Prosperity Bancshares Inc Q1 FY2026 Earnings Call

Good day, and welcome to the Prosperity Bancshares First Quarter 2026 Earnings Conference Call. 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 Egge, 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 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. 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 1, 2026, and completed the merger of Southwest Bancshares, Inc. on February 1, 2026, and announced the merger of Stellar Bancorp on January 28, 2026, for which we have now received all necessary regulatory approvals and expect to complete on July 1, 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's 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 the 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 the 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 $0.34 per diluted common share. Excluding these charges, the net income was $149.9 million and net income per 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 31, 2026, an increase of $3.3 billion or 15.1% compared with $21.9 billion at March 31, 2025. The linked quarter loans increased $3.4 billion or 16% from $21.8 billion at December 31, 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, an increase of $4.6 billion or 16.4% compared with $28.0 billion at March 31, 2025. Our linked quarter deposits increased $4.1 billion or 14.6% from $28.4 billion at December 31, 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 their normal seasonal decrease. Prosperity has strong noninterest-bearing deposits of 32.4% of the total deposits as of March 31, 2026, 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 the three months ending March 31, 2026, compared with 3.3% for the three months ending December 31, 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: our nonperforming assets totaled $122 million or 33 basis points of quarterly average interest-earning assets as of March 31, 2026, compared with $150 million or 46 basis points of quarterly average interest-earning assets at December 31, 2025. The allowance for credit losses on loans and off-balance sheet credit exposure was $421 million at March 31, 2026, compared with $386 million at March 31, 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 was mitigated somewhat by the total being comprised primarily of two credits, both of which were unique in nature, and we believe do not represent a trend in potential future losses. This is evidenced by the lack of any material additions to nonperforming loans in quarter 1, 2026, and only two nonperforming 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 start-up 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 a history of backing its investments, it failed to do so this time. The smaller charge-off was with a customer who legacy banked with us 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 1, 2026, and the operational integration is scheduled for September 2026, and the merger of Southwest Bancshares was completed on February 1, 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 Stellar Bancorp and expect to complete the transaction on July 1, 2026. While we continue to have conversations 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 headquartered 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 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. Growth in 2026 is expected to be steady, and the state's 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 will continue to work hard to help 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 provision for credit losses for the three months ended 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 an increase of $46.2 million compared to $275.0 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 an increase of 21 basis points compared to 3.3% for the quarter ended December 31, 2025. Excluding accounting adjustments, the net interest margin for the three months ended March 31, 2026, was 3.44% compared to 3.10% for the same period in 2025 and 3.26% for the quarter ended December 31, 2025. The increase in net interest income and net interest margin during the first quarter 2026 is primarily due to repricing of earning assets and the addition of American Bank and Texas Partners banks during this period. The fair value loan income for the first quarter 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 million to $4 million. Noninterest 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. Noninterest 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 Partners Bank during this period. For the second quarter of 2026, we expect noninterest expense to be in the range of $176 million 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 the quarter ended December 31, 2025, and 45.7% for the same period in 2025. Excluding merger-related expenses, the efficiency ratio was 47.6% for the three months ended March 31, 2026. The bond portfolio metrics at March 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 for some details on loan and asset quality.

Thank you, Asylbek. Nonperforming assets at quarter end March 31, 2026, totaled $122.107 million or 48 basis points of loans and other real estate compared to $150.842 million or 69 basis points at December 31, 2025. Since March 31, 2026, $7.936 million of nonperforming assets have been removed or put under contract for sale. For March 31, 2026, the nonperforming asset total was made up of $108.714 million in loans, $136,000 in repossessed assets and $13.257 million in other real estate. Net charge-offs for the three months ended March 31, 2026, were $41.309 million compared to net charge-offs of $5.884 million for the quarter ended December 31, 2025. There was no provision to the allowance for credit losses during the quarter ended March 31, 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 31, 2026. The average monthly new loan production for the quarter ended March 31, 2026, was $312 million compared to $314 million for the quarter ended December 31, 2025. Loans outstanding at March 31, 2026, were approximately $25.288 billion, compared to $21.805 billion at December 31, 2025. The March 31, 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.

The first question will come from Catherine Mealor with KBW.

I wanted to 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 I'm 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 should be rolling forward to next quarter?

I'll answer, Catherine. We are pleased with our margin expansion this quarter. As I mentioned, it was contributed from our asset repricing during the first quarter and the addition of two banks, which helped with the increase in the margin. But if you look at our rate-track model, and it's based on a static balance sheet, looking to the second quarter, we see that our projected margin for the second quarter will be flat to slightly higher than the first quarter. The reason is that there were several factors that impacted Q1. We saw continued repricing of earning assets, but we also recognized about $4 million of loan income from nonaccrual loans, which we don't expect in the second quarter. Also, having fewer days in the calendar quarter historically helped our margin. So those two items had an impact, but overall, we are very pleased with the expansion.

Do you want to go ahead and give them some kind of guide?

So we continue on the guidance. If you look longer term, and I'm going to include the Stellar Bank in our model for 2026, I think what the model shows is that we'll be exiting combined NIM around 3.70%, and having a full year of Prosperity and a half year of Stellar, the average model shows around 3.60% for 2026.

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

No, I think it's a good run rate. What we've done in the first quarter, in addition to bringing the bond book from the acquired banks, we also bought some securities. That's why you saw almost $1.4 billion including the bond portfolio. I think we will continue to buy. From now on, I see that the yield on bonds should increase a little bit from what we had in the first quarter.

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

So I think it was between 4.50% and around 4.85%. It was in between; when rates fluctuated, we were able to secure some at 4.85%.

The next question will come from Manan Gosalia with Morgan Stanley.

Can you hear me?

Yes, 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 maybe if I add on to that, there's 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 competition overall, loan spreads, deposit rates, loan growth and just your bigger-picture thoughts on the dynamics in the state?

Well, that's a big question. Even though it may be slower growth, there's probably still better growth than anywhere else in the United States. So I still think Texas is probably the best place to be as far as growth goes. People do complain about prices going up — groceries, gas, cars that used to cost $60,000 now cost $100,000. It has slowed some people down, especially lower-earning groups, but people still have money and they're still spending. For the long run, Texas still has tremendous growth. Every time another state enacts policies like taxing net worth, it makes states like Texas and Florida look better. Talking about competition, that is a big deal because you have a lot of banks that want to be in Texas. It's hard for them to get market share, and we're competing against them on loans day to day. On some of the bigger deals, where we were in the 6% price range, others were in the 5.9% range. When banks go into a new market, they often underprice to get market share. On the deposit side, you still see them offering higher advertised rates; for example, some noncustomers are being offered a 4% money market rate while we're closer to 3%. They're trying to buy business. We've lost several big deals because we haven't come down on price; we're trying to maintain our margin. We'll continue to do that. We've been through this before; it's not our first rodeo. We'll continue to do well. Stellar did better than we did this time, and they were up over $200 million — where they had been lagging before. We'll win. We have a number of big deals we're looking at now where I think we've agreed on price; we're just making sure we want to do the deal. Having said that, we have three mergers. Historically, you'll see some asset runoff after acquisitions; it's not unusual to have mid-to-single-digit or double-digit loan growth consistently, so if we can stay flat this year while integrating these deals, that's pretty good.

No, I agree with you, David. Prosperity excluding acquisitions has not had growth in the last couple of quarters. The market has gotten more competitive, particularly on very large construction deals, which we've always participated in. The market has gotten cheaper in terms of the rates those banks are willing to do those deals at and they come off at much lower levels of recourse. We have not played in that game, and it's cost us; we've missed out on some deals. To augment that, we're likely to set aside a bucket of, say, $750 million to $1 billion of commitments where we'll play in those markets with certain clients, very well-known folks that have been clients for a long period of time. We'll fight some of that off ourselves excluding what happens in the acquisitions. As David said, 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 again. We have three of them, so we'll be fighting those headwinds for the next year to 15 months to 18 months, and I think if we are flat during that period, overall we'll have done pretty well.

I'd even add that some of the out-of-state banks are offering 5.8% or 5.9%, and we can get 4.85% on a security with about a four-year average life. It's pretty hard to pay that lender rate, reserve money for loan loss and really go that low. If a customer brings a broader relationship, it's different; we'll give credit for that and may match lower pricing if it's not a dry relationship. Overall, core deposits are what make the bank and that's where we're focused. We're focused on increasing net interest income and net income for the shareholder over the next one to two years. I'm probably more excited than I've been in the last three years about our future. Our net interest margin got as low as around 2.75% to 2.90%, and our current outlook shows really strong net interest margin going forward. I think we're looking at net interest income increasing for the next two years, and I'm terribly excited for where we are today.

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

I think our main focus right now is the operational integration of these three deals. We're going from a roughly $38 billion bank to a $53 billion or $54 billion bank. So our primary focus is bringing these three deals together and hitting the consensus numbers that you analysts have out there. I don't think you ever want to say never on anything, but right now the focus is on integrating these transactions.

The next question will come from Dave Rochester with Cantor.

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 I was just curious where you're seeing new loan yields come in as the remaining fixed-rate loans are still rolling off here?

I don't think that if interest rates stay where they're at, our net interest margin targets are really good. We talked earlier about roughly a 3.6% average for this year and a 3.7% exit. For 2027, you might see around 3.8% net interest margin. If interest rates stay where they are, we'll hit or even exceed those levels. If interest rates fall 100 basis points, there will be some impact, but I don't think our deposit rates will fall as fast as they rose in past cycles because many of our customers didn't move rates up fully. So we may not come down as fast either. That gives you some color on the dynamics.

I'll add on the deposit side: we haven't decreased or changed our rates for the past few months. Based on the deposit growth we've seen and our core deposit growth, we are holding our own at current rates. A lot will depend on competition, but at current rates we don't need to increase rates. Over time, we do expect some overall deposit rate or cost of deposits to come down a little bit because some higher-yielding CDs are being repriced lower. But overall, as long as rates do not change materially, we should be at this level or lower by ourselves. If you add Stellar, Stellar has a bit higher cost of deposits, but the combined model shows a cost of deposits around 1.40%. On loan pricing, I think new loan yields are still a little bit higher right now.

On loan repricing, we're generally comfortable where we're at. We might participate on one or two deals to compete under 6% but for the most part we are not going to play that low-margin game. We'd rather buy securities in those instances than take on a dry relationship at a low spread and higher risk.

So are new loan yields a little bit higher where the book is right now?

A little bit higher.

A little higher.

Maybe one more on loan trends going forward. You mentioned flattish loans this year with all the deals closing and some runoff that you normally get. Looking at Stellar this quarter, they had solid loan growth that seemed fairly broad-based. With Stellar in the fold, after you have that little bit of runoff, do you think your organic growth profile can improve from where it has been over time?

Yes. Post any normal acquisition runoff, I do think, particularly with Stellar hitting its stride, we'll return to kind of low- to mid-single-digit growth, but it will take a while.

Even American Bank and Texas Partners are excited about where they are positioned and have done pretty well.

The next question will come from David Chiaverini with Jefferies.

So following up on the deposit side, what should we expect in terms of deposit growth? Should it trend in line with loans and be kind of flattish, with the loan-to-deposit ratio staying in the low 70s? How should we think about the deposit side?

Our deposit side should see normal organic growth with the exception of seasonal fluctuations, particularly with public funds. Historically, we've had 2% to 3% growth. One of the banks that joined us has some very large accounts that operate under a treasury system; they feel comfortable that we won't lose those accounts. However, it's always possible a handful of accounts of $30 million or $40 million each could affect us. For the most part, the banks joining us were in Texas, and we should see deposit growth from those deals. Regarding loan-to-deposit ratio, our policy doesn't prevent us from going above 85%, but once we start hitting 85%, we have to go in front of the Board to discuss it. We feel more comfortable in the 75% to 80% range.

Got it. 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? You've been a bit more active on buybacks recently. How should we think about that going forward?

We expect to be profitable and generate meaningful earnings; if that continues, you'll see buybacks when the stock price is attractive, as you saw when we repurchased shares at an average around $68. We have substantial capital, even with the combination of Stellar where we're paying some cash consideration, and we expect to continue buybacks if prices remain attractive.

On the Basel III benefit, we did a high-level analysis of the impact on mortgage loans and expect it to be beneficial; we estimate roughly a 50 basis point benefit to capital from the rule when it passes as it relates to mortgage loans.

From a capital standpoint, the combined earnings profile looks strong. Even after dividends, the combined entity could generate $500 million to $600 million a year of excess, which gives us flexibility to repurchase stock and continue deploying capital.

Yes, and on capital we feel well positioned.

The next question will come from Matt Olney with Stephens.

I want to go back to the Stellar Bank discussion. I think you mentioned improving loan growth at the bank, and it looks like adjusted net income at Stellar was almost $30 million in the first quarter, ex a few nonrecurring items. If I go back to the original assumptions when the deal was announced in January, it looks like the earnings projection from Stellar for the full year was $113 million. So if I annualize that first quarter, it seems like you're tracking well above that number. Was there anything 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 feel great about the earnings prospects entering into the second quarter, taking into account the cumulative nature of the growth we had in the first quarter. So we feel good about the path that we're on and what that implies.

We paid down on April 1 the last remaining piece of subordinated debt, so we actually see a benefit to margin that will come out as a byproduct of that.

For those of you who don't know, that was Paul, CFO at Stellar.

Great. And then I think you completed the core system conversion at the bank in February. I missed it earlier — could you remind us of the timeline expectations to complete the remaining conversions for each of the acquired banks?

Yes. Completing the DNA conversion was a huge deal. Under the old system, if you had a long weekend, getting everything back up to date could take a long time. Under this new system, we can update things in about 1.5 hours, which shows how much additional capacity we have. It was a huge effort over years to complete. We have three major deals and the DNA conversion in the midst of that has kept our plate full, and the team has done a miraculous job. Going forward, we're looking at September operational integration for American Bank, November operational integration for Texas Partners Bank, and for Stellar we're looking at March 8, I think.

The next question will come from Brett Rabatin with Stonex Group.

I wanted to go back to the credits, the two credits you talked about. You obviously have historically very low net charge-offs and really strong asset quality, so these two this quarter were an outlier. I was hoping 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 expected as collateral?

The big one was an insurance company that sold Medicare Advantage products. Their business was doing fairly well initially, but their receivable model relied on projected cancellation rates. They would accrue monthly payments and book the remainder as receivables; if cancellation rates increase materially, receivables get written down and you can end up restating prior period earnings. In this deal the cancellation rates were much higher than the model reflected, which led to the large write-down. The deal was backed by a very large, well-known private equity firm that has typically backed its deals; in this case, they have not backed it to date. We began discussing this deal in the third quarter of last year and chose to write things down fully this quarter. I'd call that a one-off in our case. Across the remaining nonaccruals in our book, the largest nonaccrual loan is about $10 million, so nothing else looks like this. The other charge-off was a long-time client in the Buy-Here-Pay-Here auto space — a legacy client for 15 to 18 years. They became a little more aggressive in their business model coming out of COVID, and poor timing led to losses. The first one was an outlier and probably a loan we should not have had; the second was a business decision that just didn't work out.

To add, on the original insurance deal, we initially had the guarantee from a big sponsor. They wanted to release, a major bank took it and released the guarantee; we purchased a smaller percentage back. In hindsight, that was poor judgment on our part to buy back a portion. It was a mistake.

The first one really is a one-off; the second was a bad day for a long-time client. Nothing else in the portfolio looks like either of those.

That's very detailed color, I appreciate that. David, when I look at your map, you're pretty dense in Texas. Strategically from here, and obviously you're focused on integrating these three acquisitions, do you see the strategy as more density in existing markets or expanding to new markets? Are there other smaller markets in Texas that might have great deposits or community banks you might target? Any thoughts on how you see the environment from that perspective?

We don't want to grow just to grow. Scale is important, as technology and systems cost money — sometimes substantial amounts — so scale matters. But we won't grow indiscriminately. Core deposits are crucial; if you don't want to grow loans you can buy bonds and still earn a good return. We like where we are and our goal remains to be one of the largest Texas banks so we can offer services from technology to the biggest and smallest customers. We'll continue, but at a measured pace, focusing on integrating these three deals and delivering on the margin improvements we projected. We want to do what we say we're going to do.

The next question will come from Janet Lee with TD Cowen.

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

Janet, I don't have a specific long-term guidance because we are still integrating two banks and Stellar comes in the second half of the year. We have announced cost-savings initiatives for the two banks we've merged, and we are working toward achieving those. We're already getting some savings now, but most come when the system integrations occur in September and November. With Stellar, most cost savings will likely be realized next year; we're targeting roughly 35% cost savings with Stellar. Combining all of this, the goal is to get back to the mid-40s efficiency ratio that we ran historically — in the mid-40s, 44% to 46% — and we believe that goal is achievable.

Got it. That's fair. You said loan accretion income is expected to stay around the $3 million to $4 million range in the second quarter. Could you remind us where this could go with Stellar in the third quarter, or perhaps provide a projection around the full PAA as opposed to just loan accretion?

For the second quarter, yes, $3 million to $4 million. With the addition of Stellar, things can change depending on market rates when the merger occurs in July. When we put our projections together in January, we estimated about $10 million to $12 million of fair value income from Stellar on a pretax basis for 2027, but a lot can change depending on the rate environment in July.

That estimate was for both loan and securities fair value income.

And to clarify, the 3.70% NIM was our target for exit NIM — that is, the end of the year combined Prosperity and Stellar together.

The next question will come from Jared Shaw of Barclays.

On the $30 million charge-off you highlighted, was there a specific reserve associated with that prior to the charge-off?

Yes. For that specific loan, we had reserved half of it last year when we began seeing issues, and we reserved the rest and charged off this remaining portion this quarter. That's why you didn't see further P&L impact this quarter because we had provisioned half last quarter and charged off the remaining half this quarter.

Okay. And then on the Stellar deal, last quarter you mentioned that given their underwriting and pricing, you didn't expect to see much runoff from that portfolio. Today it sounds like maybe there could be some runoff. What should we assume is potentially at risk from the Stellar portfolio of running off? What changed to alter your view?

Kevin can add more detail, but we're preparing everyone that when you have Stellar, Texas Partners Bank and American, historically we have lost loans through acquisitions. We're being cautious. We don't want to overpromise loan growth when historically we've seen some declines. The DNA conversion and integration work in the first quarter impacted production; when you do large integrations, production and retention can be impaired temporarily. We're trying to be realistic and cautious.

Yes, it's a cautious view. Stellar underwrites much like we do, but it takes time — six to nine months — to get fully integrated into Prosperity’s systems, forms and underwriting process. Lenders need time to get used to the new process and then things stabilize.

I’d add that our production in the first quarter was affected by the DNA conversion, people getting loans to committee, and working across three banks to put everything together. With so many operational changes, things aren't going to behave exactly as if nothing changed. We need to focus on putting everything together and doing it right rather than expecting exponential immediate growth.

Just to clarify one thing: when I mentioned provision earlier, I meant specific reserves were put on that loan.

The next question will come from Jon Arfstrom with RBC Capital Markets.

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

Yes. Warehouse averaged about $1.207 billion for the quarter, and closed the quarter at roughly $1.432 billion. It has backed off a bit since then; yesterday it closed at about $1.238 billion. I think average warehouse will be a bit higher in the second quarter than in the first — I'd call it about $1.25 billion to $1.3 billion on average.

Our mortgage company is finally seeing profitability and most of our mortgage companies are performing better, so warehouse should improve.

Okay. And then construction — you mentioned being cautious due to competition. There was still decent growth for the quarter. Was that acquisition-driven or is there activity you guys are putting on the balance sheet now?

Construction has been weak. We're losing out on a lot of construction deals because competitors are willing to take lower recourse and cheaper spreads to SOFR. We're looking at establishing a bucket for a handful of A+ clients where we might do deals at slightly cheaper rates and lower recourse, but generally we are cautious.

David, one for you. You got dinged last quarter on the pricing and during the quarter on the price paid for Stellar. Just curious how you're thinking about it a quarter later. It sounds like you still believe the accretion and the 2027 EPS numbers are there. How are you feeling about it now?

I couldn't be happier. I think it's a great deal. There's a huge difference between one bank and another bank, and I believe we got a top-tier institution. If we were ever to sell our bank, I wouldn't sell for less than the multiple we paid. I'm not just saying that because they're here. I feel very confident that when we deliver the results in 2027, people will say they saw this all along. Right now I need to prove it, but I'm more confident than I've been in three years about these deals.

We did take some criticism that we paid a bit more than the market expected and used estimates above consensus for 2026. But that was based on deep due diligence and knowing the team well. It's rare for us to put out numbers above consensus when doing a public deal. We did it, and they have proven up with a clean, very good quarter. My view is that the estimates we used for Stellar for 2026 will prove to be conservative and we'll likely do better.

Absolutely, David. I'm kind of thinking now we didn't pay enough.

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.