PB Q2 Deep Dive: M&A and Margin Expansion Amid Deposit Pressures

Regional banking company Prosperity Bancshares (NYSE:PB) missed Wall Street’s revenue expectations in Q2 CY2025 as sales only rose 1.9% year on year to $310.7 million. Its non-GAAP profit of $1.42 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

Prosperity Bancshares faced a challenging second quarter, as its revenue growth did not meet Wall Street’s expectations and the market responded with a sharp decline in the company’s stock. Management attributed the quarter’s performance to seasonally lower deposits, with a particular impact from reductions in public funds and higher-cost deposits acquired in previous deals. CEO David Zalman highlighted that loan growth was mainly driven by seasonal strength in the mortgage warehouse business, while core commercial lending saw modest gains. Noninterest expenses were kept in check, but asset quality metrics saw an uptick in nonperforming assets, largely due to previously acquired loans and a specific increase in single-family mortgages.

Looking ahead, management is focused on integrating the pending merger with American Bank Holding Company, which is expected to strengthen Prosperity’s presence in key Texas markets and boost net interest margin through a higher-yielding loan portfolio and stable deposit base. CFO Asylbek Osmonov noted that repricing of the bond portfolio and loans should support further margin expansion, even if deposit costs remain steady. The company anticipates single-digit loan growth for the remainder of the year and expects deposit balances to stabilize after seasonal declines. Management remains open to additional M&A opportunities and is closely monitoring asset quality, particularly in the single-family mortgage segment, where further increases in nonperforming assets are possible but are viewed as manageable.

Key Insights from Management’s Remarks

Management attributed quarterly results to seasonal deposit outflows, loan mix shifts, and early progress on margin expansion, while also emphasizing the strategic benefits of the American Bank acquisition.

• Seasonal deposit decline: Deposits decreased due to typical seasonal patterns, especially from public fund customers using tax receipts and from runoff of higher-cost deposits acquired in recent deals. Management expects deposit balances to stabilize and recover later in the year.
• Loan growth driven by mortgage warehouse: Most loan growth came from the mortgage warehouse segment, with modest gains in core commercial lending. President and COO Kevin Hanigan noted that commercial loan production improved, and pipelines support low single-digit growth for the rest of the year.
• Net interest margin improvement: CFO Asylbek Osmonov highlighted an increase in net interest margin, partly due to the repricing of the bond and loan portfolios. He expects continued margin expansion as older, lower-yield assets are replaced with higher-yielding ones.
• Rising nonperforming assets: Asset quality metrics showed an increase in nonperforming assets, primarily related to previously acquired loans and a specific group of single-family mortgages. Tim Timanus, Chairman, explained that these exposures are largely reserved and the residential loans are being resolved with minimal losses so far.
• Strategic M&A focus: The announced merger with American Bank Holding Company is expected to deliver immediate margin benefits and strengthen the bank’s presence in South and Central Texas. Management described American Bank’s deposit base and loan yields as highly complementary, projecting accretive impacts to net interest income and margin.

Drivers of Future Performance

Management’s outlook is shaped by expectations for stable deposit trends, ongoing margin expansion, and the impact of the American Bank acquisition.

• Integration of American Bank: The merger is anticipated to be margin-accretive, with American Bank bringing a low-cost deposit base and higher loan yields. Management expects the deal to add $85–$90 million in annual net interest income and provide a mid-single-digit increase to net interest margin.
• Loan and deposit stabilization: The company projects low single-digit loan growth through organic activity and expects deposit balances to recover after typical seasonal declines. Loan pipelines and core deposit initiatives are seen as key to achieving these targets.
• Asset quality monitoring: Rising nonperforming assets, particularly in the single-family mortgage book, are a continued focus. Management has discontinued riskier lending programs and believes any further increases in nonperforming assets will be manageable due to conservative reserving and the sale of repossessed properties.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will closely watch (1) the pace and quality of integration for the American Bank acquisition, (2) stabilization and growth in both loan and deposit balances as seasonal effects fade, and (3) asset quality trends, especially in the single-family mortgage portfolio. Further M&A activity and realized margin expansion will also be important indicators of execution.

Prosperity Bancshares currently trades at $67.91, down from $72.90 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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