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DATE

Wednesday, January 28, 2026 at 11:30 a.m. ET

CALL PARTICIPANTS

  • Senior Chairman and CEO — David Zalman
  • President and Chief Financial Officer — Asylbek Osmonov
  • Vice Chairman and Chief Lending Officer — Tim Timanus
  • President and Chief Operating Officer — Kevin Hanigan
  • Chief Legal Officer — Charlotte Rasche
  • Stellar Bancorp Executive — Paul Eggie
  • Chairman — Bob Franklin

TAKEAWAYS

  • Net Income -- $139.9 million for the quarter, up 7.6%, and $543 million for the year, up 13.2%, reflecting core earnings growth.
  • EPS -- $5.72 per diluted share for the year, an increase of 13.3% from the prior annual period.
  • Return on Average Assets -- 1.49% for the quarter, indicating stable profitability relative to the asset base.
  • Return on Average Tangible Common Equity -- 13.61% for the quarter, underscoring capital efficiency.
  • Efficiency Ratio -- 43.6% for the quarter, down from 46.1%, reflecting improved cost management.
  • Net Interest Margin (tax-equivalent) -- 3.3% for the quarter, up from 3.05% a year ago and 3.24% sequentially, supported by pricing actions and balance sheet repricing.
  • Net Interest Income -- $275 million for the quarter, up $7.2 million year over year and $1.5 million from the prior quarter.
  • Stock Repurchases -- $157 million used to repurchase 2,340,000 shares at an average price of $67.04.
  • Loan Balances -- $20.5 billion at quarter end (excluding warehouse loans), down $249 million from the prior quarter, reflecting portfolio management decisions.
  • Deposits -- $28.4 billion at quarter end, up $700 million sequentially on stronger-than-expected seasonal inflows.
  • Nonperforming Assets -- $150.8 million, representing 46 bps of average interest-earning assets, up from $119 million and 36 bps sequentially, primarily due to two middle market loans and one acquired real estate credit.
  • Allowance for Credit Losses on Loans -- $333 million, with the ratio of allowance to nonperforming assets at 2.21x.
  • Noninterest Income -- $42.8 million for the quarter, rising from the prior quarter's $41.2 million and $39.8 million a year ago.
  • Noninterest Expense -- $138.7 million, essentially flat sequentially but down from $141.5 million in the prior year.
  • First Quarter 2026 Expense Guidance -- Noninterest expense of $172 million–$176 million; includes three months of American Bank and two months of Texas Partners Bank expenses, plus $30 million–$33 million in one-time merger costs.
  • Loan Production -- Average monthly new loans of $314 million, down from $356 million sequentially.
  • Loan Mix -- 35% fixed, 35% floating, and 30% variable rate, providing rate sensitivity detail.
  • Acquisition Activity -- Completed the American Bank merger effective 1/1/2026; Southwest Bankshares (Texas Partners Bank) merger effective 2/1/2026 with all regulatory and shareholder approvals secured.
  • Announced Acquisition -- Stellar Bancorp (NASDAQ:STEL) to be acquired, moving Houston deposit market rank from number nine to number five, with management describing Stellar as a culturally and operationally compatible target.
  • Deposit Mix at Stellar Bancorp -- Management highlighted "an envious non-interest-bearing deposit mix" as rationale for acquisition.
  • Purchase Accounting Loan Marks -- $31 million recognized on Stellar Bank loans, using the sum-of-years-digits method for income accretion projections.
  • Margin Outlook -- Stand-alone margin projected at minimum 3.5% for 2026, or roughly 4.22% pro forma including Stellar.
  • Cost Savings Expectation -- Management stated comfort with a 35% cost save target for the Stellar integration, citing planned branch consolidation and overlapping footprints.
  • Capital Return -- Existing capital and projected excess free cash flow over $600 million annually post-combination enable capacity for continued buybacks and dividends.

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RISKS

  • Nonperforming assets rose to $150.8 million from $119.6 million, with management attributing the primary increase to two middle market loans and a recently acquired real estate loan.
  • Chief Operating Officer Kevin Hanigan acknowledged a $35 million shared national credit was downgraded from substandard to nonperforming, describing ongoing "challenging" resolution efforts and uncertainty about backing from the involved private equity sponsor.

SUMMARY

Prosperity Bancshares (PB 7.26%) delivered higher quarterly and annual earnings, improved its net interest margin, and generated strong deposit growth exceeding expectations. Completed and pending acquisitions—including American Bank, Texas Partners Bank, and the newly announced Stellar Bancorp (NASDAQ:STEL) deal—are set to materially expand the company’s Texas franchise, shift the deposit share in Houston upward, and are described as low-risk due to operational and cultural alignment. Internal projections indicate material cost savings, accelerated margin accretion, and annual excess capital generation that may drive continued share repurchases and dividend growth. Management discussion revealed transparency about drawdowns in loan balances due to portfolio pruning, as well as increased nonperforming assets tied to a handful of large credits undergoing close monitoring with asserted reserve coverage.

  • CFO Osmonov provided first quarter guidance for a marked step-up in noninterest expense due to integrated costs, alongside communicating planned merger-related charges and a timeline for capturing cost efficiencies after system conversions.
  • CEO Zalman outlined potential for "minimum of three and a half." percent net interest margin without Stellar, rising above 4% pro forma, attributing this to higher legacy margins at acquired institutions, bond portfolio repricing, and runoff of lower-yielding assets.
  • Management characterized capital deployment post-merger as balanced, citing explicit authorization for up to 5% of shares to be repurchased, and emphasized readiness for opportunistic buybacks when blackout restrictions end.
  • Deal rationale for Stellar Bancorp (NASDAQ:STEL) stressed a mix of franchise enhancement, noninterest-bearing deposit growth, and anticipated 35% cost saves, with both sides expressing confidence in customer and employee retention strategies centered on alignment of credit culture.

INDUSTRY GLOSSARY

  • Sum-of-Years-Digits Method: An accelerated accounting technique often used to recognize purchase accounting accretion; weights early periods more heavily for mark-related income recognition following a merger.
  • AOCI (Accumulated Other Comprehensive Income): A component of equity reflecting unrealized gains and losses, often relevant in bank merger accounting for bond portfolios.
  • Shared National Credit (SNC): A syndicated loan or credit, usually large, shared among multiple lenders, subject to regulator joint review.

Full Conference Call Transcript

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 recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality. 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 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 10-Q and 10-Ks 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: Thank you, Charlotte. We had a stellar quarter listening to our Fourth Quarter 2025 Conference Call. For the year ended 12/31/2025, we had net income of $543 million compared with $480 million for the same period in 2024, an increase of $63 million or 13.2%. Our net income per diluted common share was $5.72 for the year ending 12/31/2025, compared with $5.05 for the same period in 2024, an increase of 13.3%. The net income was $139.9 million for three months ending 12/31/2025 compared with $130 million for the same period in 2024, an increase of $9.8 million or 7.6%.

Our annualized return on average assets and average tangible common equity for the three months ending 12/31/2025 was 1.49% on assets and 13.61% on tangible equity. Prosperity's efficiency ratio, excluding the net gains and losses on the sale, write-down, or write-up of assets and securities, was 43.6% for the three months ending 12/31/2025. As mentioned, since 2024, we expect that our net interest margin to increase, and it has. Net interest margin on a tax-equivalent basis was 3.3% for the three months ending 12/31/2025 compared with 3.05% for the same period in 2024 and compared with 3.24% for the three months ending 09/30/2025.

During the year ending 12/31/2025, stock repurchase program, Prosperity Bancshares repurchased approximately $157 million or 2,340,000 shares of its common stock at an average weighted price of $67.04. Our loans, excluding warehouse purchase program loans, were $20.5 billion at 12/31/2025, compared with $20.7 billion at 09/30/2025, a decrease of $249 million. We continue to see good demand for loans. However, we are not willing to compete with the terms and conditions being offered sometimes by out-of-state competitors on some of the larger deals. Our overall loans have been impacted by efforts to outsource some less desired loans acquired in previous transactions also. Deposits, as mentioned in our last quarter, we expected deposits to increase due to seasonality.

But the increase exceeded our expectations. Deposits were $28.4 billion at 12/31/2025, an increase of $700 million from $27.7 billion at 09/30/2025. Our nonperforming assets totaled $150 million or 46 basis points of quarterly average interest-earning assets at 12/31/2025 compared with $119 million or 36 basis points of quarterly average interest-earning assets at 09/30/2025. The increase in nonperforming assets during the year was primarily comprised of two loans made in our middle market lending group and one well-collateralized real estate loan acquired in one of our recent acquisitions. All of which Kevin will be able to answer and address in the Q&A.

The allowance for credit losses on loans was $333 million and the allowance for credit losses on loans and off-balance sheet exposure was $371 million as of December 2025. Our allowance for credit losses on loans still stands strong at 2.21 times of our nonperforming assets. I'm excited to announce that on 01/01/2026, Prosperity completed the merger with our new partner, American and a totally owned subsidiary, American Bank headquartered in Corpus Christi, Texas. In connection with that transaction, we are pleased that Pat Wallace, the daughter of one of the founding families of the bank, and Steve Raphael, the CEO of American Bank, have joined our bank board of directors.

We have also received all the regulatory and shareholder approvals for the merger with Southwest Bankshares, the parent company of Texas Partners Bank, and expect the transaction will be effective on 02/01/2026. We are pleased that Jean Dawson, in connection with the Southwest deal, interim chairman of Southwest Bancshares, and chairman of the nationally recognized Pate Dawson Engineering Firm, will be joining our bank board of directors. To further add to our San Antonio presence, Charlie Amato has joined our bank board of directors.

In addition to his successful business, Charlie previously served as a board member of the Federal Reserve Board of Dallas, San Antonio branch, and region of the Texas State University System, and is an investor in the San Antonio Spurs. There's much more, but it would be too much more to go over with what all he's into. When Prosperity went public in 1998, we were a small community bank in rural Texas with less than $500 million in assets. For twenty-seven years, we have remained disciplined and focused on the same strategy delivering shareholder value by prioritizing low-cost core deposits, operational efficiency, and growth via opportunistic M&A.

This morning's announcement that Prosperity is acquiring Stellar Bancorp is consistent with that strategy. And this transaction marks an important milestone for the company. Our combined Houston bank deposit rank goes from number nine to number five, making us the largest Texas-based bank in the market and second largest bank by deposits in the state. Importantly, Stellar is a well-run bank with similar credit discipline and an envious non-interest-bearing deposit mix. As a result, we view the transaction as a low-risk combination that significantly enhances our Texas footprint. I would like to thank all our customers, associates, directors, and shareholders for helping build such a successful bank. Thanks again for your support of our company.

Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financials.

Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for three months ended 12/31/2025 was $275 million, an increase of $7.2 million compared to $267.8 million for the same period in 2024, an increase of $1.5 million compared to $273.4 million for the quarter ended 09/30/2025. The net interest margin on a tax-equivalent basis was 3.3%, for the three months ended 12/31/2025. An increase of 25 basis points compared to 3.05% for the same period in 2024. An increase of six basis points compared to 3.24% for the quarter ended 09/30/2025.

Excluding purchase accounting adjustments, the net interest margin for the three months ended 12/31/2025 was 3.26% compared to 3% for the same period in 2024 and 3.21% for the quarter ended 09/30/2025. Fair value loan income for the fourth quarter 2025 was $3.19 million for the third quarter 2025. The fair value loan income for the first quarter 2026 is expected to be in the range of $3 million to $4 million. Noninterest income was $42.8 million for the three months ended 12/31/2025, compared to $41.2 million for the quarter ended 09/30/2025 and $39.8 million for the same period in 2024.

Noninterest expense was $138.7 million for the three months ended 12/31/2025, compared to $138.6 million for the three months ended 09/30/2025 and $141.5 million for the same period in 2024. For the first quarter 2026, we expect noninterest expense to be in the range of $172 million to $176 million. This projection includes three months of American Bank expenses and two months of Texas Partners Bank expenses. In addition to this, first quarter guidance we will also have about $30 million to $33 million in one-time merger-related charges for those two acquisitions.

We expect to realize most of the previously announced cost savings related to American Bank and Texas Bank after Partners Bank after the system conversions, which are scheduled later this year. The efficiency ratio was 43.7% for the three months ended 12/31/2025 compared to 44.1% for the quarter ended September '25 and 46.1% for the same period in 2024. The bond portfolio metric at 12/31/2025 have a modified duration of 3.7 and projected annual cash flows of approximately $1.9 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality.

Tim Timanus: Thank you, Asylbek. Our nonperforming assets at quarter end 12/31/2025 totaled $150,842,000 or 69 basis points of loans and other real estate. Compared to $119,563,000 or 54 basis points at 09/30/2025. This is an increase of $31,279,000. Since 12/31/2025, $6,631,000 of nonperforming assets have been removed or put under contract for sale. The 12/31/2025 nonperforming asset total was made up of $137,534,000 in loans, $12,000 in repossessed assets, and $13,296,000 in other real estate. Net charge-offs for the three months ended 12/31/2025 were $5,884,000 compared to net charge-offs of $6,458,000 for the quarter ended 06/30/2025. This is a decrease of $574,000 on a linked quarter basis.

There was no addition to the allowance for credit losses during the quarter ended 12/31/2025. In addition, no dollars were taken into income from the allowance during the quarter ended 12/31/2025. The average monthly new loan production for the quarter ended 12/31/2025 was $314 million compared to $356 million for the quarter ended 09/30/2025. Loans outstanding at 12/31/2025 were approximately $21.805 billion compared to $22.028 billion for 09/30/2025. The 12/31/2025 loan total is made up of 35% fixed rate loans, 35% floating rate loans, and 30% variable rate loans. I will now turn it over to Charlotte Rasche.

Charlotte Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator, Gary, will assist us with questions.

Operator: We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. The first question is from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor: Thanks. Good morning.

David Zalman: Good morning. Good morning.

Catherine Mealor: Wanted to start just on the Stellar acquisition. Congratulations on that. Noticed in the slide deck, you're using a different estimate for Stellar versus Consensus. Looks like it's about a $2.20 number versus $2 for Consensus roughly. Just curious what's driving that difference in your confidence in that level of earnings coming over from Stellar. Thanks.

David Zalman: Catherine, you probably saw their fourth quarter earnings come out. That's really going to influence that. But Paul is here with us today from Stellar, I'll let him go over it with you.

Paul Eggie: Absolutely. Thanks, Catherine. Hey, Paul. We've been thrilled with our growing momentum in 2025 and what that portends for 2026. We've been able to grow our earning assets in the back half of the year pretty meaningfully, all while maintaining and growing our core NIM. And that paints a great picture for 2026. We actually feel great about the momentum we're taking from a growth perspective into 2026 as well. So if you were to take 2024 just or pardon me, the fourth quarter just to be simplistic, and put a kinda more normalized provision onto it and annualize it, you'd be talking about $50.55 cent per share EPS run rate, which would annualize $2.20.

Now we enter 2026 with about a $100 million more interest-earning assets than our average for 2025. That's gonna help assist us, and then we'll have the first kinda full quarter benefits of the rate changes the Fed rate cuts that occurred in the fourth quarter. So all that paints a really good picture for us to maintain and actually upside to the go-forward earnings run rate. Then I think the last point I'd note is we assume a more normalized consensus level of net charge-off.

And both us and Prosperity have a great track record of delivering meaningfully lower net charge-offs, which would mean which would drive lower levels of credit costs and potential beats to the numbers we put forth.

Catherine Mealor: Okay. Very helpful. Thank you. And then as we think through growth moving forward, so it looks like part of that is assuming better growth at Stellar, which is great. You typically shrink a little bit, and that's from Prosperity, what we've seen with past deals is, you know, you do an acquisition, then you been part of the headwinds that we've seen at growth at Prosperity recently. So why is this acquisition different and what kind of forecast for growth in '26 should we expect for Prosperity? Thanks.

David Zalman: I think this is different. Bob and I have known each other for probably wrote romance for ten years plus, and they're again, we're across the street so we can throw rocks at each other. So to me, takes a lot of risk out of a transaction like this. I think we've talked about doing this for a lot of years. It makes a lot of sense. There's a I think there'll be efficiencies through this, and I would say far as growth going forward in 2026, I would say that our plate is pretty full with the transactions that we have. I think that we're gonna primarily focus on of the of the three banks that we have.

So the integration and having said that also, I think Stellar Bank is very much like our bank. So with some of the banks that we buy, we know that either their deposits are extremely high or their loans are something else wrong, we have to get rid of them. I don't see that in the Stellar acquisition. I think that they're very similar to us. So feel good about that. But, again, I think our focus is really gonna be taking care of our customers, taking care of our associates, and actually putting all these three deals together this year. That'll be our main focus.

Catherine Mealor: Understood. Thank you.

Operator: Our next question is from Manan Gosalia with Morgan Stanley. Please go ahead.

Manan Gosalia: Hi. Good morning, David, maybe can you help us think about the price of the acquisition? You know, 18 times one year forward does feel a little high. But, you know, I know you mentioned the higher level of NIB and the synergies. Maybe if you can help us appreciate, you know, all the synergies and growth prospects that the combined banks have. And so the unback period, four and a half years unback is a little bit higher than what you've done recently. Yeah.

David Zalman: Know, I could start off and say, and I think this I don't if this is a good analogy or not, but I think banks are a lot like cars. You know? I can drive a Ford Pinto or I can drive a Range Rover. The Pinto will probably get me wherever I need to go. And I can probably throw it away and not lose a bunch of money when it's gone. Or I can really enjoy and have a Range Rover that's gonna really be something in have a good resale value. This you know, there's a big difference in the price of things, and I wish I think some people have a harder time doing that.

A bank that's good deserves a premium price. These guys it's just it's a premium bank. And so the this the thing that we really look at is, you know, we say the price, but I look at it and I say, okay. In 2027, our combination will be earning $7.34 a share once we get all of this put together. And so there so it's $7.34. If we trade just at 13 times earnings, our you know, our stock value would be $95.42. If we traded at 15 times earnings, and then somebody may say, well, that's high. Well, I would just tell you the first bank in Colorado went for that much.

You saw these other banks, and I can tell you I could I could call up any one of the midsized banks underneath Bank of America or JPMorgan, the guys underneath them. And they would offer us 15 times earnings probably in a New York minute, which would indicate a price a value of our bank at least at a $110 a share. So there we paid a lot for it, but I would tell you too that should be easy for anybody to see that the franchise value, not only not only does it accretive, but the franchise by us being one of the largest banks in the Houston market.

So I think the combination of the earnings, the enhancement of the franchise value, and that's what sometimes I know what kind how do you put a price on the enhanced franchise? That I can tell you is significant. I think that any anybody would want to probably acquire us as being one of the bigger banks in the state of Texas. And the franchise that we have. And so that's that's kind of the rationale behind it. It also know, we it takes us from being a these all three of these deals, takes us from having a 13% return on tangible capital.

I mean, we're looking at a 17% on return on average tangible capital in the year 2027. So not only did I like it, not only is it pretty, the metrics make sense for all of these deals. So that's kind of the rationale.

Manan Gosalia: Got it. That's helpful. So maybe as you think about the capital deployment strategy from here, I mean, I guess you're now integrating three deals together. Is that you know, is that it for now? Like, do you would you focus on the integration for the coming months and, you know, just given where the stock price is? Is there more of a focus on buybacks? You know, I know you guys upped the authorization yesterday, so maybe just help us think through, capital deployment plans from here.

David Zalman: Well, let's say we're do any more deals. They've got me handcuffed in this room, so I can't get out. But you know, if you can look at the projections going forward in the year 2027, I think we're projected to make around $880 million. And so we have about 120 million shares outstanding, and you can do the math. We're paying $2.40 a share in dividends. That's $288 million or so I think that's right. So you subtract that 288 from $6.80 we have about $600 million, so we have a not only do we have we have just like a strong capital to begin with, a I mean, like a printing press.

You know, if something doesn't go wrong, which 100 million, we can do a lot of we can do a lot with that. We can buy a lot of stock back. We can increase dividends. And we can buy more banks. It's a high class problem.

Manan Gosalia: But any I guess, any immediate priorities there? Like, would you tilt more towards buybacks in the in the near future?

David Zalman: I think that we would when it's opportunistic, we certainly would look at buybacks for sure. We just as I'm with this last year, stock went down in the sixties, the low sixties, and I think you saw what we spent a $157 million on buybacks this last year. And I think we have another 5% approved for this year, so you're talking was at 300 and something million dollars that we can buy back this year as well. And that's been approved ready by the Fed.

Manan Gosalia: Got it. I appreciate it. Thanks so much.

Operator: The next question is from Stephen Scouten with Piper Sandler. Please go ahead. Mr. Scouten, your line is open on our end. Perhaps it's muted on yours. Moving on, the next question is from David Chiaverini with Jefferies. Please go ahead.

David Chiaverini: Hi, thanks for taking the question. So you mentioned about, you know, you've got multiple bank integrations occurring simultaneously. Can you talk about ways you'll be able to juggle these at the same time and not get distracted from the core operations?

David Zalman: Well, again, we they're all plans. And somebody may wanna talk about the which ones we have in order. But, I mean, we've done 40 of these transactions, so I don't think this is gonna be there may be three of these. But again, we're doing our own operational integration here probably in the next few weeks or so. Yep. And then right after that, we're going in American Bank dated what? Also back in So I think, specific to address the question, we have designated teams who does that. So it's not like our people who is out on the field doing the you know, organic growth. They'll be focused on this. We'll have specific team focusing on integration.

So we'll have a plan to convert these banks with those two bank, American Bank and Partners Bank this year in the sense of integration. And in the process, so far, it's going well, and we started in advance. So it's not like we're starting now. Overall, we are scheduled to do convert later this year, and it's working as we planned.

David Chiaverini: I we feel confident where we're at. It's not to say that you won't ever have any glitches. On anything that you do. There always may be something like that, but for the most part, we have a well-seasoned team that's done many of these things, and they feel very comfortable where we're at. Great. Thanks for that. And can you talk a little bit about the cultural fit? How did the deal come together? And why now? With the deal?

David Zalman: In the previous administration, I think we did a Well, the time seems to be right. I mean, if you look we were trying to do some bank deals and even much smaller deals. Think the last bank we took I may be wrong, but it took us almost a year to get completed. I think that from a regulatory standpoint, that the that the regulatory the regulatory things are in place to make this happen. The timing is right. And you know, it was right I think it was right for us. I think it's right for them. It just seemed to be the right time.

David Chiaverini: And can you talk about the cultural fit and how the deal came together?

David Zalman: Yeah. I mentioned earlier, Bob and I have known each other for twenty years or more. I mean, I would say I said this in our meeting the other day. I said if I got killed and ran over tomorrow, and Bob took my place, I don't think that I don't think that our bank would change, our combined bank would change at all. I think that if anything, I think they may be even more conservative than we are on the loan side, and it's hard to believe And so I we feel we did our due diligence, and we feel really good. We feel the same way about things.

You know, again, we've we've dated in romance for probably ten or twenty years, and it's not like know, we just saw this pretty girl across the street, fell in love, got married in a month. You know? This is something that we really thought about and have thought about and talked about with each other for years and years. And the timing just seemed to be right now, and we did it.

David Chiaverini: Thanks very much.

Operator: The next question is from Dave Rochester with Cantor. Please go ahead.

Dave Rochester: Hey, good morning guys. Good morning. I just wanna go back to the capital discussion real quick. I noticed the shares are trading below the average price for the buybacks this past quarter. So I just curious if you see that buyback opportunity is occurring now And then I know there are blackout periods related to the outstanding deals. If you could just talk about when you'd be actually able to buy back stock if you saw that opportunity in the near term, and if you had a, 10 b five dash one plan. Thanks.

David Zalman: Yeah. I don't know what the 75 would what plan is he talking about? The 10 b five one plan. We can talk

Charlotte Rasche: yeah. We don't have a 10 b five one plan.

David Zalman: Yeah. And, David, I would say on the others, you know, basically, I get I'd probably stick to our statement that you've seen us buy in the past that's been off to opportunistic, and we'll do that again.

Dave Rochester: Okay. Any sense for blackouts when those pop up, when those ends, that kind of thing?

Charlotte Rasche: Oh, we're in a blackout today for our

Dave Rochester: So Right. We formal earnings blackout and things, and there's some blackouts around the merger transaction, of course, around shareholder votes and things like that. When you should start soliciting the Stellar shareholders.

Dave Rochester: Okay. This before you do that, sorry. Go ahead.

Asylbek Osmonov: I say at this price and then when it's available for us to buy back, we'll do buybacks. Yeah.

Dave Rochester: Sounds good. I wanted to get your thoughts on the trajectory for NII and the margin through 26 just given the three deals you got coming in? Just assuming you closed Stellar June 30, can you just help us understand what you see as that path through the year? Thanks.

Asylbek Osmonov: Yeah. If you look at Prosperity I'm just gonna talk about Prosperity and with two smaller acquisition on projection. We definitely see the improvement in the margin as for 2026 and beyond. And it's because, the margin on the smaller banks were higher than ours as stand alone. So that's have accretion there. But if you look at our balance sheet, with the, you know, repricing our bond portfolio, as we mentioned as I mentioned that we have a $1.9 billion cash flowing from that So we'll be repricing that our yield on the bonds of two fifteen to pricing. Then we can get around four fifty right now. So 200 basis points there.

If you look at our fixed, loans, that's getting repriced as well. So, putting altogether, our kinda projection for 2026 stand alone showing about around three fifty margin for 2026. But, if you add the Stellar Bank together, I think you the margin is still about more 4.22%, so that will be very accretive too. So combined together, you can do the math. It will be looking very, very good for 2026, and

David Zalman: A minimum of three and a half. Yeah. That's Minimum of three and a half. Three and half without Stella. Yeah. Without Stella. Yes. So that's looking really good. And it comes a long way. It you know, it goes back to where two years ago Somebody said, well, you know, the bank in your peer group you know, you didn't perform as good as your peer group over the last couple of years. Well, the truth of the matter is we didn't. I mean, our bank has never tried to call rates one way or another, and we bought in every market.

In fact, we should be buying more, but I think we're still scared from what happened last time. But so for the most part, we said, you know, if every we try to buy and have a three point seven, three point eight year duration. And we said two years ago, we got caught in that. And as this thing turns, we would turn it around. We went from a two point seven five two point seven five net interest margin to three and a half today. So we did everything we said and, candidly, we have very, very strong tailwinds in back of us.

And I think that not only looking at 26, 27, without anything, we have some very, very strong tailwinds going at the same time.

Asylbek Osmonov: Yeah. And, want to add to that. I think we have a year or two ago that we wanna reduce our borrowing levels. You know, we were almost at $3.9 billion borrowing two years ago, and we have conscious program that we're gonna reduce it to level that we are right now. So now we have we believe that, borrowing level is what we expected within 1.5 to $2 billion, and now we're gonna be you know, with growth in deposits and additional of the two banks, we're gonna start growing our average earning assets while past two years we were shrinking because we

David Zalman: wanna I think it was just a matter of the time that somebody could make an argument in this email the Sharp email that I got this morning made that argument. I can make an argument that you could go back Anybody can pick the year and time that they want to. But if you go back in for the last since 2000 till today, and you compare us to the S and P five hundred and you compare us to the Nasdaq Bank Index, our bank has returned 1447% compared to the National Bank Index of about I'm thinking, 181% and it's compared to the s and p five hundred, 665%.

So I think if you're a long term player, you need to jump in and buy this stock because I did the math for you all ago. What this what this thing should trade for And so it just I think it's one of the greatest opportunities, and you will benefit if you're a long term investor right now.

Dave Rochester: Alright. Great. Appreciate all color. Maybe just one last one on the, the cost save estimate. I know historically, you guys have been pretty conservative or have outperformed your cost save expectations. I'm just wondering how you feel about this level here that you've you've talked about and if there are any branch closures that, you'll have to take care of as a result of the higher concentration of branches in Houston. Thanks.

Asylbek Osmonov: Regarding the cost, I would feel very comfortable with the 35% cost there that we printed, and it's combination of the combining two banks that have the same footprint. So, of course, there'll be some consolidation of branches. Also, there's, you know, as you know, the system conversion gonna help. So we took deep dive and feel very comfortable with the cost base.

Dave Rochester: Great. Thanks, guys.

Operator: The next question is from Janet Leigh with TD Cowen. Please go ahead.

Janet Leigh: Good afternoon.

David Zalman: Good afternoon, Janet.

Janet Leigh: Back to m and a. If I were to ask it in a different way. So if I look at your Performa one, it will be about 13 and a half. Which is slightly above peers, but definitely more normalized. And in the past or at least over the five years, you've you've had CT one running above peers. Just given the size of the deal, which was more meaningful than the recent ones and the Performa CT one post the stellar deal. Does this change your appetite for m and a, whether it's your appetite for m and a itself or the type of deals that you might be potentially looking at in the future?

Asylbek Osmonov: No. Even like I mentioned a while ago, we're when these things are combined, you're gonna have over $600 million a year just in excess cash flow We had excess capital, and everybody was asking what we were gonna do this time. Again, we didn't have it wasn't a requirement that we pay 30% in cash down. We did to try to utilize our capital to get a better return on our average tangible capital. I think probably just in earnings over a couple of years, if you've done the ratios telling to see where what we're back up within a year or two, we? On how, excuse me, on how fast we build our capital back? Yeah.

We'll be back in a couple of years at minimum. Minimum, a couple of years, we'll be back to exactly where we're at.

Janet Leigh: Got it. That's fair. For loan growth, so it seems like the potential acquired portfolio run offs from loans or deposits from the Stellar deal would not be material or meaningful. So in terms of 2026, I believe you were hoping for that low single digits or low to mid single digits kind of growth on balance sheet. Is that the fair way to assume? Or I don't want to put words in your mouth, but how should we be thinking about the overall trajectory there?

Kevin Hanigan: Yeah, think that's a good assumption. This is Kevin. Low single digits is good. You know, Stellar has been growing faster than that. And we don't see any reason that would change. I think American Bank had been growing faster than that as well. And we talked about the quality of the Stellar portfolio. Say the same about the American Bank portfolio. They were we talked about seller maybe being cleaner than us. I think American Bank was cleaner than us. Right. Right. So in terms of the quality of the assets we've purchased here, between American and Stellar, they are Stellar.

Janet Leigh: Great. Thank you.

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

Peter Winter: Good morning. Thank you. Can you just talk a little bit you mentioned the increase in nonperforming assets. If you could give a little bit more detail Last quarter, you highlighted the like $35 million SNC credit. Just wondering if that was part of the increase in nonperforming assets. And just how you're thinking about credit quality. Going forward.

Kevin Hanigan: As we said, I would reiterate what we said last quarter. We said portfolio is very clean. We had our eye on one particular asset, which we had downgraded to substandard. In third quarter to $35 million shared national credit that we're not the agent on. That credit was downgraded further in the fourth quarter to nonperforming, so it's still substandard but now nonaccrual. As I said, on the call, in the third quarter, if that became more problematic, and at this stage, it has become more problematic and we haven't worked things out. Although it is I will tell you it is a well known, very large private equity firm who has a history of backing their deals.

That doesn't mean they're backing this one, but they have a history of doing so. It's just that the resolution conversations have been challenging. Or were challenging in the fourth quarter and continue to be challenging. We don't see a need on this or the other credit we talked about last quarter, which is in the buy here, pay here space. We don't see the need at this stage or if something went further wrong with these credits. That we need to post reserve. As a result of it.

David Zalman: I'd add it to the other large Posted a provision, I should say. We have reserves up against both. Okay. And I'd say the other large credit is a is a participation for one of the banks that we bought. Actually, we originated and sold the majority of it to another bank. From the Lone Star deal. And, basically, it's it's well secured with real estate. In fact, there should be excess equity in that. There shouldn't be any loss in that.

Peter Winter: Got it. And with the Stellar deal, what is the purchase accounting accretion? Going to the run rate You gave it for the first quarter. Also back, but I'm just wondering what it is after Stella.

Asylbek Osmonov: So the guidance that I provided on purchase accounting payroll loan income, that's for American Bank and Texas Partners Bank. If you look at just Stellar, I think on the page 16, we disclose what the loan marks and AOCI mark That are pretax, and we have about $73 million net of tax and AOC So I think on the loan mark, we're having about $31 million on loan marks. So for our modeling purpose, we use sum of year digits calculation. 2027, I think the mark accretion is about $30 million combined, $3,031,000,000 combined.

Peter Winter: Okay. Thanks for taking the questions.

Operator: The next question is from Michael Rose with Raymond James. Please go ahead.

Michael Rose: Hey, good morning guys. Thanks for taking my questions. Anything to do once the deal is either leading up to or once the deal closed just on the on the bond book? I know most of Legacy Prosperity's book is HTM, but Stellar's is AFS wanted to see if there's an opportunity for a potential restructuring that may be not included in the pro forma's here?

David Zalman: You know, it's it's not. We could everybody asked, why don't you just do financial engineering? Sell your deal, sell your portfolio, If you can do the math on $10 billion, you make an extra 2%. You know, 2% a year is another $200 million income a year. So you take your loss after tax, 600, and you get it back in three years. But I just again, I just feel like that's just financial engineering. We could do it. It would make us look good, make us look like well, you do 200,000,000. After taxes, see what we have extra in income between us.

I mean, we'd be making a whole lot of money, but again, I think that's just financial engineering. And, again, we've always said that we're not trying to call rates one way or play the market. Just trying to be in every market and buy with the three point eight year duration. And so sometimes it'll be real good, and sometimes it'd be low. But I don't I don't see any change in that. And, again, we will mark to market the pop portfolio from Stellar for sure. Into the asset liability sensitivity?

Asylbek Osmonov: I think they are a little bit of asset sensitive on that. I think what we're gonna do if we mean, there will be some security that we're gonna sell and kinda buy back in a mortgage backed security like we do. So I think from the standpoint, it's gonna be maybe the same as a flight asset sensitive. We'll we'll try to buy ahead so that not so asset sensitive. We'll try to get back to neutral. If we can.

Michael Rose: Understood. And then maybe just finally, if there's any stellar guys in the room, I think Paul was in there. I guess just given how robust the NII forecasts are versus where consensus is. I guess the question is from your point of view, why sell now if the outlook is or merger, you know, merge with Prosperity now if the outlook's so good? Thanks.

Paul Eggie: Well, I think it's rare to get the to find somebody that kinda looks like you and thinks about the world the same way that you do. We've always concentrated on a real quality deposit base. I think that's what Prosperity has always done We're really sensitive around the way we fund ourselves. To get our high quality deposit base, low cost, of funds so that we can control that part of the deal. It's hard to find people to partner with But I think the expanded balance sheet, the ability to continue to do that look like that.

Kind of where the momentum started back in the third quarter, into the fourth quarter, and we can see it in the first quarter. It's starting to have a real good momentum And because we look so similar and we do similar loans, similar types of deals, it's it's it's not a heavy lift to understand that we could continue to do those kind of things. So we think we're gonna continue to drive that momentum. And we feel good about what the what the future looks like over the certainly over the next twelve months because I think we're on a on a good path.

Michael Rose: Makes sense. Thanks for taking my questions, everyone.

Operator: The next question is Jared Shaw with Barclays Capital. Please go ahead.

Jared Shaw: Hey, good afternoon. Maybe just going back to the original comment just about how your internal expectation for Stellar is better. When we look at their pipeline, are they David, do you feel like they're able to get the pricing in terms that you said if so, would that cause you to reallocate more you're not able to get in other markets? And internal Prosperity resources to those markets to take advantage of that, you know, maybe disruption or relative difference between their markets and the rest of yours? What you're doing in the state?

David Zalman: I would like to say to tell you that it would be great. We just use our loan team, and they'll they'll make higher rate loans. But what usually happens is we usually banks that we join together Usually, the return actually comes down. I mean, the net interest margin, it's it's more they're getting they're probably you know, there's a what is it? 4.2, you said? And ours is Margins. Yeah. But and ours is six 0.5 a part of that margin is because don't have as big of a bond portfolio. So their march is better because the they have a better loan to deposit ratio too.

But even having said that, even as we start merging together, it seems like their pricing from the banks that join us comes down a little bit. But I just think the number of people, though, that Stellar has on the ground and even with American Bank that had their they had a loan production office here in the Houston too together. We should really be able to inundate the market. This is such a big market. I mean, I don't know that people realize how many people move in, what the GDP is, if the Texas. It's just it's really phenomenal.

So I think the opportunities are just unlimited, especially we get momentum, put our groups put our guys together, guys and girls, I think the momentum is really gonna be good for everybody. And I think that we'll they maybe even had a better than us where we a lot of our payment or pay to lenders is maybe more discretionary. We do look at the actual production They were more on a formula driven formula driven deal. And so that I think that helps them too. So we'll probably look you know, every bank that we join with, it looks like we take the we try to do the best. We take the best from them.

And bring it to us. And so I think they're they should be able to help us with some of this stuff too. And, hopefully, hopefully, they won't lower their rates that they're charging. Let's say that. David, let's let me, if I can, tag on to you on that. I'll be real simple. I think the margin differential is threefold, and then and Bob or somebody from Stellar could comment whether they agree with this or not. The obvious differences are we've got $10.5 billion in securities earning 2.17%. That's a drag. The second big item on our balance sheet that's a drag is $8.3 billion of single family mortgages.

That were originated in times where rates were pretty low. And that portfolio is a drag. So those are the two biggies. But the one that doesn't jump out at you all that we see and we saw throughout due diligence is on the loan side of the bank, the basic commercial lending side of the bank. Not forget single family mortgages. Some of the other stuff. Just the basic commercial lending. Have a way more granular portfolio. And the granularity of that portfolio basically means it's it's smaller deals for the most part. They still do some big deals, but if it's just on average, smaller deals for the most part, tend to get higher pricing. Right.

So it's it's those three factors that really drive their relative to ours. And I'd I see ours improving as those low rate assets run off. That much.

Bob Franklin: Yeah. I agree, Kevin. I mean, it I've we do have a granular portfolio. I think there's there's getting to be more and more balance to that over time. But it certainly started off that way when we combine the two banks together. But pricing's competitive. We're in Houston, Texas, and price is competitive. So no not one's not gonna be better pricing than the other. You guys are just as good as us with pricing loans. So but for the most part, it is granular, and we do get a little bit higher pricing on the smaller. Stuff. So yeah, I would agree with that.

Jared Shaw: Okay. Thanks. And then just as a follow-up, comes with cheap deposits. Yeah. Right. Which is why your noninterest bearing deposits are generally a bit higher than ours. So I just a little a little additional inside baseball. Great. Thanks. And I guess just as a follow-up, what are some of the assumptions on customer retention as this will be I guess, an additional name change over the past few years for Stellar. Do you think that there's what do you think the risk is of retention?

David Zalman: I'll answer first. Or, Bob, you wanna go first? Mean I was just gonna say, I mean, we're think we're doing a good job of retaining our guys. I think that's that's the big key. Is to is to make sure that we keep our customer facing folks out there that our customers see every day and not changing that. So Yeah. I mean, we entered into fifth about 15 non compete agreements in about 70 letter of retention agreements. So we I think the team's the team's on board. It's it doesn't mean you won't lose somebody.

Go I think for the most part, know, we'll be able to retain the customers, and it's not like it's not like another bank is coming out from another state that's jumping in. They know who we are. We've advertised here. We've you know it's not somebody that they that they're not familiar with. So I think the retention is good here. I think and, again, they don't have a lot of high yield time deposits or something that's gonna run off like that. So I mean, I this is really a great combination, guys. It's truly it's it's a marriage made in heaven. And the other piece, David, I think is the credit cultures are very similar. Right.

We've always thought about the world the same And I so I don't think you see that drastic change that you do in some combinations where people say, oh gosh. You know, this maybe this is too conservative or whatever they might think. Well, you're you're a lot like needed. Analysts. They wanna say, okay. You gotta have, like, double digit loan growth. Gotta do this. Gotta have 6%, 10%. Every year. Well, and your deposits are growing 3%. What do you do when you run out of money? So we I think we have a lot of the same logics that, you know, we're we're used to around the 80% loan to deposit ratio.

Again, we bring in new deposits. We'll make more, but we have a lot of liquidity, I think. If there's ever a run on our bank, for example, I think we have, like, $16 billion that we can draw in a in a minute. So we have a lot of liquidity. Y'all have a lot of liquidity. So the combined earnings of these two banks, the of these two banks, they're so similar I think it's a good deal. Thank you.

Operator: The next question is from John Arfstrom with RBC Capital Markets. Please go ahead.

John Arfstrom: Hey. Hello, everybody.

David Zalman: Hey, John. Uh-huh.

John Arfstrom: David, for you, just a couple on the numbers. What's your level of estimate for 2027? I don't think you have any revenue synergies in there, so it seems like it's just cost saves, but, you know, consensus six eighty is you talk about the accretion. How confident are you in the seven thirty four?

David Zalman: Colin just handed me the seven thirty four So if he's wrong, we'll shoot him. But I we feel very confident and I think we do have some we do have some triggers that I think that above beyond expenses. I mean, right now, they don't charge NSF the charges. I'm not saying one way or another, we'll go the other way. Their cost of money is a little bit higher than ours. So we do have some other triggers, but I feel very confident in the $7.34. Know, once we get everything combined, I think that's a really real number. And that's why I can't believe trading where we are trading if we're we're gonna make $7.34.

I mean, again, we should have a 95 to a $100 price target really Even you, John.

John Arfstrom: I hear you.

David Zalman: That's 75 stuff or 78.

John Arfstrom: Well, okay. This begs the next question then. You kind of opened the door to it. It's gonna be with your well, with your with your 15 times acquisition, multiple math, Right. That you shared earlier You know, the question is, I'm not saying you should do it, but do the larger regionals call on you frequently? And is there a bid if you want it? Again, I'm not saying you should, but I'm just I'm I'm curious on that.

David Zalman: You know, I was I was on the I was on the Federal Reserve Advisory Board in Washington in it every bank that you can imagine that size is was on there. I mean, you had a PNC Truist Regions The answer to your question is they would all love us a lot. They would love us. And I would tell you that I wouldn't even accept 15 times because I think we could even do better. And anybody that really wants to break into a market like Texas, you can't do it. I mean, if you really wanna break into Texas and wanna be the largest bank in Texas, it's gonna cost you something.

And that's the difference in the price of cars. One's a four Pinto and one's a Jaguar. I mean, it's just there's just a big difference. And, again, I'm not saying we are selling or not. I'm just telling that we are truly, truly undervalued in a takeout.

John Arfstrom: Okay. Yeah. I think it adds a lot of franchise value. Despite today. So okay. Thank you very much.

Operator: 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: 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: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.