Amidst a flurry of positive margin projections, buyback authorizations, and optimistic discussions of M&A, something ominous lurks within Prosperity Bancshares' Q1 2024 earnings call transcript. It's a subtle shift, easily overlooked in the deluge of numbers and projections, but its implications could be explosive. Prosperity, the stalwart of core deposits, the champion of customer relationships, is quietly, almost imperceptibly, inching closer to a reliance on a funding source it has vehemently shunned for decades: brokered deposits.

Don't misunderstand, Prosperity hasn't gone full-blown brokered. Their core deposit base remains remarkably strong. Their 36% non-interest-bearing deposit ratio is the envy of many peers. But a closer examination of management's commentary reveals a subtle shift in tone, a slight crack in the armor of their previously unwavering commitment to core funding.

The first hint appears in CEO David Zalman's response to a question regarding loan growth. He acknowledges the attractiveness of high loan yields in the current environment, but then issues a cautionary statement, "You want to make sure – I don't think we're a bank that wants to end up with a 90% loan-to-deposit ratio. We want to have liquidity in the bank. And so you have to grow deposits and loans at the same time... I just don't believe that broker deposits is true liquidity. That's not core deposits."

This statement, while seemingly reaffirming their core deposit focus, subtly hints at a potential loosening of their previously rigid stance. The phrase "I don't *think* we're a bank" instead of a more definitive "We are *not* a bank" suggests a sliver of doubt, a crack in the previously impenetrable wall.

This subtle shift gains further weight when coupled with Kevin Hanigan's, President and COO, remarks about "leaning in" on loan opportunities. He specifies, "The things we would lean in on are – not to name any names, but banks with a really high loan-to-deposit ratio... We would like to lean into those, where we get a full-blown, 'hey, we're going to help you out on this, but we want a full relationship here. We want your deposits, and we want to do a full relationship.'"

While advocating for full relationships, Hanigan acknowledges that these banks, facing loan-to-deposit constraints, are raising money through brokered deposits. This raises a crucial question: If Prosperity is aggressively pursuing loans from these liquidity-constrained banks, how will they manage their own loan-to-deposit ratio without, at least partially, resorting to the same brokered funding they've publicly denounced?

Analyzing the Numbers

Let's consider the numbers. Prosperity projects 3-5% loan growth for the year. Assuming a 2% deposit growth, as suggested by Zalman, that implies a potential $300-$500 million gap between loan growth and deposit growth. Additionally, they aim to reduce their borrowings using cash flow from the bond portfolio, further straining their funding capacity. Even if some of that funding gap is filled by unfunded loan commitments, a significant portion will likely need to be sourced elsewhere.

Here's the crux: Prosperity has historically maintained a loan-to-deposit ratio below 85%. If they pursue aggressive loan growth while facing deposit constraints and reducing borrowings, will they breach their own self-imposed limit? If they do, will they compromise their core funding purity and turn, even reluctantly, to brokered deposits?

Projected Loan and Deposit Growth

This chart illustrates the potential funding gap Prosperity might face based on their own projections.

This isn't a certainty, but it's a hypothesis that deserves close scrutiny. The transcript's subtle shifts in language, coupled with the numerical realities of their balance sheet, suggest a potential turning point for Prosperity. It's a ticking time bomb, and how they manage this funding challenge could have profound implications for their future profitability and long-term strategic direction.

"Fun Fact: Prosperity's Senior Chairman, David Zalman, is a renowned art collector with a passion for Texas artists. His collection, showcasing the vibrant landscape and spirit of the state, is a testament to his deep roots in the Texas community."