Prosperity Bancshares, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Mergers: Signed a definitive merger agreement with Southwest Bancshares Inc. and is excited about expanding footprint; also pending merger with American Bank Holding Corporation to strengthen presence in South Texas and Central Texas.
• Dividend: Board of Directors approved increasing the fourth quarter 2025 dividend to $0.60 per share from $0.58 per share.
• Financial Performance: Net income increased, net interest margin improved, annualized return on tangible equity was 13.43% and return on assets was 1.44%.
• Loans and Deposits: Loans decreased slightly, deposits increased with growth in core deposits. Nonperforming assets slightly increased but credit remains strong.
• Acquisitions: Continuing to work on pending acquisitions of American Bank Holding Corporation and Southwest Bancshares Inc., and having conversations with other banks regarding strategic opportunities.

Segment Performance

• Net Income: Prosperity reported net income of $137.6 million for the quarter ending 09/30/2025, compared with $127.3 million for the same period in 2024. Net income per diluted common share was $1.45 for the quarter ended 09/30/2025, compared with $1.34 for the same period in 2024, an increase of 8.2%.
• Net Interest Margin: The net interest margin on a tax-equivalent basis was 3.24% for the three months ending 09/30/2025 compared with 2.95% for the same period in 2024, and 3.18% for the quarter ended 06/30/2025. Excluding purchase accounting adjustments, the net interest margin for the three months ended 09/30/2025 was 3.21% compared to 2.89% for the same period in 2024 and 3.14% for the quarter ended 06/30/2025.
• Loans: Loans, excluding the warehouse purchase program loans, were $20.7 billion at 09/30/2025 compared with $20.9 billion at 06/30/2025, a decrease of $160 million. Nonperforming assets totaled $119 million or 36 basis points of quarterly average earning assets at 09/30/2025, compared with $110 million or 33 basis points of quarterly average interest-earning assets at June 30, 2025.
• Deposits: Deposits were $27.7 billion at 09/30/2025, an increase of $308 million or 1.14% annualized from the $27.4 billion at 06/30/2025. Core deposits have grown and there are no broker deposits.

Guidance

• Dividend: Fourth quarter 2025 dividend increased to $0.60 per share.
• Net Interest Margin: Expect net interest margin to continue to improve over the next 24 to 36 months. Noninterest expense for the fourth quarter of 2025 is expected to be in the range of $141 to $143 million. Efficiency ratio was 44.1% for the three months ended 09/30/2025.
• Loan Production: Average monthly new loan production for the quarter ended 09/30/2025 was $356 million compared to $353 million for the quarter ended 06/30/2025.

Risks

• Regulatory Burden: Potential compliance pressure from regulations.
• Loan Competition: Intense competition in lending with aggressive terms and conditions, which may impact net interest margin and asset quality.
• Funding Costs: Increase in funding costs may affect earnings.
• Acquisition-Related Risks: Potential integration issues and loan runoff in acquired portfolios.

Question and Answer

Q: Catherine Mealor asked about the outlook for loan growth.

A: Kevin Hanigan said the fourth quarter may be flat, with low single-digit growth expected next year, and the two acquisitions will help, but there may be loan runoff from acquisitions.

Q: Catherine Mealor asked about buyback activity.

A: David Zalman said the stock is undervalued and expected to be active in buybacks soon.

Q: Michael Rose asked about hiring efforts for loan growth.

A: David Zalman said they are constantly looking at hiring people to grow the bank.

Q: Michael Rose asked about the warehouse question and rate cut.

A: Kevin Hanigan said warehouse production is flat to last quarter, and there's a mini refi boom.

Q: Dave asked about medium-term margin outlook.

A: David Zalman said margin will continue to improve over the next 12-36 months; Asylbek Osmonov added fixed-rate loans will reprice over years.

Q: Dave asked about M&A inbound calls.

A: David Zalman said the bank is not for sale but is undervalued, and will always do what's right for shareholders.

Q: Manan Gosalia asked about product gaps and buyback strategy.

A: David Zalman said they are focused on getting stock price up and will still look at M&A but main focus is on buybacks now.

Q: Peter Winter asked about loan runoff from acquisitions and margin outlook.

A: Kevin Hanigan said runoff from acquisitions will be muted; Asylbek Osmonov said margin will continue to grow but tick down slightly.

Q: Jared Shaw asked about deposit beta and M&A competition.

A: Asylbek Osmonov said deposit beta is 13 basis points; David Zalman said they have more deals than money.

Q: David Chiaveroni asked about credit quality uptick and drivers.

A: Tim Timanus said nonperforming assets related to single-family homes were due to regulatory fair lending pressure, and they've discontinued aggressive programs.

Q: Ben Gjerlinger asked about deal close dates and buyback timeline.

A: Charlotte Rasche said American deal expected to close end of year, Southwest in 2026; David Zalman said expected to start buybacks next week.

Q: Matt Olney asked about borrowings and deposit growth.

A: Asylbek Osmonov said borrowing is $1.8 billion and will buy securities; David Zalman said deposit growth seasonally favorable.

Q: Janet Lee asked about deposit runoff from acquisitions and fee income.

A: David Zalman said American Bank acquisition has stable deposits, Texas Partners Bank has more treasury risk; Asylbek Osmonov said fee income guidance remains 38 to 40.

Q: Jon Arfstrom asked about optimal capital target and Texas economy moderation.

A: David Zalman said has room for capital; said there's a slight moderation in Texas economy but still good overall.