Prosperity Bancshares, Inc.

Good day and welcome to the Prosperity Bancshares first quarter 2026 earnings conference call. All participants will be in a 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 a touchtone phone. To withdraw your question, please press star and 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, ma'am.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' first quarter 2026 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, 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, Senior Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Mays Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. Also joining us this morning are Bob Franklin, Chief Executive Officer of Stellar Bancorp, Ray Vitulli, President of Stellar Bancorp, and Paul Agee, Chief Financial Officer of Stellar. 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 bankshares 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 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 Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter 2026 conference call. The first quarter of 2026 was impactful for the company, and I'm excited to announce that during the quarter we completed the merger of American Bank Holding Corporation on January 1st, 2026. and completed the merger of Southwest Bancshares, Inc. on February 1st, 2026 and announced the merger of Stellar Bancorp on January 28th, 2026 for which we have now received all necessary regulatory approvals and expect to complete on July 1st, 2026. Additionally, we completed a core system conversion in February. We and others believe that Prosperity is doing the right thing. Prosperity has been ranked as one of Forbes America's Best Banks for 2026 and since the list inception in 2010 was ranked in the top 10 for 14 consecutive years. Prosperity has also been recognized by Newsweek as one of America's Best Regional Banks and was ranked 15th in the S&P Global Market Intelligence Top 50 U.S. Public Bank Rankings for 2025. In an effort to continue to enhance shareholder value, Prosperity Bancshares repurchased approximately 837,000 shares of its common stock at an average weighted price of $68.15 a share for a total of $57 million during the three months ending March 31, 2026. Our net income was $116 million for three months ending March 31, 2026, compared with $130 million for the same period in 2025. The net income per diluted common share was $1.16 for three months ending March 31, 2026. compared to $1.37 for the same period in 2025. During the first quarter of 2026, Prosperity incurred merger related expenses from the mergers with American and Southwest of 42.5 million or 34 cents per diluted common share. Excluding these charges, the net income was 149.9 million and net income for diluted common share was $1.50 for the first quarter of 2026. This represents a 9.5% increase over the $1.37 reported for the same period in 2025. Our loans were $25.2 billion at March 31st, 2026, an increase of $3.3 billion or 15.1% compared with $21.9 billion at March 31st, 2025. The linked quarter loans increased to $3.4 billion or 16% from $21.8 billion at December 31st, 2025. Loans increased primarily due to the mergers with American and Southwest. Excluding the loan Increases due to the mergers and excluding the impact of the net charge-off, total loans decreased 1.2% or about 4.8% annually. That did include about $100 million plus in warehouse lending increase, so excluding that, the decrease would have been somewhat more. The deposits were $32.6 billion at March 31, 2026. and increase of $4.6 billion or 16.4% compared with $28 billion at March 31st, 2025. Harleen's quarter deposits increased $4.1 billion or 14.6% from $28.4 billion at December 31st, 2025. Deposits increased primarily due to the mergers excluding the deposits acquired from American and Southwest, our core deposits increased about 1.2% and public fund deposits experienced its normal seasonal decrease. Prosperity has strong non-interest-bearing deposits of 32.4% of the total deposits as of March 31st to 26th with a cost of funds of 1.45% and a cost of deposits of 1.32%. compared with 1.38% for the same period last year. Our net interest margin on a tax equivalent basis was 3.51% for three months ending March 31st, 2026 compared with 3.3% for the three months ending December 31st, 2025. Obviously, the net interest margin was affected by the mergers but it was also impacted by the repricing of assets as we predicted and mentioned during previous calls. Our asset quality or non-performing assets total 122 million or 33 basis points of quarterly average interest earning assets as of March 31st, 2026 compared with 150 million or 46 basis points of quarterly average interest earning assets at December 31st, 2025. The allowance for credit losses on loans and off-balance sheet credit exposure was 421 million at March 31st, 2026, compared with 386 million at March 31st, 2025. The allowance for credit losses on loans increased during the first quarter of 2026 due to the mergers of which $47 million was attributable to the American merger and $43 million was attributable to the Southwest merger. Excluding warehouse purchase program loans, the allowance for credit losses on loans to total loans was 1.61% at March 31, 2026. And that's compared with 1.67% at March 31, 2025. Our quarterly net charge-offs were $41 million, the largest amount in our bank's history. This is mitigated somewhat by the total being comprised primarily of two credits, both which were unique in nature and we believe do not represent a trend in the potential future losses. This is evidenced by the lack of any material additions to non-performing loans in Quarter 1, 2026, and only two non-performing relationships of more than $10 million. Both charged off credits were generated out of our Dallas office. Both loans were shared national credits. However, both were initially originated and syndicated by us before the loans were moved to much larger banks that were willing to provide modified loan structures that we were not. The larger charge off of approximately $30 million was to a startup insurance company. Once that loan was moved and syndicated, Prosperity purchased a percentage of that loan back, although it was a smaller exposure than we previously had. While the borrower had allegedly a strong sponsor that is well known in the industry with the history of backing its investments, it felt to do so this time. The smaller charge off was a customer who Legacy Bank for over 15 years and is reflective that in lending money sometimes things just don't work out. With regard to acquisitions, as previously mentioned, the merger of American Bank Holding Company was completed on January 1st, 2026 and the operational integration is scheduled for September 2026 and the merger of Southwest Bancshares was completed on February 1st, 2026 and the operational integration is scheduled for November of 2026. We are fortunate to have American and Southwest Associates on the Prosperity Team. We are excited about our pending merger with Sterler Bank Corp and expect to complete the transaction on July 1st, 2026. While we continue to have conversation with other bankers regarding potential acquisition opportunities, We remain focused on the completion of the Stellar merger and the integration of all three transactions. Texas and Oklahoma continue to benefit from strong economies and are home to 57 Fortune 500 tech core companies. Texas also benefits from diversification in various industries including energy, oil, gas, renewables, technology, manufacturing, trade, logistics, Major Ports, Health Care and Finance. Further, its business-friendly environment, no state income tax, population growth that supports spending and workforce expansion, and key role in trade and cross-border commerce position, Texas is well for 2026 and the future. While Texas continues to outperform the U.S. on output growth, the labor market has cooled noticeably after years of rapid expansion. The growth in 2026 is expected to be steady, although the state size, diversity, and policy advantages position it well for a rebound. Overall, I would like to thank all of our associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity, and we'll continue to work hard to keep our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over the discussion to Asylbek Osmonov, 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 provisions for credit losses for the three-month end of March 31, 2026, was $321.2 million, an increase of $55.8 million compared to $265.4 million for the same period in 2025 and increase of $46.2 million compared to $275 million for the quarter ended December 31, 2025. The net interest margin on a tax equivalent basis was 3.51% for the three months ended March 31, 2026, an increase of 37 basis points compared to 3.14% for the same period in 2025 and increase of 21 basis points compared to 3.3% for the quarter ended December 31st, 2025. Excluding purchase accounting adjustments, the net interest margin for the three months ended March 31st, 2026 was 3.44% compared to 3.1% for the same period in 2025 and 3.26% for the quarter ended December 31st, 2025. The increase in net interest income and net interest margin during the first quarter of 2026 is primarily due to repricing of earning assets and addition of American Bank and Texas Partner Bank during this period. The fair value loan income for the first quarter of 2026 was 3.7 million compared to 3.1 million for the fourth quarter of 2025. The fair value loan income for the second quarter of 2026 is expected to be in the range of $3 to $4 million. Non-interest income was $46.5 million for the three months ended March 31, 2026 compared to $42.8 million for the quarter ended December 31, 2025 and $41.3 million for the same period in 2025. Non-interest expense was $217.3 million for the three months ended March 31, 2026, compared to $138.7 million for the quarter ended December 31, 2025, and $140.3 million for the same period in 2025. The linked quarter increase was primarily due to merger-related expenses of $42.5 million and the addition of American Bank and Texas Partner Bank during this period. For the second quarter of 2026, we expect non-interest expense to be in the range of $176 to $180 million. This projection does not include additional one-time merger expenses for the quarter. The efficiency ratio was 59.2% for the three months ended March 31, 2026, compared to 43.7% for quarter ended December 31st, 2025 and 45.7% for the same period in 2025. Excluding merger related expenses, the efficiency ratio was 47.6% for the three month ended March 31st, 2026. The bond portfolio metrics at 3-31-2026 have a modified duration of 3.8 and projected annual cash flows of approximately $2.1 billion. And with that, let me turn over the presentation to Tim Timanus from some details on loan and asset quality. Tim Timanus.

Thank you, Asylbek. Non-performing assets at quarter end March 31, 2026 totaled $122,107,000, or 48 basis points of loans and other real estate. compared to $150,842,000 or 69 basis points at December 31st, 2025. Since March 31st, 2026, $7,936,000 of nonperforming assets have been removed or put under contract for sale. The March 31st, 2026 Non-performing asset total was made up of $108,714,000 in loans, $136,000 in repossessed assets, and $13,257,000 in other real estate. Net charge-offs for the three months ended March 31st, 2026, were $41,309,000 compared to net charge-offs of $5,884,000 for the quarter ended December 31st, 2025. There was no provision to the allowance for credit losses during the quarter ended March 31st, 2026, but $91.4 million total was added via the mergers with American Bank and Texas Partners Bank. No dollars were taken into income from the allowance during the quarter ended March 31st, 2026. The average monthly new loan production for the quarter ended March 31st, 2026 was $312 million compared to $314 million for the quarter ended December 31st, Loans outstanding at March 31st, 2026 were approximately $25.288 billion compared to $21.805 billion at December 31st, 2025. The March 31st, 2026 loan total is made up of 38% fixed rate loans, 28% floating rate loans and 34% 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, Nick, will assist us with questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. The first question will come from Catherine Mueller with KBW. Please go ahead.

Thanks. Good morning.

Good morning.

I wanted to first just start out on the NIM guidance. It was great to see the NIM move higher. I know part of this was just the addition of these two acquisitions. But interested if you could just help us think about how you're thinking about the margin moving forward next quarter and then once you add in Stellar. And then maybe is there anything within the margin this quarter that felt one-time in nature, either some kind of one-time loan payments or anything like that that we should be aware of that we shouldn't be rolling forward to next quarter? Thanks.

I'll answer, Kathryn. So we are pleased with our margin expansion this quarter. you know it was like I've mentioned the contributed from our assets repricing during the first quarter in addition of two banks so help us with a increase in the margin but if you look at our rate track model and it's like based on the static balance sheet looking for the second quarter we see that our projected margin for second quarter be flat and little slightly higher than the first quarter and the reason is that there was several factors that impacted Q1. We saw continued repricing of earning assets, but we also recognized about $4 million of loan income from non-accrual loans, which we don't expect in the second quarter. And also, I think having fewer days in the calendar quarter historically helps our margins. Those two things had an impact on it, but overall we are very pleased with the expansion.

You want to go ahead and give some kind of guidance?

Yeah, so we continue on the guidance. If you're kind of long-term, and I'm going to include Stellar Bank in our model for 2026, I think the model shows that we'd be exiting combined NIM around 370, but for having... Full Year of Prosperity and Half Year Stellar, I think the average model shows about 360 for 2026.

Okay, great. And then on the bond book, there's a big increase in bond yield. I assume you restructured the portfolios that you acquired. Is this a good run rate for the rent yield on the securities book or anything to be aware of there and how you're thinking about that going forward?

I think it's a good run rate. What we've done in the first quarter, we did, in addition to bringing the bond book from the acquired banks, we also did buy some securities. That's why you saw almost $1.4 billion in closing bond portfolio. I think we also continue to buy. So from now on, I see that the yield on bonds should increase a little bit than what we had in the first quarter.

And where did that $1.4 billion in securities, what was the new rate on that?

So I think it's between, we were able to get between $4.50 and we were able to get around $4.85. So it was kind of in between when rates, you know, with the Iran war, the rates fluctuated. So we were able to secure some at $4.85.

Great. Thank you. Great quarter, guys.

The next question will come from Manan Ghazalia with Morgan Stanley. Please go ahead. Hey, good afternoon.

Can you hear me?

We can.

All right. Sorry about that. So, David, you mentioned the benefits of diversification in Texas. At the same time, you mentioned the labor market is kind of cooling right now. And then, you know, maybe if I add on to that, there's, you know, clearly a lot more competition, especially from some out-of-state banks. Can you put that together for us in terms of how you're thinking about, you know, competition overall, loan spreads, deposit rates, loan growth, and, you know, just your bigger picture thoughts on the dynamics in the state?

Well, that's a big question. But, you know, even though it may be slower growth, it's probably still better growth than anywhere else in the United States. So I still think that Texas is probably the best place to be as far as growth goes. I mean, there has, it's really kind of a, it's kind of split, you know. Everybody complains about prices going up and, you know, when they go to the grocery store or they go buy gas or, you know, a car that used to cost $60,000 now costs $100,000 and and everybody complains about it, but when I talk to people, again, I think probably middle class and upper middle class, it still hasn't slowed people down. People still have a lot of money and they're still spending money. Probably it's affecting a lower earning group than maybe the other group, but I think for the long run, Texas has still had tremendous growth. You're still seeing I mean every time California does a thing like they're going to tax people five percent on their network it only makes people it only makes states like Texas and Florida better so for the foreseeable future we still see it very good talking about the competition it's that is a big deal because you have a lot of banks that want to be in Texas they it's hard for them to get market share and we're competing against them on loans on a day-to-day basis and um you know the uh Some of the bigger deals that we competed on where we were in the 6% price range, they were down in the 5.9% range. I understand that when we ever go into a new market, that's exactly what we do. We try to underprice something and try to get some market share. So that's what we're looking at from the out-of-state banks coming in. On the deposit side, you still see them throw in sometimes if you're a non-customer right now like Truist, is advertising like a 4% rate on a money market account. We're closer to the three. So they're trying to buy the business. We understand that. At the same time, we haven't acquiesced. We lost several big deals where we haven't come down on the price. We haven't come down on the price yet. We're still trying to maintain our margin. I think that we will continue. And I think that overall, in the long run, we've been through this before. It's not our first rodeo. We'll continue to do good. Our partners, you saw Speller, they did much better than we did this time. And I think it just shows that things happen over periods of time. They were up over $200 million where they might have been lagging before. And I think that's the same thing for us. We'll win. We have a number of big deals that we're looking at right now that I think we've agreed to the price. We're just making sure that we want to do the deal. So I do see that. Having said that, we have three mergers with banks. And if you look at us historically, you know, I'd like to tell you that you're going to see this mid single, mid to single digit loan growth or double digit loan growth. And that just doesn't happen. I think that, you know, if we can stay, you know, we can stay flat. That's pretty good this year. I mean, because I think that as you do these deals, you just see some You see some change in that. And just historically, I'd like to say that you're going to be there. We're going to make it. But historically, that's not happening. Kevin, you may have some comments on the deal.

No, I agree with you, David. I think, not to get too granular, Prosperity X Acquisitions has not had growth in the last couple of quarters. I think, as I think about the whys to that, The market has gotten more competitive, particularly on very large construction deals, which we've always played a part in. The market's gotten cheaper in terms of the rates that they're willing to do those deals at, and they've come off levels of recourse, much lower levels of recourse, and we have not. We have not played in that game, and it's cost us. We've missed out on some deals. I think to augment that or to fight that off a little bit, we're likely to set aside a bucket of, say, $750 million to $1 billion worth of commitments where we'll play in those markets with certain clients, very well-known folks that have been clients for a very long period of time. So I think we'll fight some of that off ourselves. That's what happens in the acquisitions. As David said, And this is no surprise to any of you. When we do acquisitions, it is more likely than not that there's some asset runoff from those acquisitions in the ensuing 18 months. It's been the case time and time and time again, and we've got three of them. So we'll be fighting those headwinds for the next year to 15 months, 18 months. and I think if we are flat during that period of time overall, we'll have done pretty well.

Well, and I'd even say, you know, when some of the out-of-state banks are offering 5859 and we can get 485 on a security with about a four-year average life, pretty hard to pay the lender, reserve some money for loan loss and really go that low. But again, at the same time, You know, if a customer is able to bring and it's just not a dry relationship and that customer is really over to bring over a deposit relationship, that's a whole different story. And we'll give you credit for that. We'll probably get as low as that if it's not a dry relationship. But all in all, we still we still stick with the story that, you know, the core deposits are really what makes the bank. And that's what we're focused on. We're really focused on increasing that interest income. and net income for the shareholder over the next one or two years. And I have to tell you right now, I'm probably more excited than I've ever been in the last three years about our future. When I look at the numbers, I mean, we were going, as you all know, our net interest margin was what it got as low as 275 or something like that, 290. Our numbers that we're looking at right now, we're really looking at some really great net interest margin going forward. I think we're looking at probably for the next two years net interest income increasing. And so I'm terribly excited for where we're at right now today.

I appreciate all the color. I know that was a fairly broad question, but I appreciate the fulsome answer. So maybe just to follow up there, given the excitement about the forward NIM expansion and forward growth as well, Maybe how are you thinking about additional M&A from here? Does it make sense to integrate the current deals first, or do you think that there's room to pursue another one if you get something that makes sense for you?

I think the answer that we all need to be doing is these three deals are very important. I mean, we're going... from a $38 billion bank to a $53, $54 billion bank. And so that's, you know, so our main focus right now is the operational integration of these three deals. And so that's why when we talk about the things we talk about, our whole focus, I mean, I don't think you'd ever want to say never on anything. At the same time, our primary focus is bringing these three deals together. and hitting those consensus numbers that you analysts all have out there. And we feel really good about that.

Great. Thanks very much.

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

Hey, good morning, guys. Good morning. So just as a part of your view on NIM going forward, how are you thinking about the cost of deposits here in a scenario of no rate cuts? Do you think you guys can hold deposit costs here? Can you shift them lower? And then was just curious where you're seeing new loan yields come in as the remaining fixed rate loans are still rolling off here. Thanks.

I don't think that if interest rates stay where they're at, you know, our net interest margin targets are really good. I mean, I think Asylbek talked to you just a minute ago saying about a 3.6 average for this year 3.7 exit uh 2027 I think you guys have about 3.8 percent uh net interest margin 3.8 I think if uh if interest rates stay where they're at we'll we'll hit that or even higher uh if interest rates go down 100 basis points we're probably you know we'll come off of that to some degree but I again I don't think that we're lower deposit rates any, and I think our numbers show really higher net interest margins than maybe you do. At the same time, I don't know that I really believe them because as interest rates come down, we never went up as high on a lot of our customers as they could have gone somewhere else. So I don't know that we'll come down as faster at the same time. So I don't know if that gives you any color or not.

I'll just add a little bit on the deposit side of it. So we, you know, we hadn't decreased or changed our rates for past few months now. And based on what we see on the deposit growth, we mentioned on our core deposit growth, I think we're holding our own with the current rate. I know it's a lot going to depend on the competition, but at current rate, we believe that, you know, we don't need to increase the rate. So they might come down rate overall because we have some higher CDs getting repriced. So we'll see some overall deposit rate or cost of deposit come down a little bit, but not significant, but it will do because of repricing. But overall, I think as long as rate doesn't change, we should be at this level or lower by ourselves. But if you add stellar, of course, stellar has a little bit higher, but in the combined one, it's still going to be cost of deposit around 140. That's what our model shows. I think on the loan repricing, they want to know. The loan repricing, I think if you...

The loan repricing, I mean, I think we're kind of good where we're at. I mean, I don't see us... I'm not saying we won't jump to maybe one or two deals to compete on the 5.9 under six, but for the most part, we're really not going to play that game. And we'd rather buy securities, I think, than just try to play a game just to have a dry relationship to beat somebody out and take a lot of risks. Yeah. Okay.

New loan yields are where the book is right now, or are they still a little bit higher?

A little bit higher. A little higher.

Okay. Maybe just one more switching to the loan trends, your thoughts there going forward. I know you mentioned maybe flattish loans this year with all the deals closing. Maybe that carries into next year a little bit in terms of like a little bit of runoff that you normally get. But just looking at Stellar this quarter, which had a solid loan growth quarter, seemed pretty decently broad-based. I was just thinking about you guys next year and the growth trajectory. I was wondering if you think that with Stellar in the fold, after you have that little bit of runoff, are you thinking that maybe your organic growth profile can improve from where it has been over time?

Yeah. Post any, what I would call normal for us, post-acquisition runoff, I do think, particularly with Stellar hitting its stride that will return to, you know, kind of low to mid single digit kind of stuff.

But that's going to take a little while. I think even American Bank and Texas Partners are talking. They're excited with where their position is, too, and it's done pretty good.

Okay.

Thanks, guys. We just want to be cognizant of the fact that it is typical for us to have some loan declines post The next question will come from David Chiaverini with Jefferies.

Please go ahead.

Hi, thanks for taking the question. So, following up on the deposit side, what sort of deposit growth should we expect? Should it, you know, kind of trend in line with loans and kind of flattish and the loans deposit ratio stays in the low 70s? How should we think about the deposit side?

I think our deposit side is really not going to be affected. We should have our normal organic growth on the deposit side with the exception of seasonal fluctuations with public funds. And I think we've always done at least 2% to 3% more now. Having said that, one of the banks that joined us has some really larger accounts that really operate under their treasury fund. Thank you. Thank you. As far as the loan to deposit ratio is, I think I didn't answer that. We have a policy that it doesn't say we can't go above 85%, but once we hit 85%, we have to go in front of the board and discuss that with them. So unlike a lot of the other banks or a number of the other banks that are at 90% and 100%, I don't think you'll see us doing that. I think we feel more comfortable at the 75% and 80% for the most part.

Got it. Thanks for that. And then shifting over to the capital side, can you talk about the Basel III endgame potential benefit to your capital ratios and then your buyback appetite from here? Last couple quarters, you've been a little bit more active than you had been historically. How should we think about that going forward?

I think that we're going to make a lot of money, or at least it looks like we're going to be making a lot of money, at least combined. And so I think that as long as whenever we see this you'll see the price we saw buy back when the price of the stock was I forgot what the average is time was 68 dollars or something like that so I think you'll still see us when the price is an opportunity like it is right now you'll see us continue to buy back and again we have a lot of capital even with the combination of Stellar Bank and I know we're paying 25 or 30 percent cash on that but we still have a lot of capital and

you know I think going forward you'll see us continue to buy back if prices stay where they're at for sure yeah and on the battle three benefits we did high level analysis of impact of the mortgage loans and it will benefit but I think it's uh when we calculate maybe a 50 basis point on the capital that what we saw benefit on the uh once the rule passes on the mortgage loans but from a capital standpoint I mean we're real rich and it's gonna benefit

When we look at a pro forma based on a combined earnings of both of these banks, even after you take out dividends, you're talking about $500 or $600 million a year in excess after dividends to do something with. So we have a strong capital going in, and I think we'll have a stronger capital going forward, really, and the ability to purchase our own stock back.

Very helpful. Thank you.

The next question will come from Matt Olney with Stevens. Please go ahead.

Yeah, thanks for taking the question, guys. I want to go back to the Stellar Bank discussion, and I think you mentioned the improving loan growth at the bank, but also it looks like the adjusted net income at Stellar Bank was almost $30 million in the first quarter, x a few non-recurring items. If I go back to the original assumptions when the deal was announced back in January, I It looks like the earnings projections from Stellar for the full year was $113 million. So it seems like you're tracking well above that number if I just annualize that first quarter. Was there anything else unusual or anything else to consider with that first quarter net income number of almost $30 million? Or is that a clean number that we can carry forward from here?

Matt, thanks for the question. It is a clean number. We actually feel great about the earning prospects entering into the second quarter taking the cumulative nature of the growth that we had in the first quarter. So we feel good about the path that we're on and what that implies. Okay, I appreciate that. We paid down on April 1st, the last remaining piece of sub-debt. So we actually see benefit to margin that will come back, come out as a byproduct too.

Okay.

For those that don't know, that was Paul. That was Paul, CFO at Stellar.

Great. Thank you. Thank you, Paul. And then I think you completed the core system conversion at the bank in February. I think there was a mention earlier on the prepared remarks, but I missed it. Just remind us of the timeline expectations to complete the remaining conversions for each of the acquired banks.

First of all, The DNA conversion was a huge deal. I don't want to just keep talking about it, but our bank was more on a batch system. And over the weekend, if you had a long weekend, by the time we ran everything back through and brought everybody's account back up to date, we may be up by Monday morning and we may not. And under this new system, we can update everything in about an hour and a half. So that just tells you how much capacity we had. It was a real big deal. It took us years to complete. And so... you know I think when you look at our bank and we had three major deals we had a DNA conversion we've had our plate full so the team has done just a miraculous job and so going forward we're looking at a September operational integration for the American Bank we're looking at a November operational integration for the Texas Partners Bank and for Stellar we're looking at March 8th I think so

Okay, thanks for the caller. The next question will come from Brett Rabitin with Stonex Group. Please go ahead.

Hey, good morning, everyone. Morning. Wanted to go back to the credits, the two credits you guys talked about. And, you know, you guys obviously have a historical... Very low net charge-offs, really strong asset quality. The two this quarter were obviously an outlier, but was hoping maybe for any other color. You mentioned one was an insurance company. Was there fraud involved? Were these loans from past acquisitions? Was there anything unusual that created the loss exposure relative to what you might have had as collateral?

Yeah, the big one, this is Kevin, Brett, the big one was an insurance company. They were in the business of selling Medicare products, so Medicare Plus, Medicare Advantage kind of products. And if you want to get to the core of it, their business was doing pretty well for the first 18 to 24 months. Not to get too deep into the accounting, but if you called them and you did a Medicare Advantage program through them and your annual premium for the year was, let's just say, $240 to make it easy, $20 a month, they would accrue $20 for that first month, paid by the government, largely, and then the rest of it would be booked as a receivable, so $220 in account receivable. In that business, What you do is you model and project what your account turnover is going to be. So you may wake up three months from now and cancel that policy because you think you can get a better deal or you want a different deal. You're unhappy with the deal you've got. So there is some modeling of the turnover of your receivables, of people canceling. What happened here was the cancellation rates were way higher than the model reflected. And that causes obviously two things, a write-down of your receivables by the remaining balance that has not been accrued in the income, and it can cause you to have to restate prior period earnings. And that was the big factor in that overall deal. The deal was backed by a very large, very well-known private equity firm that our bankers have had some experience with in the past, and they have typically backed their deals. In this case, at least to this time, they have not backed the deal. I think we began talking about this deal probably in the third quarter of last year, talked about it again in the fourth quarter, and we chose to write things down this quarter all the way. I would call that a one-off in our case. If we look across the remaining non-accruals in our book, I think the largest non-accrual loan we have is $10 million. So there's nothing else out there that looks anything like this. This is truly a one-off. David mentioned the other one. It's been a long-time client. It was a legacy client in the buy here, pay here car space. High performing company for 15, 18 years with us that we banked them. And they got a little more aggressive in their business model coming out of COVID. Poor timing. And I would differ the first one, which was a one offer and probably should never happen again. A loan we probably should not have made. Easy to say today. The second one is a loan we would have made today. and it's just basic business. The guys changed their strategy a bit. The strategy was not successful and it cost them dearly and it cost us a bit. So I'd say one is a way out there. Nothing else looks like that in the portfolio kind of thing that we're worried about. And the other one, you know, look, it was a bad day.

Well, you'd have to say the original insurance deal, we did have the backing of this big big sponsor right we didn't want it we didn't want to release it they wanted it released and so a huge major major bank took it and they released the guarantee on it our stupidity is enough us being stupid we bought a percentage back however a lesser percentage than what we had originally okay that's um that's very detailed color appreciate that um and then

David, I wanted to ask, when I look at your map, you're pretty dense in Texas. Is the strategy from here, you're obviously very focused on integrating these three acquisitions, but would the strategy from here be more density, or would you look to new markets? Are there other smaller markets in Texas that might have great deposits, other community banks? Just any thoughts on how you see the environment from that perspective?

You know as we mentioned before first of all I'd say you know we don't want to grow just to be grow but have but having said that you know scale has just become very very important I look I look at our income statement and I see you know just buying equipment technologies like two million dollars a month sometimes that doesn't count with the technology we spend 75 80 90 million dollars a year on that so scale is important but we don't want to just say we grow to grow We still, as we mentioned earlier, I think that we really think that a real bank, the real value in it is the core deposits where if you don't want to grow loans, that you can still buy bonds and still have a good 1.5% plus return. I think that we've all talked about it. We like where we're at right now, but we also, we still, again, our primary objective is still to put these three deals together, but Our deal is to really be, and we grew up in the times when you had a Texas Commerce and a First City and an Ally and all that. And it's still our plan and goal to continue to make one of the Texas biggest banks, not just because it's big, but that can offer services from a technology standpoint to the biggest customers, to the smallest customers. And we'll continue to do that, but we're going to do it at a pace. We're not going to do it at a pace until we really can put these deals together. and really show you that everything that we can make the $6 or something since this year, we make the $7 or something since next year. We want to show everybody that we can do that and that like in the past when we promised that we'd bring the net margins up, we want to do what we say that we're going to do. But the future is still building that larger bank that we want to be for everybody.

Okay.

That's great, Calworth.

Thanks so much, David.

The next question will come from Janet Leigh with TD Cowan. Please go ahead.

Hello.

Good morning.

Good morning. I appreciate the near-term guidance you provided on expenses for the second quarter, just given a lot of moving pieces with some cost saves and Stellar in the third quarter. Is there some sort of Fuller expense guide you could give for the year or where the efficiency ratio could trend? Is this mid-40s level a good place to be or how should we think about the trajectory?

Janet, I don't know if I can give a specific guidance long term because we're still trying to integrate two banks and then Stellar coming in the second half of the year. But what we see said early on at least two banks that we merged, cost savings that we announced that we are working toward it, and we're going to achieve those cost savings. I mean, we're already getting some of the cost savings now, but most of them come when the integration of the system, what we mentioned in September, November, then when we're going to see that. Also, you know, with the stellar addition, we're going to probably see most of the cost savings next year, and we said, what, 35% cost savings, we feel very comfortable about the cost savings. on that side of it. So if you combine all together, I think the goal for us to get back to the, with all the cost savings and get back to the mid 40s, that will rerun historically 44, 45, 46%. So that's the goal and I think it is achievable.

Got it. That's fair. Thank you. And you said the loan accretion income, expected to stay around this $3 million to $4 million range on the loan side in the second quarter. Could you remind us where this could go with the seller in the third quarter, or could you maybe provide projections around the full PAA as opposed to just loan accretion?

Yeah, on the second quarter, yeah, it stays the same, $3 million to $4 million. With the addition of Stellar, I mean, it can a lot of change, right? It depends on the market rate environment when we do merge with Stellar July. So it's kind of hard to say. But I'll tell you when we did our projection, when we put together in January, we said that, you know, we're probably going to expect about at least on 2027, about 10 to 12 million dollars of interest, fair value income from Stellar. That's a pre-tax number. That's what we estimated. But again, a lot can change depending on the rate environment in July.

That was for loans and securities.

For loans, yeah, and securities are going to reprice. I think Stellar was about, what, three, three and a half margin. So they're going to reprice a little bit. Right. Another maybe 100 basis points or so. Right.

Got it. And the 370 NIM, that was the, that was the

Yeah, that's going to be our exit, meaning the end of the year combined prosperity bank and seller together. The 3-6 average. The 3-6 average for the year because we're just going to have seller for half a year.

Got it. All right. Thank you for taking my questions.

You're welcome.

The next question will come from Jared Shaw of Barclays. Please go ahead.

Good morning, thanks. I guess just on the $30 million charge-off that you had highlighted, was there a specific reserve associated with that prior to the charge-off?

Yeah, for that specific, we had a reserve half of it last year because I think when we kind of started seeing that, we reserved the rest of it and charged off this one. That's why we didn't see any of the P&L impacts this quarter because we provisioned half last quarter and we charged off the remaining half this quarter.

Okay, okay, thanks. And then on the Stellar deal, last quarter a couple times you mentioned that, you know, just given their underwriting and pricing, you didn't expect to see any runoff from that portfolio. But today it sounds like, you know, maybe there could be some runoff. What should we assume is potentially at risk from the Stellar portfolio of running off? And I guess what changed to change your view on that?

Kevin can jump in a minute. But again, I think we're just trying to prepare everybody that, you know, you have Stellar, you have Texas Partners Bank and American that just from an historic from historically, you know, that we have we have lost loans through through these deals. And again, don't we don't want to give somebody a deal that says, OK, you know, we thought it was great that they increased two hundred and something million dollars. But again, we don't want to come here and tell you We're going to have a 5% or 6% loan growth when historically we've seen things that I guess we're just being cautious, really.

Yeah, I'd say it's being cautious. I do think they underwrite much like we do. It does take, and again, I went through this on the other side in 2019 with a large lending staff. It takes six to nine months to get integrated into the system and have the underwriting is done at Prosperity in the forms and in the process. It takes a while and then lenders get used to it and things stabilize.

I think it's even more than that, Kevin. I think, you know, even I looked at what we did in our production this first quarter and it was definitely impacted by, you know, doing a DNA conversion, people trying to get their loans to the loan committee, doing three Working with three different banks to put it all together. So I think there's when you're doing this, I mean, you know, we increased our assets. You can do the math between 38 and 54 billion. That's a lot of increases. So to try to massage and put all this together, things are not going to be just exactly the way they were. And if you and I would say this, that if you if you think they're going to be exactly plus, you're going to have this exponential growth. I think it would be a mistake. I think right now we really need to focus on putting all this together, making sure everybody fits in good, and take our time in doing it right.

Great, thanks. And Jared, just to clarify one, in my mind I called provision, but that's the one I meant like specific reserve.

We put specific reserve on that loan, not provision expenses.

The next question will come from John Arfstrom with RBC Capital Markets. Please go ahead.

Hey, thanks. Good morning. I might have missed this, but Kevin, can you touch on the warehouse lending business and your outlook there?

Yeah. Warehouse, as you know, John, averaged $1.207 billion, I think, for the quarter, but we closed out at $1.430 billion something, maybe $1.432 billion or $1.433 billion. So I It ended up the quarter really strong. It's backed off a bit from there. I think yesterday it closed at about a billion 240, billion 238, something like that. I think it'll be higher on average in the second quarter than it was in the first. So I'll call it a billion three to a billion 325.

Because even our own mortgage company, we're finally seeing where they're making money and Most of our mortgage companies are doing okay. They're doing pretty well. Yeah, so probably ought to be a little better.

Okay, good. And then maybe also, Kevin, you talked about construction and being a little more cautious there due to competition, but there was still decent growth for the quarter. Was that acquisition driven or is there activity that you guys are putting on the balance sheet now?

Now, construction's been weak. What I was saying is we're losing out on a lot of construction deals because of the competition in the market is willing to do it with less recourse and way cheaper spreads to SOFR. And we are looking at establishing a bucket for a handful of clients that would be our A-plus rated clients where we might be willing to do things at a little cheaper rate and a little less recourse.

The bottom line is we lost some really larger deals, $100 million plus deals, because, again, we just weren't willing to go down to the pricing and the terms and conditions that those guys were willing to do, and we could buy a bond and not have the risk and still make the money.

Okay. David, one for you. This may be an odd question with your stellar team in the room, but you got beat up last quarter on the pricing and during the quarter on the price paid. Just curious how you're thinking about it a quarter later. Sounds like you still believe the accretion is there and the 2027 EPS numbers are there. And maybe Stellar is doing better than planned. But how are you feeling about this a quarter later? Just it's a big deal, obviously.

I couldn't be happier. I think it's a great deal. I mean, I think there's a huge difference between one bank and another bank. And I think I'm not just saying this because these guys are in here. If we were ever to sell our bank, I wouldn't sell for anything less on a multiple than these guys that we paid for. So I think it's top notch. I think all the analysts, at the end of 2027, when we make the money we're going to make, I think everybody's going to say, I knew it the whole time. But right now, I got to prove it. But you guys are all going to say, well, we knew it the whole time. And that's when the stock is going to go to $95 or $100. But you know which I'm telling you it's going to happen and it's and I feel better than I have in three years about all these different deals.

Yeah John this is Kevin I look we did get a little dinged up right we the market thought we paid a little too much and they thought we're what we thought we were using estimates that were greater than the market had for for 2026. But here's right but I think step you know we did it based upon you know A deep dive of due diligence and knowing these people really, really well in the course of putting the acquisition together and feeling comfortable with their internal numbers. And it's really rare for us to put out numbers that are above the consensus when we're doing a public deal. It's rare for anybody to do. We did it. And I think they've proven up with a clean quarter that's really good this quarter and My guess is, well, when we look back at all of this, the estimates that we used for Stellar for 2026 are going to be better than the one, they're going to, we're going to end up doing better than even the ones we used.

Well, I would even go a step further that, and Bob can jump in if he wants, but I know this goes for American and probably for Bob both. If they wouldn't have got the price that they wanted, they wouldn't have done the deal. I mean, they know what they're worth, Bob. You may jump in and say that, but I wouldn't. I mean, I wouldn't do a deal if we knew we were worth more.

No, absolutely. David, I'm kind of thinking now we didn't pay enough.

I knew that was coming.

Nice try, Bob. All right. Thanks a lot. I appreciate it. Thanks, John.

Thank you.

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.