Prosperity Bancshares Inc (PB) 2025 Q4 法說會逐字稿

Good morning, and welcome to the Prosperity Bancshares fourth-quarter 2025 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) 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.

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; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Mays 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 Vitulli, President of Stellar Bancorp; and Paul Egge, Chief Financial Officer of Stellar Bancorp. 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-K 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.

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, 2025.

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 nonperforming assets totaled $150 million or 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 comprised of two loans made in our middle market lending group and 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 31, 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 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 Raffaele, 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 Pape-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 as an investor in the San Antonio Spurs.

There's much more, but there'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 -- I'll skip that low-cost core deposits, operational efficiency, sound credit quality 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 noninterest-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 Osmano, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 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 of 2025. The fair value loan income for the first-quarter of 2026 is expected to be in the range of $3 million to $4 million. Noninterest income was $42.8 million for the 3 months ended December 31, 2025, compared to $41.2 million for the quarter ended September 30, 2025, and $39.8 million for the same period in 2024.

Noninterest expense was $138.7 million for the three months ended December 31, 2025, compared to $138.6 million for the three-months ended September 30, 2025, and $141.5 million for the same period in 2024. For the first-quarter of 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 -- 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 12/31/2025 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.

Thank you, Asylbek. Our non-performing assets at quarter end December 31, 2025, totaled $150.842 million or 69 basis points of loans and other real estate. Compared to $119.563 million or 54 basis points at September 30, 2025. This is an increase of $31.279 million. Since December 31, 2025, $6.631 million of nonperforming assets have been removed or put under contract for sale.

The December 31, 2025 nonperforming asset total was made up of $137.534 million in loans, $12,000 in repossessed assets and $13.296 million in other real estate. Net charge-offs for the three months ended December 31, 2025 were $5.884 million compared to net charge-offs of $6.458 million 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 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.

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

(Operator Instructions) Catherine Mealor, KBW.

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. It looks like it's about a $2.20 number versus $2 for consensus roughly. Just curious what's driving that difference and your confidence in that level of earnings coming over from Stellar. Thanks.

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, and I'll let him go over with you.

Absolutely. 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 well.

So if you were to take 2024 just -- or 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 a $0.55 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 we'll have the 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.

Okay. Very helpful. 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. 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 on the Prosperity recently. So why is this acquisition different? And what kind of forecast for growth in '26 should we expect for Prosperity?

I think this is different. We -- Bob and I have known each other for probably we 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. There's -- 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 will be our main focus.

Manan Gosalia, Morgan Stanley.

David, maybe can you help us think about the price of the acquisition? 18 times one 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, 4.5 years earn back is a little bit higher than what you've done recently?

Yes. I can 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. 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. I can really enjoy and have a Range Rover that's going to really be something and have a good resale value.

This -- 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 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 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 that 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 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 $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 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.

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 the franchise that we have. And so that's kind of the rationale behind it. It also -- it takes us from being a -- these -- 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.

Got it. That's helpful. And maybe as you think about the capital deployment strategy from here, I mean, I guess you're now integrating three deals together. Is that it for now? Like 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 yesterday. So maybe just help us think through capital deployment plans from here.

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 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. So that's $288 million or so.

I think that's right. So you subtract that $288 million from $680 million. 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 -- I mean, like a printing press. If something doesn't go wrong with $600 million, 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.

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

I think that we would -- when it's opportunistic, we certainly would look at buybacks for sure. We just -- as this last year, our stock went down in the 60s to low 60s. 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 that we can buy back this year as well, and that's been approved ready by the Fed.

(Operator Instructions) David Chiaverini, Jefferies.

So you mentioned about 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?

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 3 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 to American Bank, David, what also --

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 is doing the organic growth, they will be focused on this. We'll have a specific team focusing on integration. So we have a plan to convert these banks as 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.

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. And can you talk a little bit about the cultural fit? How did the deal come together? And why now with the deal?

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 maybe 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 it was right. I think it was right for us and I think it's right for them. It just seems to be the right time.

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

Yes. I mentioned earlier, Bob and I have known each other for 20 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 our banks 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 I -- we feel -- we did our due diligence, and we feel really good. We feel the same way about things. And again, this -- we've dated and romance for probably 10 or 20 years, and it's not like we just saw this pretty girl across the street, fell in love and got married in a month. 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.

Dave Rochester, Cantor.

I just wanted to go back to the capital discussion real quick. I noticed the shares are trading below the average price of 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 10b5-1 plan.

Yes. I don't know what the 75%, what plans are you talking about?

Yes, we don't have a 10b5-1 plan.

Yes. And David, I would say on the others. 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.

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

Well, we're in a blackout today for earnings. So we have a 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 should start soliciting the Stellar shareholders.

Before you do that. Sorry, go ahead.

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

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?

Yes. 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 margins for 2026 and beyond. And it's because the margin on the smaller banks were higher than ours, a stand-alone. 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 a $1.9 billion cash flowing from that.

So we'll be repricing that our yield on the bonds of $215 to 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 stand-alone showing about around 350 margin for 2026. But if you add Stellar Bank together, I think the margin on Stellar is still about more 4.2%, so that will be very accretive to. So combined together, you can do the math, we'll be looking very good for 2026 and --

A minimum of 3.5% -- minimum 3.5%.

Yes. So that's looking really good.

And that comes along the way, it goes back towards two years ago, somebody said, well, the bank and your peer group, you did in performance because as your peer group over the last couple of years. Well, the truth of the matter is we did and 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 -- so for the most part, we said 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 2.75% net interest margin to 3.5% 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.

Yes. And I want to add to that. I think we mentioned a year or two ago that we want to reduce our borrowing levels. We were almost $3.9 billion borrowing two years ago, and we have a conscious program that we're going to reduce it to a level that we are right now. So now we believe that the borrowing level is what we expected is between $1.5 billion to $2 billion.

And now we're going to be -- with the growth in deposits and additional of the two banks, we're going to start growing our average earning assets, while the past two years, we were shrinking because we want (technical difficulty).

I think it was just a matter of the time that somebody could make an argument in this e-mail -- the sharp e-mail that I got this morning made that argument, I can make an argument that you could go back. Anybody can pick a year in time that they want to. But if you go back for the last just 2,000 until today and you compare us to the S&P 500 in comparison 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 the stock because I did the math for you all ago what this thing should trade for -- and so it's just -- I think it's one of the greatest opportunities and you will benefit if you're a long-term investor right now.

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

So regarding the cost saves, we feel very comfortable with the 35% cost saves that we printed and it's a combination of the combining two banks that have the same footprint. So of course, there will be some consolidation of branches. Also, there is -- as you know, the system conversion is going to help. So we took deep dive, and we feel very comfortable with the cost saves.

Janet Lee, TD Cowen.

Good afternoon. Back to M&A. If I were to ask it in a different way. So if I look at your pro forma 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 Proforma CET1 post the Stellar deal, does this change your appetite for M&A, whether it's your appetite for M&A itself or the type of deals that you might be potentially looking at in the future?

Now even like I mentioned a while ago, we -- when these things are combined, you're going to have over $600 million a year just in excess of 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 in earnings over a couple of years, if you've done the ratios to see where we're back up within a year or two, aren't we --

On how fast we build our capital back. Yes, 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.

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 with 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?

Yes, 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 talked 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 that. So in terms of the quality of the assets we've purchased here between American and Stellar, they are Stellar.

Peter Winter, D.A. Davidson.

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 like a $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?

As we said, and I would reiterate what we said last-quarter, we said that the 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 nonperforming. 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. So it 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. 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 was in the buy-here-pay-here space. We don't see the need at this stage or something further wrong with these credits that we need to post to reserve as a result of it.

I'd add at the other large --

Post a provision, I should say. We have reserves up against both.

And I'd say the other large credit 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 well secured with real estate. In fact, there should be excess equity in that they shouldn't be loss in that.

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 off the back, but I'm just wondering what it is after Stellar?

So the guidance that I provided on purchase accounting fair value loan income, that's for American Bank and the Texas Partners Bank. If you look at just Stellar, I think, on the page 16, we disclosed what the loan marks and AOCI mark. So I think on the loan mark, we're having about $31 million on loan marks that is pretax. And we have about $73 million net of tax in AOCI.

So for our modeling purposes, we use some of your digits calculation. So if you look at for the 2027, I think the mark accretion is about $30 million combined, $30 million, $31 million combined.

Michael Rose, Raymond James.

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 Stellar's is AFS. Just wanted to see if there's an opportunity for a potential restructuring that may be not included in the pro formas here?

It's not -- 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% here is another $200 million of income a year. So you take your loss after tax, $600 million and you get it back in three years. But I just -- again, I just feel like it'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 income between us. I mean we'd making a whole lot of money, but -- 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 will be real good and sometimes it will be low. But I don't see any change in that. And again, we will mark-to-market the portfolio from Stellar for sure.

And what would that do to the asset liability sensitivity?

I think there 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.

We'll try to buy ahead so that it's not so asset sensitive. We'll try to get back to the neutral, if we can.

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 -- are merge -- merge with the Prosperity now if the outlook is so good?

Well, I think it's rare to get the opportunity to find somebody that kind of looks like you, 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 is 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 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 over the -- certainly over the next 12 months because I think we're on a good path.

Jared Shaw, Barclays Capital.

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 and 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 yours what you're doing in the state?

I would like to say 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 there is we usually banks that we joined together. Usually, the return actually comes down. I mean the net interest margin, it gets -- they're getting -- they're probably -- there's what is at 4.2% you said?

Margins -- our 3.5%. 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 so, too. But even having said that, even as we start merging together, it seems like the pricing from the banks that joined 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 -- they had a lot of production office here in the Houston market to 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 of 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.

Again I think that we'll -- they maybe even had a better -- better than us, where we -- a lot of our payment or paid to lenders is maybe more discretionary. We do look at the actual production. They were more formula-driven deal. And so that -- I think that helps them too. So we'll probably look at -- 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.

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 us on that. But the obvious difference is 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 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 there's really having to come down all that much. Bob, would you --

Yes, 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 combine the two banks together. But the pricing is competitive. We're in Houston, Texas and price is competitive. So we're not -- one is not going to be better pricing than the other. You guys are just as good at us pricing loans. So -- but for the most part, it is granular and we do get a little bit higher pricing on the small side. So yes, I would agree with that.

Okay. And then just as a follow-up --

Which goes with cheap deposits. Yes, which is why you're not interest-bearing deposits are generally a bit higher than ours. So just a little additional inside baseball.

Great. 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 -- where do you think the risk is of retention?

I'll answer first or Bob, do you want to go first?

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

Yes. I mean we entered into about 15 non-compete agreements and about 70-letter retention agreements. So we -- I think the team is on board it doesn't mean you won't lose somebody. I think for the most part, we'll be able to retain the customers, and it's not like -- it's not like another bank that's coming out from another state that is jumping in. They know who we are.

We've advertised here. We -- it's not somebody that they're not familiar. 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 mean, this is really a great combination guys. It's truly it's a marriage made in heaven.

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.

Well, you're a lot like me, some of the guys, I mean even analysts, they want to say, okay, you got to have double-digit loan growth. You 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 we -- 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 a 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 got to have a lot of liquidity, so the combined earnings of these two banks, the liquidity of these two banks are so similar, I think it's a good deal.

Jon Arfstrom, RBC Capital Markets.

Hello, everybody. David, for you, just a couple on the numbers. What's your level of confidence in the $7.34 estimate for 2027? I don't think you have any revenue synergies in there. So it seems like it's just cost saves, but consensus $6.80, you talk about the accretion, how confident are you in the $7.34?

Colin just handed me to $7.34 ,so if he's wrong, we'll shoot him. But we feel very confident, and I think we do have some triggers that I think that above beyond expenses. I mean, right now, they don't charge NSFs, 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 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 going to make $7.34. I mean, again, we should have a $95 to $100 price target, really, even you, Jon. That's $75 stuff or $78.

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. The question is, I'm not saying you should do it, but due to larger regionals call on you frequently. And is there a bit if you want it? Again, I'm not saying you should, but I'm just -- I'm curious on that.

I was on the Federal Reserve Advisory Board in Washington every bank that you can imagine that size was on there. I mean you had P&C, 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, I 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 is 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 that we are truly, truly undervalued in a takeout.

Okay. Yes, I think it adds a lot of franchise value despite today.

This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.