn't anything unusual. It's just the seasonality of first quarter.

[Michael Rose, Managing Director - Equity Research at Raymond James Financial]

All right. Thanks for taking my questions.

[Operator]

Your next question comes from Peter Winter with D. A. Davidson. Please go ahead.

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

Thanks. You guys obviously have a very strong deposit franchise. You've done a great job managing the deposit costs when rates were moving higher. But the question is, if the Fed were to stop lowering rates, is there much room for you to further lower deposit costs? Because it's you're already at the low end near the low end up here, 2.08%.

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

I'm sorry, didn't hear the last part, Peter. You said if the Fed stops doing rates, what was the question?

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

Is there still room to lower your deposit cost?

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

I would say yes. Again, we didn't go up as much as everybody else. I mean, we're I think our total cost of funds, our total cost of deposits like 1.38. So about sometimes 100 percentage basis points unless it's some of our peer group. But we would like to keep them.

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

A lot of times we reward our customers when rates come down and we still try to keep them. But I think it depends on the timing of that. And so if the repricing is if we get enough repricing in the bond portfolio and the loan portfolio, we probably won't be as aggressive as bringing down rates. If they can't, they started lowering rates really quick, we would have to be a little bit more aggressive. I don't know if that's a good answer or not.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

Yes. I'll just go, Peter, I'll give you a little bit of additional information on that. When we had a 100 basis point cut since end of last year too, we did not decrease significantly our deposit rates. What we did cut is our special CDs that we pretty much cut one to one on the special CDs. And there's or some customer we gave them exception rates, so we cut those exception rates.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

But overall, if you're looking bigger based our customer, we did not decrease the rates. If you look at interest bearing demand deposits, I mean, we have 70 basis points. We were in Q4 and Q1 and even same rate on the Q1 of last year. So I think there's opportunity to cut some of those rates if Fed did come cut the rate. So we hadn't touched those.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

So

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

overall

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

probably because it's been slower than everybody anticipated with the rate cuts. We've really not had to cut our rates and we still have done better because of the repricing. Is that a good analogy?

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

That's right. So there's opportunity to cut it.

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

So the real

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

question is, will the Fed lower rates or will they lower them one time, two times or three times or will they lower them at all? That's the whole question. We actually if they didn't lower them at any at all for the rest of the year, it would be better for us. If they lowered them even three times, we would still hit the net interest margin that we've described to you earlier.

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

Got it. Got it. That's really helpful. And then just on credit, it's obviously excellent. Reserve coverage to the non performing assets, very strong over four times.

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

But with a more uncertain economic environment, do you still expect to take a zero provision throughout the year?

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

Well, we have not what $81,000,000 in non performing and $386,000,000 or something like that in reserve. So, I think that in a good position. We have to do these testing all the time to tell us they're adequate or not adequate. We've always been able to keep a little bit more because just because of times like this, because of what's going on and we justify having the extra money in the account, think. Right now, do you want to comment on that?

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

Yes. And I'll add that when we calculate or estimate our provision, we have a baseline and we layer on the recessionary scenario. So our model already anticipates some recessionary scenario in it, where we stress certain variables on our loans. So with that anticipation in the model, I think even the economy goes a little bit worse than we are right now. I think we covered there.

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

What do we have about an extra $100,000,000 for the recessionary part of it? Around there, yes. Close to that. Yes. So I mean, we're already again, we're already reserved for a recession if that happens.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

Yes. So from that standpoint to answer specifically, unless the economy really get worse than we are, then I don't think we'll be putting much of

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

a reserve in near future.

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

And actually the reserve, you look at it, if you look at it March 2024 compared to 2025, you have about $20,000,000 more in the reserve than you did back in 2024.

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

Great. Thanks a lot. Very helpful. And

[Operator]

your next question comes from Jon Arfstrom with RBC Capital. Please go ahead.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Thanks. Good morning, everyone.

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

Good morning, Jon.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Asselbeck, maybe for you, give us a profile of what you're buying in the securities portfolio, kind of yield type duration. And then remind us of the $1,000,000,000 that what that's rolling off at?

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

Yes. I mean, we're not buying a lot when I say we're not doing one to one. So we still have cash flow coming in. What's the rolling off is our we have MBS, fifteen year MBS that's rolling off and that's what we're essentially buying, just replacing those. I think on the depending on the day when we buy, I think we're buying yielding around $5.25, $5.50.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

That's what we're replacing.

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

You're replacing the 2% with the 5%. Yes, basically.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

Exactly.

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

So that's where spread comes in. I think on the duration, I think it's around maybe a new one putting four.

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

Four to five. Yes, four to five. The duration. So fifteen year mortgage backed security with an average duration probably anywhere from three to five. I mean, depending on the coupon basically of where you're going to be at.

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

We haven't John, they're probably the we haven't bought a bunch of security. We have been buying some. A lot of this stuff a number of the stuff that we did buy was primarily for CRA purposes and stuff like that. Having said that, we did buy probably a couple of hundred million dollars here recently because we did we had excess funds and we've gotten through paying down the 3.9 is down to 2.7. So we are buying some, we are starting to buy back some now, but a lot of our excess money had been going just to reduce that debt at the Fed and borrowings which we were paying how much on?

[Asylbek Osmonov, Chief Financial Officer at Prosperity Bancshares]

About 4.4.

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

So even that, I mean, was really a net interest margin improvement. If you're getting two on your bond portfolio, we were still might have not gotten to five, but we still had a good margin and reducing the 4.4. That's correct.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Okay, good. That's helpful. And then, David, back on capital, you're, you know, you're doing a return on tangible 13% with 11% tangible equity, which is incredible. I've seen you run with much lower TCE over the years that covered you, what's optimal TCE for you? How do you think about optimal capital?

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Because it just feels like it's incredibly high at this point.

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

It's high. Remember the days when we started, we had 3% tangible capital ratio. So this is extremely high. But it's a high class problem I guess, I would say. On the other hand, there's no doubt in my mind that we're going to use that money.

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

So I think if we do a deal, it'll probably be there'll be a combination of cash and stock. And right now, if the market gets crazy, the good thing is we have enough to do an all cash deal, it's a small deal. So I think it just gives us a lot of optionality. I wouldn't want to just say here's a special dividend for something like that because I do feel that we're going to be able to use it. And our return on tangible capital usually has been around 16%.

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

It's been hard. Again, we had two things that affected that. One, the net interest margin falling to 2.75 that in and of itself reduced that return. But now that you've got 11.2% tangible capital, that's a little bit of a stress on itself. But I can promise you we're going to use it.

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

We're going to use it whether it's through the buyback, a stock or through the mergers and acquisition. We will use the money.

[Tim Timanus, Chairman at Prosperity Bancshares]

I think a really nice thing about it is the flexibility that it gives us look at acquisitions, to

[Tim Timanus, Chairman at Prosperity Bancshares]

look at buybacks, to look

[Tim Timanus, Chairman at Prosperity Bancshares]

at dividends. I mean, we can look at all three. Right. Maybe do a little of each, right? I mean, it's a good place to be.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Yep. Okay. I I remember the 4% days. I do. But, is there a minimum in in your mind that you wouldn't go below?

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

Just just from the from my mind, if again, I'd like to not go below 8%, but if we had if we bought if we did a bigger deal and it fell to 7.5% or 7.75%, it took us the end of the year to get back to 8%, that's probably acceptable.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Okay. Thank you very much.

[Operator]

And the next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Hey, good morning.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

Good morning, Mike.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

I guess, David, wanted to follow-up on M and A. We've seen public stocks down 20%, thirty % in the last couple of months. You know as much as about M and A and psychology of CEOs and Boards. Do you think we need a significant recovery in public stock prices for a deal to pan out where you don't have to pay a massive premium? Like how do you think that plays itself out?

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

And also remind us, are there private bank M and A opportunities in or out of Texas that you're looking at which are realistic and meaningful?

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

I guess the first I'll answer the first question. I think I understood that basically based on the stock prices where they're at today, do they have to go up to get more deals or and I would say that basically if what's happened in the last few days and the trend is where it's at right now, we're seeing that I think that we'll still be able to do deals because people have seen the volatility especially in our price where we were at $80 and then probably average $75 and now you're $67 But we were dealing with some of the same people a few years ago where our stock price dropped to 55 And so they've seen as they've watched us and I think that they feel comfortable that if they take our product based on our stock price where it is today, they'll be fine. They've seen tremendous Black Swan activities over the last couple of years and I think they have the confidence in us. But the good part is if they don't even if you have some private deals and with the amount of capital that we have, I think it just really gives us the advantage for somebody that may want maybe not the whole thing in cash, but a certain percentage of cash.

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

We have that ability to provide that with the excess capital that we have. So I'm very confident where we're at.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Got it. That's helpful. And I guess maybe one Kevin for you on the mortgage warehouse. So you talked about the new commitments. I'm just wondering how do you think about the interplay between where mortgage interest rates are, what that warehouse balance could look like in the summer or over the next year?

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Is there a certain point where the warehouse activity picks up meaningfully? It just feels like we might be in a decade of very low refi activity. And would love to hear how you think about that and what that means for if there is an upper end to what your warehouse balances could look like.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

Yes. It is rate dependent. Believe it or not, it wasn't that long ago we were talking about people doing refis when rates were low. And now we're looking at, in my mind, as I said in my comments, at this level of rates, I'm a little bit worried about the tail end of this quarter if we stay at these levels. So I think rates are going to play an impact on the tail end of this quarter because a lot of this stuff is baked in.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

Take an application and it generally six months or six weeks after that, you're closing the loan. So I've always said we've got really, really good vision over the next six weeks. And then it becomes more rate dependent. So I think that rate dependency will hit the tail end of this quarter to the extent rates stay high and could bleed into the what is normally the very strong third quarter. So that's just how I think about it.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

We'll see where rates go and we'll take it from there. If I could just go back to your M and A question, I agree with everything David said. There is some psychological impact for all of us. When rates are high, everything feels good, right? And it feels like more deals ought to happen.

[Kevin Hanigan, President & Chief Operating Officer at Prosperity Bancshares]

But as you know, and as we try to convince people, to the extent we've all moved in concert with each other as a group, exchange ratio math doesn't change. It's all it's just relative math. And most really knowledgeable CEOs end up getting there over the psychology of it all.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

That's helpful color. Thank you both.

[Operator]

Seeing no further questions, 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, Executive VP & 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Charlotte Rasche, Executive VP & General Counsel
• David Zalman, Senior Chairman & CEO
• Asylbek Osmonov, Chief Financial Officer
• Tim Timanus, Chairman
• Kevin Hanigan, President & Chief Operating Officer

Analysts

• Manan Gosalia, Equity Analyst at Morgan Stanley
• Catherine Mealor, Managing Director - Equity Research at Keefe, Bruyette & Woods (KBW)
• Michael Rose, Managing Director - Equity Research at Raymond James Financial
• Peter Winter, Managing Director - Senior Research Analyst at D.A. Davidson
• Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets
• Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch