Prosperity Bancshares Q2 2025 Earnings Report

Prosperity Bancshares EPS Results

• Actual EPS: $1.42
• Consensus EPS: $1.40
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $1.22

Prosperity Bancshares Revenue Results

• Actual Revenue: $310.70 million
• Expected Revenue: $315.66 million
• Beat/Miss: Missed by -$4.95 million
• YoY Revenue Growth: N/A

Prosperity Bancshares Announcement Details

• Quarter: Q2 2025
• Date: 7/23/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, July 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 Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: We entered into a definitive merger agreement with American Bank Holding Company to expand our presence in South and Central Texas, boosting market share in Corpus Christi and San Antonio with an estimated mid-single-digit net interest margin accretion and a three-year earn-back.
• Positive Sentiment: Net income grew 21% year-over-year to $135 million, or $1.42 diluted EPS, with adjusted EPS up 16.4%, while return on average tangible common equity rose to 13.44% from 12.34%.
• Positive Sentiment: The net interest margin expanded to 3.18% from 2.94% a year ago, driven by higher loan yields and anticipated bond and loan repricing tailwinds that are expected to sustain near-term NIM growth.
• Neutral Sentiment: Loan balances at $22.1 billion were down 0.9% year-over-year even as core loans ex-warehouse rose 4% annualized, while deposits fell 1.6% mostly on seasonal public-fund outflows and disciplined pricing in a higher-rate environment.
• Negative Sentiment: Non-performing assets increased to $110 million (33 bps of average earning assets) from $89 million a year ago, reflecting acquired non-accrual loans and single-family home repossessions, though coverage remains over 3.4 times NPAs.

Presentation

[Operator]

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

[Operator]

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 - General Counsel at Prosperity Bancshares]

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Second Quarter twenty twenty five Earnings Conference Call. This call is being broadcast live over on our website and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer H.

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

E. Tim Tamanis Jr, Chairman Asylbek Osmanov, Chief Financial Officer Eddie Safadi, Vice Chairman Kevin Hannigan, President and Chief Operating Officer Randy Hester, Chief Lending Officer Mays Davenport, Director of Corporate Strategy and Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Oslo Bek Osmanov, who will review some of our recent financial statistics and Tim Timanis, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions.

[Charlotte Rasche, EVP - 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 our filings with the Securities and Exchange Commission, including Forms 10 Q and 10 ks and other reports and statements we have filed. All forward looking statements are expressly as qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

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

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

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

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

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

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

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

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

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

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

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

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

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

Texas was rated as a second best state for business in 2025 by CNBC. However, we believe it should have been number one. That's just a little humor guys. Continues to shine as more people and companies move to the state because of the business friendly political structure and no state income tax. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever changing technology and product distribution channels.

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

We intend to continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone involved in our company for helping to make it the success it has become. Thanks again for your support of our company. Let me turn over our discussion to Asselbeck Osmanov, our Chief Financial Officer to discuss some of the specific financial results we achieved. Asselbeck?

[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 06/30/2025, was $267,700,000 an increase of $8,900,000 compared to $258,800,000 for the same period in 2024, an increase of $2,300,000 compared to $265,400,000 for the quarter ended 03/31/2025. Fair value loan income for the second quarter twenty twenty five was $3,100,000 compared to $3,300,000 for the first quarter twenty twenty five.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

[Tim Timanus, Chairman at Prosperity Bancshares]

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

[Tim Timanus, Chairman at Prosperity Bancshares]

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

[Tim Timanus, Chairman at Prosperity Bancshares]

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

[Charlotte Rasche, EVP - 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 withdraw your question, please press then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Michael Rose with Raymond James. Please go ahead.

[Michael Rose, Managing Director at Raymond James Financial]

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

[Michael Rose, Managing Director at Raymond James Financial]

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

[Michael Rose, Managing Director at Raymond James Financial]

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

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

Yeah, I think the thing that we liked about it too, rightly or wrong, that we really saw commercial, our commercial loans pick up and mortgage loans went down. Again, we have so many mortgage loans that we've seen that the $73,000,000 more in commercial loans increase that I think that was good. We do seem to see a lot of, I don't know, I wouldn't call it production, but there's a lot of stuff going through the loan committee now. Things look pretty good, I think.

[Tim Timanus, Chairman at Prosperity Bancshares]

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

[Michael Rose, Managing Director at Raymond James Financial]

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

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

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

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

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

No, that's absolutely right and just give you a little bit of a color on the question why we're achieving these numbers. If you look at our model, our cost of deposit model shows it's going to continue to stay as is. You know, there's not much downward decrease on the cost of deposit. But what we see is the repricing of two things, right? First of all, it's our bond portfolio.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

[Michael Rose, Managing Director at Raymond James Financial]

Okay. I appreciate all the color everyone. I'll step back. Thanks.

[Operator]

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

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

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

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

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

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

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

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

You also reduced your borrowings from the Federal Home Loan Bank compared to last year where we were at 3.9 last year.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah, the beginning of 3.9 and we'd reduced to 2.9 this year in November.

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

And again, we again, that was a big drop in the asset size. They shouldn't affect the net interest income, just a big drop in the asset size. Correct.

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

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

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

Okay, that's very helpful. So still upward momentum in loan pricing as expected. Yes. That's great. Okay, great. Thank you.

[Operator]

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

[Manan Gosalia, Head - U.S. Midcaps Banks Research at Morgan Stanley]

Hey, good morning all.

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

Good morning. Morning.

[Manan Gosalia, Head - U.S. Midcaps Banks Research at Morgan Stanley]

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Okay. I'll take that one. And I'll start off with deposit. And what we noticed in American West has really good deposit base and very similar to ours. That's what attracted us to American Bank.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

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

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

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

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

[Manan Gosalia, Head - U.S. Midcaps Banks Research at Morgan Stanley]

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

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

Right now, there's a lot of activity in M and A. And again, I suspect that we'll be using some of that capital that we have going forward probably in M and A.

[Manan Gosalia, Head - U.S. Midcaps Banks Research at Morgan Stanley]

Got it. Thank you.

[Operator]

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

[Peter Winter, MD & Senior Research Analyst at D.A. Davidson]

Good morning. I wanted to ask I wanted to ask about the Lone Star portfolio. Loans were down about $180,000,000 year over year and deposits were down about $250,000,000 year over year. So are you nearing a bottom? And then maybe if you can talk about the quality of American Bank's loans and deposits, would you expect some runoff once you close that deal?

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

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

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

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

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

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

[Tim Timanus, Chairman at Prosperity Bancshares]

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

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

But we knew going in there was a certain portion, they were about 100%.

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

There were some 5% CDs that were going to go.

[Tim Timanus, Chairman at Prosperity Bancshares]

That's correct. And from day one, they have worked very closely and very well with us to address those issues and deal with them.

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

We knew that even going in, so it wasn't anything none of us expected, let me say that.

[Peter Winter, MD & Senior Research Analyst at D.A. Davidson]

That's correct.

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

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

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

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

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

[Peter Winter, MD & Senior Research Analyst at D.A. Davidson]

Thank you for all that detail. If I could ask on credit, I'm certainly not worried about credit with you guys, but just curious about the what drove the increase, dollars 29,000,000 increase in non performing assets?

[Peter Winter, MD & Senior Research Analyst at D.A. Davidson]

And then just what's the outlook for non performing assets going forward? Just given the comment, most of it is acquired loans, which you have reserves against. But I'm just wondering when those should start to decline.

[Tim Timanus, Chairman at Prosperity Bancshares]

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

[Tim Timanus, Chairman at Prosperity Bancshares]

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

[Tim Timanus, Chairman at Prosperity Bancshares]

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

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

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

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

[Tim Timanus, Chairman at Prosperity Bancshares]

That's right. And we did discontinue that type of loan actually over a year ago. Right, over a year ago.

[Peter Winter, MD & Senior Research Analyst at D.A. Davidson]

Got it. Thanks for taking the questions. I appreciate it.

[Operator]

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

[Stephen Scouten, MD & Senior Research Analyst at Piper Sandler Companies]

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

[Stephen Scouten, MD & Senior Research Analyst at Piper Sandler Companies]

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

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

I guess I should just say stay tuned, guess.

[Stephen Scouten, MD & Senior Research Analyst at Piper Sandler Companies]

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

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

That three year, Cullen help me, that three year include the way it was priced, it looks like it was priced higher than some of the other deals at 2.2 times.

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

A little over two times.

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

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

[Stephen Scouten, MD & Senior Research Analyst at Piper Sandler Companies]

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

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

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

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

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

[Stephen Scouten, MD & Senior Research Analyst at Piper Sandler Companies]

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

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

No, this is just our existing balance sheet. So that should help. No question.

[Stephen Scouten, MD & Senior Research Analyst at Piper Sandler Companies]

Perfect. Thanks for the clarification. Thanks for the time today.

[Operator]

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

[Eric Dray, Equity Research Associate at Bank of America]

Hey, everyone. This is Eric on for Eby. Just had one on the fee income line. It has been running above. I know previously you've talked about 36,000,000 to $38,000,000 as kind of the run rate that you view, but it's been above that for several quarters now.

[Eric Dray, Equity Research Associate at Bank of America]

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

[Asylbek Osmonov, CFO at Prosperity Bancshares]

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

[Eric Dray, Equity Research Associate at Bank of America]

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

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

No, we're still very active.

[Eric Dray, Equity Research Associate at Bank of America]

Got it. Okay. That was it for me. Thank you.

[Operator]

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

[Jon Arfstrom, MD & Associate Director - US Research at RBC Capital Markets]

Hey, thanks. Good morning.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Good morning, Hey,

[Jon Arfstrom, MD & Associate Director - US Research at RBC Capital Markets]

just to follow-up on that. I know you guys had a tough time with the last deal getting it closed on time. Any evidence of less regulatory pressures, David? I mean, I don't think you're going to get into that situation again, but any evidence of that?

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

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

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

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

[Jon Arfstrom, MD & Associate Director - US Research at RBC Capital Markets]

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

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

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

[Jon Arfstrom, MD & Associate Director - US Research at RBC Capital Markets]

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

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

I do. I do. We spent the better part of a couple of days digging into it here last week and this week and talking to clients. Think it's not only going to stabilize, it's probably going to go the other way.

[Jon Arfstrom, MD & Associate Director - US Research at RBC Capital Markets]

Okay. And you feel like it's starting to turn now?

[Kevin Hanigan, President, COO & Director at Prosperity Bancshares]

It is.

[Jon Arfstrom, MD & Associate Director - US Research at RBC Capital Markets]

Okay. Thank you very much.

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

Thanks, John. This

[Operator]

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

[Charlotte Rasche, EVP - 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 - General Counsel
• David Zalman, Senior Chairman & CEO
• Asylbek Osmonov, CFO
• Tim Timanus, Chairman
• Kevin Hanigan, President, COO & Director

Analysts

• Michael Rose, Managing Director at Raymond James Financial
• Catherine Mealor, Managing Director at Keefe, Bruyette & Woods (KBW)
• Manan Gosalia, Head - U.S. Midcaps Banks Research at Morgan Stanley
• Peter Winter, MD & Senior Research Analyst at D.A. Davidson
• Stephen Scouten, MD & Senior Research Analyst at Piper Sandler Companies
• Eric Dray, Equity Research Associate at Bank of America
• Jon Arfstrom, MD & Associate Director - US Research at RBC Capital Markets