Prosperity Bancshares Q1 2025 Earnings Results & 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
• EPS Beat Rate: 7 of last 8 quarters

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 (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 Q1 2025 Earnings Call Transcript

Key Takeaways

• Net income rose 17.9% year-over-year to $130 million and diluted EPS increased 16.1% to $1.37, driving a 13.23% return on tangible common equity.
• Net interest margin expanded by 35 basis points to 3.14% in Q1, with further improvement expected as existing bond and loan portfolios reprice.
• Non-interest-bearing deposits remained robust at 34.5% of total deposits, helping maintain a low cost of funds of 1.66% and a cost of deposits of 1.38%.
• Asset quality stayed stable with non-performing assets at 24 basis points of earning assets and an allowance for credit losses covering NPLs by nearly 4.7x, supporting zero provision expense in Q1.
• With a high tangible equity-to-asset ratio of 11.2%, the bank holds ample capital for M&A opportunities, share repurchases, or dividends, all aimed at enhancing shareholder value.

Presentation

[Operator]

Good day, and welcome to the Prosperity Bancshares First Quarter 2025 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 First Quarter 2025 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. Timanus Jr., Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Safady, Vice Chairman, Kevin Hanigan, 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 Osmonov, who will review some of our financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality.

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

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. 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 10Q and 10K, 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 First Quarter 2025 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 14 consecutive years. Additionally, Prosperity was named the best overall bank in Texas by Money for 2024-2025 and was ranked among America's best regional banks by Newsweek in 2025. 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 $3.9 billion.

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

Our net income was $130 million for the three months ended March 31, 2025, compared with $110 million for the same period in 2024, an increase of $19.8 million or 17.9%. The net income per diluted common share was $1.37 for the three months ended March 31, 2025, compared with $1.18 for the same period in 2024, an increase of 16.1%. For the three months ended March 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. Loans were $21.9 billion at March 31, 2025, an increase of $712 million or 3.3%, compared with $21.2 billion at March 31, 2024, primarily due to the merger with Lone Star State Bancshares.

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

As of March 31, 2025, loans, excluding warehouse purchase program loans and loans acquired in the Lone Star merger, decreased $67.6 million compared with December 31, 2024. The bank continues to reduce identified loans assumed in recent acquisitions in the amount of $434 million in 2024 and $115 million in the first quarter of 2025. Our deposits were $28 billion at March 31, 2025, an increase of $851 million or 3.1%, compared with $27 billion at March 31, 2024, primarily due to the merger. Linked quarter deposits decreased $354 million from $28.3 billion at December 31, 2024. 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.

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

Prosperity has strong non-interest-bearing deposits of 34.5% of total deposits as of March 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 March 31, 2025, compared with 2.79% for the same period in 2024, and 3.05% for the three months ending December 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. Our non-performing assets totaled $81.4 million, or 24 basis points of quarterly average interest-earning assets at March 31, 2025, compared with $83 million, or 24 basis points of quarterly average interest-earning assets as of March 31, 2024, and again $81.5 million, or 23 basis points of quarterly average interest-earning assets at December 31, 2024.

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

The allowance for credit losses on loans and off-balance sheet credit exposure was $386 million at March 31, 2025, compared with $366 million at March 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. Employment growth was solid, and sales tax revenue increased broadly, according to the Federal Reserve Bank of Dallas Texas Economic Indicators, published April 3, 2025. The March 2025 Texas Business Outlook surveys showed continued expansion in wages and benefits all across all sectors.

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

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, stay close to our customers and their needs, and maintain a quality loan portfolio. Although there is market volatility, we continue to have active conversations 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. 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.

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

Let me turn over the discussion to Asylbek Osmonov, 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 March 31, 2025, was $265.4 million, an increase of $27.1 million compared to $238.2 million for the same period in 2024, and a decrease of $2.4 million compared to $267.8 million for the quarter ended December 31, 2024. The linked quarter decrease was primarily due to having two less days in the first quarter of 2025. The fair value loan income for the first quarter of 2025 was $3.3 million compared to $3.6 million for the fourth quarter of 2024. For the second quarter of 2025, the fair value loan income is expected to be in the range of $2-$3 million.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

The net interest margin on a tax-equivalent basis was 3.14% for the three months ended March 31, 2025, an increase of 35 basis points compared to 2.79% for the same period in 2024, and an increase of 9 basis points compared to 3.05% for the quarter ended December 31, 2024. Excluding purchase accounting adjustments, the net interest margin for the three months ended March 31, 2025, was 3.1% compared to 2.76% for the same period in 2024, and 3.0% for the quarter ended December 31, 2024. Non-interest income was $41.3 million for the three months ended March 31, 2025, compared to $39.8 million for the quarter ended December 31, 2024, and $38.9 million for the same period in 2024.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Non-interest expense for the three months ended March 31, 2025, was $140.3 million compared to $141.5 million for the quarter ended December 31, 2024, and $135.8 million for the same period in 2024. For the second quarter of 2025, we expect non-interest expense to be in the range of $141-$144 million. The efficiency ratio was 45.7% for the three months ended March 31, 2025, compared to 46.1% for the quarter ended December 31, 2024, and 49.1% for the same period in 2024. The bond portfolio metrics at 3/31/2025 have a modified duration of 3.9 and projected annual cash flows of approximately $1.9 billion. Let me turn over the presentation to Tim Timanus for some details on loan and asset quality.

[H.E. Timanus, Chairman at Prosperity Bancshares]

Thank you, Asylbek. Non-performing assets at quarter end March 31, 2025, totaled $81,419,000 or 37 basis points of loans and other real estate, compared to $81,541,000 or 37 basis points at December 31, 2024. This is basically flat, with some non-performing assets coming off and others coming on. Since March 31, 2025, $89,162 of non-performing assets have been removed or put under contract for sale. The March 31, 2025 non-performing asset total was comprised of $73,378,000 in loans, $29,000 in repossessed assets, and $8,012,000 in other real estate. Net charge-offs for the three months ended March 31, 2025, were $2,704,000, compared to net charge-offs of $2,592,000 for the quarter ended December 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 March 31, 2025.

[H.E. Timanus, Chairman at Prosperity Bancshares]

No dollars were taken into income from the allowance during the quarter ended March 31, 2025. The average monthly new loan production for the quarter ended March 31, 2025, was $317 million, compared to $333 million for the quarter ended December 31, 2024, and $295 million for the full year 2024. Loans outstanding at March 31, 2025, were approximately $21.978 billion, compared to $22.149 billion at December 31, 2024. The March 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, EVP and 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. 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. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. First question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

[Manan Gosalia, Analyst at Morgan Stanley]

Hi. Good morning, all.

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

Good morning.

[Manan Gosalia, 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 the $115 million of deliberate reduction in acquired loans this quarter, but I guess even when you adjust for that, loans were fairly flat. 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?

[H.E. Timanus, Chairman at Prosperity Bancshares]

Yeah. Kevin, you want to start off on that question?

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Sure. Thanks, David. Yeah. I think we're still in the camp of low single digits for the year. As David mentioned and as you mentioned, in the last five quarters, we've had $549 million worth of runoff between the Lone Star and the First Capital acquisitions. That runoff is about completed. 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. I think that's about completed. Unlike the last at least three quarters when we were on this call, three weeks in the quarters, loans were down anywhere from $25 million to $90 million within the first three weeks of the quarter. Loans are actually up modestly the first three weeks of this quarter.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

I do know, if I just look at the pipelines, we've got some non-construction-related loans that are term loans, fully funded kind of term loans in our pipeline. 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. We're going to keep our guidance where it's been.

[H.E. Timanus, Chairman at Prosperity Bancshares]

Yeah. I'd add, too, that we usually have a quarterly management meeting where our chairmen and presidents come from all different parts of the states, of Texas and Oklahoma, and they're between Dallas, Houston, West Texas, on and on Oklahoma. I asked that exact question. I said, "The total loan dollars were down." At the end of the meeting, I always ask, "Are they optimistic or pessimistic?" 100% of all of our chairmen 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 no?

[David Zalman, Senior Chairman and CEO 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. Some of those, I'm sure, will move forward and end up being funded. 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. I think it's a matter of just letting some of these things settle out.

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

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. Again, as you say, it's still sluggish because of not knowing where everything is.

[H.E. Timanus, Chairman at Prosperity Bancshares]

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

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Yeah. 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 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'll slow down as well if the tariffs become an issue.

[H.E. Timanus, Chairman at Prosperity Bancshares]

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

[Manan Gosalia, Analyst at Morgan Stanley]

That's all really helpful, color. Thank you for that. If we think about the balance sheet, I think you've had a couple of quarters where the balance sheet has gone down. You've used the opportunity to pay down some of the high-cost borrowings. Should we expect that that continues from here to the extent that loan growth stays sluggish for a quarter or two?

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

We couldn't really understand anything. As you said, Manan, 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, Analyst at Morgan Stanley]

I'm sorry. Can you hear me now?

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

We can. You're better.

[Manan Gosalia, Analyst at Morgan Stanley]

Oh, okay. Thanks. I was asking you 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 and CEO at Prosperity Bancshares]

Again, the balance sheet we borrowed when COVID happened and a lot of deposits went out of the bank, I think. What did we borrow up to? What, $3.9 million?

[Kevin Hanigan, President and COO at Prosperity Bancshares]

$3.9.

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

$3.9 billion. We've reduced that now to about $2.7 billion. We don't see it reducing a lot more. If you look historically or normalized times, we've always leveraged the bank by a couple of billion dollars plus a little bit because, again, we have so much liquidity coming from the bond portfolio. I think you're pretty much going to see the I think we might reduce it maybe $200 million, but that's probably about it.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

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

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

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

[Manan Gosalia, 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, Analyst at KBW]

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

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

Yeah. 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. Again, we could not because of the earnings announcement, but we would have been buying back, no question.

[Catherine Mealor, Analyst at KBW]

Even at, we've had a little bit of a rebound since then. 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 and 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&A, some acquisitions. We have other opportunities that we're looking at. I think I would just pause and say if there is another downturn, we will be back in the stock. Again, I know it seems like we have a lot of capital, but we do have plans to use that. We will buy when there's another downturn into the stock price.

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

Yeah. I think it's safe to say we're watching it daily. We'll see. We may buy back. We may not.

[Catherine Mealor, Analyst at KBW]

Okay. Great. Maybe just any additional comments on M&A. It feels like it's on pause, but I know you've been active in discussions. Just kind of curious if you think this is an environment where we're able to do M&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 2-20, so it's a big range, but just kind of curious how you're thinking about that. Thanks.

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

Yeah. I mean, again, we started off the year with everybody just being terribly excited with the regulatory environment really easing up. I think everybody got terribly excited. I think we had three calls. I think I mentioned Steven in December. I think things did pause a little bit. We are starting to see those same calls are starting to come back again right now. I think you will see something. I think you will see some M&A coming forward again. I think people want to do something. You have all these tariffs and that kind of stuff. For the most part, I think 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 and CEO at Prosperity Bancshares]

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

[Catherine Mealor, Analyst at KBW]

Great. Thank you.

[Operator]

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

[Michael Rose, Analyst at Raymond James]

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 325-330 range and given some longer-term outlook in prior calls. Has any of that changed just with the rate backdrop at all in your forecasts?

[David Zalman, Senior Chairman and 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 the ships are going to fall off of the planet, our deal is not predicated on the growth. It's predicated on a repricing. I think we're still sticking with the deal of the 225-325-330.

[Michael Rose, Analyst at Raymond James]

Okay. Perfect. 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 and COO at Prosperity Bancshares]

Yeah, Michael, thank you. You're right. This quarter, we did, I think we averaged 876, and our guidance was in the 850 range. 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 up to $1.088 billion average so far for the quarter. We closed the book out last night at $1.148 billion. It is looking like typically the second quarter is good. The third quarter is usually our best quarter. Q1 and Q4 tend to be weaker quarters. We are moving into a better time. I am a little bit concerned with where the rate environment is. I think conservatively, I'd say $1.05 billion-$1.1 billion for this quarter.

[Michael Rose, Analyst at Raymond James]

Okay. I'll.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Just other color, Michael, we actually got two new clients. One we boarded and started funding loans on for this month. It's a $75 million commitment that's been funding up. The other new client we have is a $40 million client that hasn't started funding up yet. I think they'll probably start funding up in the next several weeks. Those are going to be slightly helpful to whatever we've got going on. As we look in the next quarter, and we're not that far out yet, we've got a client that's got itself for sale. I think they'll sell that business, and we'll have some impact on the third quarter. We'll talk about that in July.

[Michael Rose, Analyst at Raymond James]

Very helpful. If I could just squeeze one last one in, 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, CFO at Prosperity Bancshares]

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

[Michael Rose, Analyst at Raymond James]

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 and Senior Analyst at D.A. Davidson]

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

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

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

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

Is there still room to lower your deposit costs?

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

I would say yes. Again, we didn't go up as much as everybody else. I mean, I think our total cost of funds, our total cost of deposits is like 1.38. About sometimes on a percentage basis points unless it's some of our peer group. We would like to keep them. A lot of times we reward our customers when rates come down, and we still try to keep them. I think it depends on the timing of that. 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 start 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, CFO at Prosperity Bancshares]

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

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

That's 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, CFO at Prosperity Bancshares]

That's right. There is opportunity to cut it.

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

The real 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. Actually, if they didn't lower them 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 and Senior Analyst at D.A. Davidson]

Got it. Got it. That's really helpful. Just on credit, it's obviously excellent. Reserve coverage to the non-performing assets, very strong, over four times. With a more uncertain economic environment, do you still expect to take a zero provision throughout the year?

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

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

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

What do we have about an extra $100 million for the recessionary part of it?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Around there, yes.

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

Yeah. Something like that.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Close to that, yes.

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

I mean, we're already, again, we're already reserved for a recession if that happens.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah. From that standpoint, to answer specifically, unless the economy really gets worse than we are, then I don't think we'll be putting much of a reserve in the near future.

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

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

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

Great. Thanks a lot. Very helpful.

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

Yeah.

[Operator]

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

[Jon Arfstrom, Associate Director at RBC Capital]

Thanks. Good morning, everyone.

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

Good morning, Jon.

[Jon Arfstrom, Associate Director at RBC Capital]

Good morning. Asylbek, 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 $1.9 billion, what that's rolling off at.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah. 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 rolling off is our we have 15-year MBS that's rolling off, and that's what we're essentially buying, just replacing those. I think depending on the day when we buy, I think we're buying yielding around 5.25, 5.50. That's what we're replacing.

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

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

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

Four to five.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah. Four to five.

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

Yeah. The duration. So 15-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. We haven't, Jon, they're probably the we haven't bought a bunch of securities. We have been buying some. A lot of the 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 had excess funds, and we had gotten through paying down the 3.9s, down to 2.7. We are buying some. We are starting to buy back some now. 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, CFO at Prosperity Bancshares]

About 4.4% that we're paying.

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

Even that, I mean, that was really a net interest margin improvement. If you're getting two on your bond portfolio, instead of saying we still might have not gotten the five, but we still had a good margin and reducing to 4.4.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

That's correct.

[Jon Arfstrom, Associate Director at RBC Capital]

Okay. Good. That's helpful. David, back on capital, 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 I've covered you. What's optimal TCE for you? How do you think about optimal capital? It just feels like it's incredibly high at this point.

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

It's high. I remember the days when we started, we had a 3% tangible capital ratio. This is extremely high. It is a high-class problem, I guess, I would say. On the other hand, there is no doubt in my mind that we are going to use that money. I think if we do a deal, it will probably be a combination of cash and stock. Right now, if the market gets crazy, the good thing is we have enough to do an all cash deal. It is a small deal. I think it just gives us a lot of optionality. I would not want to just say, "Here is a special dividend for something like that," because I do feel that we are going to be able to use it. Our return on tangible capital usually has been around 16%. It has been hard.

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

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. Now that you've got 11.2% tangible capital, that's a little bit of a stress on itself. I can promise you we're going to use it. We're going to use it, whether it's through the buyback of stock or through the mergers and acquisitions. We will use the money. I think the really nice thing about it is the flexibility that it gives us to look at acquisitions, to look at buybacks, to look at dividends. I mean, we can look at all three, maybe do a little of each, right? I mean, it's a good place to be.

[Jon Arfstrom, Associate Director at RBC Capital]

Sure. Okay. I remember the 4% days. I do. Is there a minimum in your mind that you wouldn't go below?

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

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

[Jon Arfstrom, Associate Director at RBC Capital]

Okay. Thank you very much.

[Operator]

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

[Ebrahim Poonawala, Managing Director at Bank of America]

Hey. Good morning.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Morning.

[Ebrahim Poonawala, Managing Director at Bank of America]

I guess, David, wanted to follow up on M&A. We've seen public stocks down 20-30% in the last couple of months. As much as about M&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? How do you think that plays itself out? Also remind us, are there private bank M&A opportunities in or out of Texas that you're looking at which are realistic and meaningful?

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

I guess I'll answer the first question. I think I understood that. It's basically based on the stock prices where they're at today, do they have to go up to get more deals? 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 averaged $75, and now you're $67. We were dealing with some of the same people a few years ago where our stock price dropped to $55. They have seen us. They have watched us. I think that they feel comfortable that if they take our price based on our stock price where it is today, they'll be fine.

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

They've seen tremendous black swan activities over the last couple of years, and I think they have the confidence in us. 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. We have that ability to provide that with the excess capital that we have. I am very confident where we're at.

[Ebrahim Poonawala, Managing Director at Bank of America]

Got it. That's helpful. I guess maybe one, Kevin, for you on the mortgage warehouse. 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? 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. I 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 and COO at Prosperity Bancshares]

Yeah. 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. 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. 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. You take an application, and generally six months or six weeks after that, you're closing a loan. I've always said we've got really, really good vision over the next six weeks, and then it becomes more rate dependent.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

I think that rate dependency will hit the tail end of this quarter to the extent rates stay high and could bleed into what is normally the very strong third quarter. That is just how I think about it. We will see where rates go, and we will take it from there. If I could just go back to your M&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? It feels like more deals ought to happen. As you know, and as we try to convince people, to the extent we have all moved in concert with each other as a group, exchange ratio math does not change. It is just relative math. Most really knowledgeable CEOs end up getting there over the psychology of it all.

[Ebrahim Poonawala, Managing Director at Bank of America]

That's helpful, Kevin. 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, 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Charlotte Rasche, EVP and General Counsel
• David Zalman, Senior Chairman and CEO
• Asylbek Osmonov, CFO
• H.E. Timanus, Chairman
• Kevin Hanigan, President and COO

Analysts

• Manan Gosalia, Analyst at Morgan Stanley
• Catherine Mealor, Analyst at KBW
• Michael Rose, Analyst at Raymond James
• Peter Winter, Managing Director and Senior Analyst at D.A. Davidson
• Jon Arfstrom, Associate Director at RBC Capital
• Ebrahim Poonawala, Managing Director at Bank of America