Prosperity Bancshares, Inc (PB) Q4 2025 Earnings Call Transcript

Prosperity Bancshares, Inc (NYSE: PB) Q4 2025 Earnings Call dated Jan. 28, 2026

Corporate Participants:

Charlotte Rasche — Executive Vice President General Counsel

David Zalman — Chairman of the Board & CEO

Asylbek Osmonov — Chief Financial Officer

Kevin Hanigan — President and Chief Operating Officer

H. E. Timanus — Chairman of the Board

Robert Dowdell — Executive Vice President

Paul Egge — Chief Financial Officer

Analysts:

Catherine Mealor — Analyst

Manan Gosalia — Analyst

David Chiaverini — Analyst

David Rochester — Analyst

Janet Lee — Analyst

Peter Winter — Analyst

Michael Rose — Analyst

Jared David Shaw — Analyst

Jon Arfstrom — Analyst

Presentation:

operator

Good morning and welcome to The Prosperity Bancshares fourth quarter 2025 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche, Executive Vice President and General Counsel. Please go ahead.

Charlotte Rasche — Executive Vice President General Counsel

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares fourth quarter 2025 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I’m Charlotte Rasche, General Counsel of Prosperity Bancshares and here with me today is David Zalman, Senior Chairman and Chief Executive Officer. HE Tim Tamanisch Jr. Osilbek Osmanov, Chief Financial Officer Eddie Safety, Vice Chairman Kevin Hanigan, President and Chief Operating Officer Mae Davenport, Director of Corporate Strategy and Bob Dowdell, Executive Vice President. Randy Hester, our Chief Lending Officer, is unable to be here today.

Also joining us this morning are Bob Franklin, Chief Executive Officer of Stellar Bancorp, Ray Vittuli, President of Stellar Bancorp and Paul Ege, Chief Financial Officer of Stellar Bancorp. David Zallman will lead off with a review of the highlights for the recent quarter. He will be followed by Azlebek Osmanoff, who will review some of our recent financial statistics and Tim Tamanis, 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 Bank Share’s filings with the securities and Exchange Commission, including Forms 10Q and 10K 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 Solmle.

David Zalman — Chairman of the Board & CEO

Thank you, Charlotte. We had a stellar quarter. I would like to welcome and thank everyone for listening to our fourth quarter 2025 conference call for the year ended December 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 December 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 December 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 December 31, 2025 were 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 December 31, 2025. As mentioned, since 2024 we expected our net interest margin to increase and it has. The net interest margin on a tax equivalent basis was 3.3% for the three months ending December 31, 2025, compared with 3.05% for the same period in 2024 and compared with 3.24% for the three months ending September 30, 202025 during the year ending December 31, 2025.

Under its 2025 stock repurchase program, Prosperity Bancshares repurchased approximately $157 million, or 2.34 million 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 December 31, 2025, compared with 20.7 billion at September 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 December 31, 2025, an increase of $700 million from 27.7 billion at September 30, 2025. Our non performing assets totaled 150 million are 46 basis points of quarterly average interest earning assets at December 31, 2025 compared with 119 million or 36 basis points of quarterly average interest earning Assets at September 30, 2025. The increase in nonperforming assets during the year was primarily compromised 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 and 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 31, 2025. Our allowance for credit losses on loans still stands strong at 2.21 times of our non performing assets. I’m excited to announce that on January 1, 2026, Prosperity completed the merger with our new partner American and its wholly 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 Rafael, 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 Bancshares, the parent company of Texas Partners bank, and expect the transaction will be effective on February 1, 2026. In connection with the Southwest deal, we are pleased that Gene Dawson, 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 Regent of the Texas State University System as an investor in the San Antonio Spurs.

There’s much more, but it’d be too much more to go over with 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 27 years we have remained disciplined and focused on the same strategy, delivering shareholder value by prioritizing. Excuse me, prioritizing. I’ll skip that. Low cost, core deposits, operational efficiency, sound credit quality and growth via opportunistic M and 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 of 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 Asobek Osmanov, our Chief Financial Officer to discuss some of the specific financial results we achieved.

Osobek .

Asylbek Osmonov — Chief Financial Officer

Thank you Mr. Zalman Good morning everyone. Net interest income before provision for credit losses for three months ended December 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 September 30, 2025. The net interest margin on a tax equivalent basis was 3.30% for the three months ended December 31, 2025, an increase of 25 basis points compared to 3.05% for the same period in 2024, an increase of 6 basis points compared to 3.24% for the quarter ended September 30, 2025.

Excluding purchase accounting adjustments, the net interest margin for the three months ended December 31, 2025 was 3.26% compared to 3% for the same period in 2024 and 3.21% for the quarter ended September 30, 2025. Fair value loan income for the fourth quarter 2025 was 3.1 million compared to 2.9 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 to 4 million. Non interest income was 42.8 million for the three months ended December 31st, 2025 compared to 41.2 million for the quarter ended September 30th, 2025 and 39.8 million for the same period in 2024.

Non interest expense was 1.38.7 million for the three months ended December 30st, 2025, compared to 138.6 million for the three months ended September 30th, 2025 and 141.5 million for the same period in 2024. For the first quarter 2026, we expect non interest expense to be in the range of 172 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 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 Texas Partners bank after the system conversions which are scheduled later this year, the efficiency ratio was 43.7% for the three months ended December 31, 2025 compared to 44.1% for the quarter ended September 30, 2025 and 46.1% for the same period in 2024.

The bond portfolio metrics at 12,31,025 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 Timanis for some details on loan and asset quality.

H. E. Timanus — Chairman of the Board

Thank you Osselbeck. Our nonperforming assets at quarter end December 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 September 30, 2025. This is an increase of $31,279,000. Since December 31, 2025. $6,631,000 of non performing assets have been removed or put under contract for sale. The December 31, 2025 non performing 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 December 31, 2025 were $5,884,000 compared to net charge offs of $6,458,000 for the quarter ended June 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 December 31, 2025. In addition, no dollars were taken into income from the allowance during the quarter ended December 31, 2025. The average monthly new loan production for the quarter ended December 31, 2025 was $314 million compared to $356 million for the quarter ended September 30, 2025. Loans. Outstanding at December 31, 2025 were approximately $21.805 billion compared to $22.028 billion for September 30, 2025. The December 31, 2025 loan total is 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 — Executive Vice President General Counsel

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

Questions and Answers:

operator

We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then two. The first question is from Kathryn Meller with kbw. Please go ahead.

Catherine Mealor

Thanks. Good morning. I wanted to start just on the Stellar acquisition. Congratulations on that. I noticed in the slide deck you’re using a different estimate for stellar versus consensus. Looks like it’s about a 220 number versus 2 bucks for consensus roughly. Just curious what’s driving that difference in your confidence in that level of earnings coming over from Stellar.

David Zalman

Thanks, Kathryn. You probably saw their fourth quarter earnings come out. That’s really going to influence that. But Paul’s here with us today from Stellar and I’ll let him go over it with you. Absolutely. Thanks, Catherine. Hey Paul, We’ve been thrilled with our growing momentum in the back half of 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 we well so if you were to take 2024, just pardon me, the fourth quarter just to be simplistic and put a kind of more normalized provision onto it and annualize it, you’d be talking about 55 cent per share EPS run rate which would annualize to $2.20.

Now we enter 2026 with about $100 million more in interest earning assets than our average for the fourth quarter of 2025. That’s going to be help assist us and then first kind of 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. And then I think the last point I’d note is we assume a more normalized consensus level of net charge offs 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 seller, which is great. Typically from Prosperity. What we’ve seen with past deals is you do an acquisition, then you shrink a little bit. And that’s 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 romance for 10 years plus, and again, we’re across the street because we can throw rocks at each other. So to me, it 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. I think there will be efficiencies through this. And I would say as 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 going to primarily focus on the integration of the three banks that we have. So. 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 or 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 I feel good about that. But again, I think our focus is really going to 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

Great. Understood. Thank you.

operator

Our next question is from Manon Gosalia with Morgan Stanley. Please go ahead.

Manan Gosalia

Hi, good morning. All right, David, maybe can you help us think about the price of the acquisition 18 times 1 year forward does feel a little high. But I know you mentioned the higher level of nib and the synergies. Maybe if you can help us appreciate all the synergies and growth prospects that the combined banks have and also how you think through the earn back period, four and a half years earn back is a little bit higher than what you’ve done recently.

David Zalman

Yeah, you know, I could start off and saying, I think, I don’t know 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 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 going to really be something and 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 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 earnings $7.34 a share once we get all of this put together. And so at $7.34, if we trade just at 13 times earnings, our stock value would be $95.42 if we traded at 15 times earnings. And 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 mid sized banks underneath Bank America or JP Morgan, 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 $110 a share. So we paid a lot for it. But I would tell you too that it should be easy for anybody to see that the franchise value, not only, not only is it accretive, but the franchise value is really enhanced 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 don’t know what kind of, how do you put a price on the enhanced franchise, but I can tell you it’s significant. I think that anybody would want to probably acquire us as being one of the bigger banks in the state of Texas and, and the franchise that we have. And so that’s kind of the rationale behind it. It also, you know, it takes us from being all three of these deals, it 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. And maybe as you think about the capital deployment strategy from here, I guess you’re now integrating three deals together. Is that it for now? Would you focus on the integration for the coming months and just given where the stock price is, is there more of a focus on buybacks? I know you guys upped the authorization yester to maybe just help us think through capital deployment plans from here.

David Zalman

Well, let’s say we’re going to 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 share in dividends. That’s $288 million or so. I think that’s right. So you subtract that 288 from 680. You know, we have about $600 million. So we have a tremendous, not only do we have a strong capital to begin with, we have just like a, I mean like a printing press.

You know, if something doesn’t go wrong with 600 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, would you tilt more towards buybacks 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 this last year our stock went down in a and I think you saw where we spent $157 million on buybacks this last year. And I think we have another 5% approved for this year. So you’re talking was that 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 Steven Scouten with Piper Sandler. Please go ahead. Mr. Skelton, your line is open on our end. Perhaps it’s muted on yours. Moving on. The next question is from David Chiavarini 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, they’re all planned and somebody may want to talk about which ones we have in order. But I mean, we’ve done 40 of these transactions, so I don’t think this is going to 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. And then right after that we’re going in American bank dated what also back.

Paul Egge

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 organic growth. They’ll be focused on this. We have specific team focusing on integration. So we have a plan to convert these banks, 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 converge later this year and it’s working as we planned.

David Zalman

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.

David Chiaverini

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

Well, the time seems to be right. I mean, if you look in the previous administration, I think we did a, we were trying to do some bank deals and even much smaller deals. I 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 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 and 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 20 years. Bob. 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 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. So we feel we did our due diligence and we feel really good. We feel the same way about things.

You know, again, this. We’ve dated and romanced for probably 10 or 20 years. And it’s not like, you know, we just saw this pretty girl across the street, fell in love and 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 right now. And we did it.

David Chiaverini

Thanks very much.

operator

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

David Rochester

Hey, good morning, guys. I just want to 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 was 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 10B 5. One plan. Thanks.

David Zalman

Yeah, I don’t know what the 75. What plan is he talking about?

Charlotte Rasche

The 10B 51 plan. Yeah. We don’t have a 10B 51 plan.

David Zalman

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

David Rochester

Okay. Any sense for blackouts when those pop up, when those end, that kind of thing?

Charlotte Rasche

Well, we’re in a blackout today for our earnings, so we have normal earnings blackout and things. And there’s some blackouts around the merger transaction, of course, around shareholder votes and things like that. When you start soliciting those stellar shareholders.

David Rochester

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.

David Rochester

Yeah, 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 close stellar June 30th. Can you just help us understand what you see is that path through the year? Thanks.

Asylbek Osmonov

Yeah. If you look at prosperity, I’m just going to talk about Prosperity and with two smaller acquisition on projection we definitely see the improvement in the margin for 2026 and beyond. And it’s because the margin on the smaller banks were higher than ours a standalone. So that have accretion there. But if you look at our balance sheet with repricing our bond portfolio as we mentioned, as I mentioned that we have our 1.9 billion cash flowing from that. So we’ll be repricing that our yield on the bonds of 250 into pricing I think we can get around 450 right now.

So 200 basis points there. If you look at our fixed loans, that’s getting repriced as well. So putting all together our kind of projection for 2026 standalone showing about around 350 margin for 2026. But if you add stellar bank together, I think the margin on stellar about more 4.2%. So that will be very accretive too. So combined together you can do the math, it will be looking very, very good for 2026.

David Zalman

And a minimum of three and a half. Yeah, minimum of three and a half.

David Rochester

Three and a half without stellar.

David Zalman

Yeah, what I was telling you.

Asylbek Osmonov

Yes. So that’s looking really good.

David Zalman

And that comes a long way. 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, we try to buy and have a 3.7, 3.8 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 2.75 net interest margin to 3 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 mentioned a year or two ago that we want to 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 going to reduce it to level that we are right now. So now we believe that borrowing level is what we expected within 1.5 to $2 billion. And now we’re going to be, you know, with growth in deposits and additional of the two banks, we’re going to start growing our average earning assets. While past two years we were shrinking because we want to.

David Zalman

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 and for the last since 2000 until today, and you compare us to the s and P500 and you compare it to the NASDAQ bank index, our bank has returned 1,447% compared to the national bank index of about, I’m thinking 181% and it’s compared to the S&P 500 665%.

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 while ago, what, what this, what this thing should trade for. And so it just, I think it’s one of the greatest opportunities and you, you will benefit if you’re a long term investor right now.

David Rochester

All right, great. Appreciate all that 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. Just wondering how you feel about this level here that 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 save, we feel very comfortable with the 35% cost save that we printed and it’s combination of the combining two banks that have the same footprint. So of course there will be some consolidation of branches. Also there’s, you know, as you know, system conversion going to help. So we took deep dive and we feel very comfortable with the cost saves.

David Rochester

Great, thanks guys.

operator

The next question is from Janet Lee with TD Cowan. Please go ahead.

Janet Lee

Good afternoon.

David Zalman

Good afternoon, Janet.

Janet Lee

Back to M and A if I were to ask it in a different way. So if I look at your Performa CET1, it will be about 13.5, which is slightly above peers but definitely more normalized. And in the past, or at least over the five years you’ve had CET1 running above peers, just given the size of the deal, which was more meaningful than the recent ones and the Performa CET1 post a 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.

David Zalman

No. Even like I mentioned a while ago, when these things are combined, you’re going to have over $600 million a year just in excess cash flow. We had excess capital that everybody was asking what we were going to 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. And I think probably just. Just in earnings over a couple of years. If you’ve done the ratios, tell them to see where. We’re back up within a year or two, aren’t we? Excuse me.

Asylbek Osmonov

On how fast we build our capital back. Yeah, we’ll be back in a couple of years.

David Zalman

Minimum a couple of years. We’ll be back to exactly where we’re at.

Janet Lee

Got it. That’s fair for loan growth. So it seems like the potential acquired portfolio runoffs 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, I think that’s a good assumption. This is. Kevin. Low single digits is good. As you know, Stellar has been growing faster than that and we don’t see any reason that that would change. I think American bank has been growing faster than that as well. And we talk about the quality of the Stellar portfolio. I’d say the same about the American bank portfolio. They were. We talked about Stellar maybe being cleaner than us. I think American bank was cleaner than us. So in terms of the quality of the assets we purchased here between American and Stellar, they are stellar.

Janet Lee

Great. Thank you.

operator

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

Peter Winter

Good morning. Thank you. Can you just talk a little bit? You mentioned the increase in non performing 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 non performing 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 the 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 non performing. So it’s still substandard but now non accrual. 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 a reserve as a result of it.

David Zalman

I’d add it the other large post.

Kevin Hanigan

A provision I should say we have reserves up against public and I’d say.

David Zalman

The other large credit is a participation from 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 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 Stellar.

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 a OCI mark. So I think on the loan mark we’re having about 31 million on loan marks that are pre tax and we have about 3 million net of tax and AOCI.

So for our modeling purpose we use sum of year digits calculation. So if you look at for the 2027 I think the mark accretion is about 30 million combined. 30, 31 million 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 is closed just on the bond book. I know most of Legacy Prosperity’s book is htm, but Stellars is afs. Just wanted to see if there’s an opportunity for a potential restructuring that may be not included in the performance here. Thanks.

David Zalman

You know, it’s not everybody asks, why don’t you just do financial engineering? Sell your deal, sell your portfolio. 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, 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 million after tax and 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. We’re just trying to be in every market and buy with a 3.8 year duration. And so sometimes it’ll be real good and sometimes it’ll be low. But I don’t see any change in that. And again we will mark to market the portfolio from Stellar for sure.

Michael Rose

And what would that do to the asset liability sensitivity?

Asylbek Osmonov

I think they are a little bit of asset sensitive on that. I think what we’re going to do if we, I mean there will be some securities that we’re going to sell and kind of buy back in a mortgage backed security like we do. So I think from the standpoint it’s going to be maybe the same as a slight asset sensitive.

David Zalman

We’ll try to buy ahead so that it’s 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. You know, I guess just given how. Yeah. 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 merge with the prosperity now if the outlook’s so good. Thanks.

Paul Egge

Well, I think it’s rare to get the opportunity to find somebody that kind of 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’s always done. We’re really sensitive around the way we fund ourselves to get a 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 that look like that. But I think the expanded balance sheet, the ability to continue to do kind of where the momentum started back in the third quarter, into the fourth quarter and we can see it in the first quarter started to have a real good momentum.

And because we look so similar and we do similar loans, similar types of deals, it’s not a heavy lift to understand that we could continue to do those kind of things. So we think we’re going to continue to drive that momentum and we feel good about what the future looks like certainly over the next 12 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 from Jared Shaw with Barclays Capital. Please go ahead.

Jared David Shaw

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

David Zalman

I would like to tell you that it would be great. We just use their loan team and 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 gets, they’re getting, they’re probably, you know, there’s, what is it? 4.2 you said. And ours is margin. Yes, and our 6.5. So part of that margin is because they don’t have as big of a bond portfolio. So their margin is better because they have a better loan to deposit ratio too.

But even having said that, even as we start merging together, it seems like the 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 market 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. Texas, it’s just, it’s really phenomenal.

So I think the opportunities are just unlimited, especially we get momentum, put our groups to put our guys together, guys and girls. I think the momentum is really going to be good for everybody. And I think that they maybe even had a better, 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 should be able to help us with some of this stuff too. And hopefully they won’t lower their rates that they’re charging. Let’s say that.

Kevin Hanigan

David, 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 Bob or somebody from Stellar could comment whether they agree with this or not. But 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. Forget single family mortgages and some of the other stuff, just the basic commercial lending, they have a way more granular portfolio. And the granularity of that portfolio basically means 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. So it’s those three factors that really drive their margin relative to ours. And I see ours improving as those low rate assets run off. And I don’t see theirs really having to come down all that much.

Bob, would you.

Robert Dowdell

Yeah, I agree, Kevin. I mean we do have a granular portfolio. I think there’s getting to be more and more balance to that over time. But it certainly started off that way when we combined the two banks together. But pricing’s competitive. We’re in Houston, Texas and pricing is competitive. So one’s not going to be better pricing than the other. You guys are just as good at us as pricing loans. So. But for the most part it is granular. We do get a little bit higher pricing on the smaller stuff, so. Yeah, I would agree with that.

Jared David Shaw

Okay, thanks. And then this is a follow up.

Kevin Hanigan

Which goes with cheap deposits. Yeah. Which is why your non interest bearing deposits are generally a bit higher than ours. So just a little additional inside baseball.

Jared David Shaw

Great, thanks. I guess just as a follow up, you know, what are some of the assumptions on customer retention? You know, 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 want to go first?

Robert Dowdell

I was just going to say, I mean I think we’re doing a good job of retaining our gu. And I. Think that’s the big key is to make sure that we keep our customer facing folks out there that our customers see every day and not changing that.

David Zalman

Yeah, I mean we entered into about 15 non compete agreements and about 70 letter retention agreements. So I think the teams on board, it doesn’t mean you won’t lose somebody, but I think for the most part, you 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, they know who we are. We’ve advertised here. We, you know, it’s not somebody 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 going to run off like that.

So I, I mean this is really a great combination, guys. It’s truly, it’s a marriage made in heaven.

Robert Dowdell

And the other piece, David, I think is the credit cultures are very similar. We’ve always thought about the world the same way. So I don’t think you see that drastic change that you do in some combinations where people say oh gosh, maybe this is too conservative or whatever they. Might think,

David Zalman

well, you’re a lot like me. I mean some of the guys, I mean even analysts, they want to say, okay, you got to have double digit loan growth, got to do this, got to have 6%, 10% every year. Well, and your deposits are growing 3%. What do you do when you run out of money? So I think we have a lot of the same logics that 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 run on our bank, for example, I think we have like $16 billion that we can draw in a minute.

So we have a lot of liquidity. You all have a lot of liquidity. So the combined earnings of these two banks, the liquidity of these two banks, they’re so similar. I think it’s a good deal.

Jared David Shaw

Thank you.

operator

The next question is from John Arstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom

Hey, hello everybody. David, for you, just a couple on the numbers. What’s your level of confidence in the 734 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 680s. You talk about the accretion. How confident are you in the 734?

David Zalman

Cullen just handed me the 734. So if he’s wrong, we’ll shoot him. 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 will 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 734. You 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’re trading.

If we’re, we’re going to make $7.34. I mean again, we should have a 95 to $100 price target. Really? Even you, John? I hear you. That 75 stuff or 78.

Jon Arfstrom

Okay, this begs the next question. Then you kind of open the door to it. Well with your 15 times acquisition Multiple math 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 curious on that.

David Zalman

You know I was, I was on the, I was on the Federal Reserve Advisory Board in Washington and every bank that you can imagine that size was on there. I mean you had 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 want to break into Texas and want to be the largest bank in Texas, it’s going to cost you something.

And that’s the difference in the price of cars. One’s a Ford 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 you that we are truly, truly undervalued in a takeout.

Jon 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.