Prosperity Bancshares Q2 2026 Earnings Report

Prosperity Bancshares EPS Results

• Actual EPS: $1.62
• Consensus EPS: $1.50
• Beat/Miss: Beat by +$0.12
• One Year Ago EPS: $1.42

Prosperity Bancshares Revenue Results

• Actual Revenue: $391.26 million
• Expected Revenue: $380.73 million
• Beat/Miss: Beat by +$10.53 million
• YoY Revenue Growth: +25.90%

Prosperity Bancshares Announcement Details

• Quarter: Q2 2026
• Date: 7/29/2026
• Time: Before Market Opens
• Conference Call Date: Wednesday, July 29, 2026
• Conference Call Time: 11:30AM ET

Prosperity Bancshares (NYSE:PB) is a bank holding company headquartered in Houston, Texas. Through its principal subsidiary, Prosperity Bank, the company provides a range of banking and financial services to individuals, businesses and institutional customers.

Prosperity Bank offers deposit accounts, commercial and consumer lending, mortgage and real estate loans, treasury management, cash management, online and mobile banking, and other related financial services. Its lending activities support businesses, agricultural customers, real estate projects and consumers.

Founded in 1983, Prosperity Bancshares has expanded through organic growth and acquisitions. The company serves customers through a network of banking locations across Texas and Oklahoma, with a presence in many metropolitan areas and communities throughout those states.

Prosperity Bancshares Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Stellar Bancorp merger completed July 1, 2026, adding 52 banking offices in Texas and creating potential for significant synergies. Management expects $20–$25 million of additional pre-tax savings from American Bank and Texas Partners, plus approximately $80–$85 million from Stellar once integrations are completed.
• Positive Sentiment: Second-quarter core net income rose 20.4% year over year to $162 million, or $1.62 per diluted share, excluding one-time items. Including estimated Stellar earnings, management cited an annualized core net income run rate of approximately $780 million before future cost savings.
• Positive Sentiment: Management raised its net interest margin outlook modestly, still expecting approximately 3.70%–3.75% by year-end 2026 and 3.80%–3.85% for 2027. Asset repricing and Stellar’s accretive balance sheet are expected to support margin expansion, although higher money-market deposit rates could temper the gains.
• Neutral Sentiment: Company-wide loan balances are expected to remain roughly flat through the rest of 2026, despite improved quarterly production and a $1.2 billion Stellar pipeline. Executives cited unusually aggressive pricing from large regional banks, including some transactions near SOFR plus 125 basis points, and emphasized profitability over volume growth.
• Neutral Sentiment: Asset quality remained broadly stable relative to the enlarged balance sheet, though non-performing assets increased to $131 million, or 52 basis points of loans and other real estate, from 48 basis points in the prior quarter. Net charge-offs fell sharply to $2.2 million, no provision was recorded, and management believes the allowance provides substantial coverage.

Presentation

[Operator]

Good day, and welcome to the Prosperity Bancshares second quarter conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone 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. Please go ahead.

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' second 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 am Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. 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. Robert Franklin, Vice Chairman and former CEO of Stellar Bancorp. Randy Hester, Chief Lending Officer. Mays Davenport, Director of Corporate Strategy. Bob Dowdell, Executive Vice President, and Ray Vitulli, Houston Area Chairman and former President of Stellar Bancorp. David Zalman will lead off with a review of the highlights for the recent quarter.

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

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 the 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.

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

Additional information concerning factors that could cause the 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.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2026 conference call. I am excited to announce that on July 1, 2026, Prosperity Bancshares completed the merger of Stellar Bancorp and its wholly owned subsidiary, Stellar Bank, headquartered in Houston, Texas. Stellar Bank operated 52 banking offices, including its main office in Houston and banking offices in the Houston, Beaumont, and East Texas areas, and in Dallas, Texas. I am also pleased to announce that Robert Franklin, former CEO of Stellar Bancorp, and Joe Swinbank, a former Stellar director, have joined the Prosperity Bancshares Board of Directors, and that Ray Vitulli, former CEO of Stellar Bank, and Pat Parsons, a former Stellar Bank director, have joined the Prosperity Bank Board of Directors. Pat was instrumental in building Stellar's Beaumont franchise over the years.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

With regard to earnings, excluding the gain on the Visa Class B-2 stock exchange and net of investment security sale that we had and merger related expenses, net income was $162 million and earnings per diluted common share was $1.62 for the three months ended June 30, 2026, compared with $135 million, or $1.42 per diluted common share for the same period in 2025. This represents a 20.4% increase in net income and a 14.1% increase in diluted earnings per share. These earnings for the second quarter of 2026 do not reflect any contribution from Stellar. Excluding one-time merger related expenses and charges related to security sales, Stellar had $42.1 million in pre-tax, pre-provision core income. Assuming a 21% tax rate, Stellar's second quarter net income would have been approximately $33 million.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Annualizing this amount for Stellar and Prosperity second quarter, core net income after excluding the non-recurring items shows an annual run rate of approximately $780 million. This does not reflect any cost savings that we expect to achieve after the operational integrations of American Bank in September, Texas Partners Bank in November, and Stellar Bank in March of 2027. As mentioned on prior calls, these are the results we expected, and we believe these tailwinds should continue to be positive for the near future. With regard to loans, loans were $25 billion at June 30, 2026, an increase of $2.8 billion or 12.8%, compared with the $22.2 billion at June 30, 2025. This was primarily due to the American Bank and Texas Partners Bank mergers.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Loans, excluding warehouse purchase program loans, were $23.7 billion at June 30, 2026, compared with $23.8 billion at March 31, 2026, a decrease of $117 million. We experienced pay downs this quarter with our one to four family residential portfolio decreasing $100+ million, as well as other large pay downs. We also are focusing on the integration with our new partners. Our deposits were $32.6 billion at June 30, 2026, an increase of $5.1 billion or 18.7%, compared with $27.4 billion at June 30, 2025, primarily, again, due to the American Bank and Texas Partners merger. Our linked quarter deposits decreased $33 million from $32.6 billion at March 31, 2026. However, our non-interest bearing deposits increased $159 million during the second quarter of 2026. Excuse me. Our non-interest bearing deposits of $10.7 billion at June 30, 2026, represent 32.9% of our total deposits.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

The net interest margin on a tax equivalent basis was 3.47% for the three months ending June 30, 2026, compared with 3.18% for the same period in 2025, and 3.51% for the three months ended March 31, 2026. The net interest margin in the first quarter of 2026 was impacted by a one-time loan interest income of $4 million from a non-accrual loan. Excuse me. The net interest margin continues to be positively impacted by the repricing of assets, as we predicted and mentioned during previous calls, and Asylbek will give you a lot more color, but we are really excited where our net interest margin is headed. Asset quality.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Our non-performing assets total $130 million, or 34 basis points of quarterly average interest-earning assets at June 30, 2026, compared with $122 million, or 33 basis points of quarterly average interest-earning assets at March 31, 2026, and $110 million, again at 33 basis points of quarterly average interest-earning assets at June 30, 2025. So you saw somewhat of an increase there, but based with the new banks that have come in with this and the amount of assets, we are still basically at the same ratio. The allowance for credit losses on loans and off-balance sheet credit exposure was $420 million at June 30, 2026. The allowance for credit losses on loans was 2.9x the amount of non-performing assets. With regard to acquisitions, we are excited about the synergy we have with our new partners, Stellar Bank, Texas Partners Bank, and American Bank.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Our top priority is the operational integration of all three banks, and our combined teams are working very hard to ensure they are successful. While we continue to have conversation with other bankers regarding potential acquisition opportunities, we remain focused on the integration of our three transactions. Texas has one of the strongest and most diverse state economies in the U.S., ranking as the second largest by GDP after California, and approximately the eighth largest economy in the world. Oklahoma has a smaller but stable economy, heavily influenced by oil and gas with more modest growth. Texas continues to shine as more people and companies move to the state because of the business-friendly political structure and no state income tax. Prosperity continues to focus on building core relationships, maintaining sound asset quality, and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

We intend to continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone involved in our company for helping to make it the success it has become. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended June 30, 2026, was $330.6 million, an increase of $62.8 million compared to $267.7 million for the same period in 2025, an increase of $9.4 million compared to $321.2 million for the quarter ended March 31, 2026. The net interest margin on a tax equivalent basis was 3.47% for the three months ended June 30, 2026, an increase of 29 basis points compared to 3.18% for the same period in 2025, and a decrease of 4 basis points compared to 3.51% for the quarter ended March 31, 2026. The linked quarter margin decrease was primarily due to the previously mentioned one-time loan interest income of $4 million recorded during the first quarter of 2026.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Excluding this one-time loan income, net interest margin increased by 1 basis point on a linked quarter basis. Excluding first accounting adjustments, the net interest margin for the three months ended June 30, 2026 was 3.41%, compared to 3.14% for the same period in 2025 and 3.44% for the quarter ended March 31, 2026. The fair value loan income for the second quarter of 2026 was $4 million, compared to $3.7 million for the first quarter of 2026. Fair value loan income for the third quarter of 2026 is expected to be in the range of $6 million-$8 million. Non-interest income was $60.7 million for the three months ended June 30, 2026, compared to $46.5 million for the quarter ended March 31, 2026 and $43 million for the same period in 2025.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

The higher non-interest income during the second quarter of 2026 includes a net gain of $8.2 million resulting from the conversion of Visa stock, partially offset by loss on the sale of investment securities. The non-interest expense was $176.2 million for the three months ended June 30, 2026, compared to $217.3 million for the quarter ended March 31, 2026 and $138.6 million for the same period in 2025. The first quarter included merger-related expenses of $42.5 million. For the third quarter of 2026, we expect non-interest expense to be in the range of $244 million-$250 million. This includes the additional Stellar Bank operations. However, this projection does not include any one-time merger-related expenses associated with the Stellar merger. The efficiency ratio was 46% for the three months ended June 30, 2026, compared to 59.2% for the quarter ended March 31, 2026 and 44.8% for the same period in 2025.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

The bond portfolio metrics at 06/30/2026 have a modified duration of 3.7 and projected annual cash flows of approximately $2.2 billion. I will now provide a high-level overview of Stellar financial performance for the second quarter of 2026. Stellar also delivered strong financial results during the quarter. Stellar's net interest income before provision for credit losses for the three months ended June 30, 2026 was $106.4 million, an increase compared to $105.9 million for the quarter ended March 31, 2026. The second quarter results included one-time merger-related expenses and losses related to the sale of certain investment securities. Excluding these one-time charges, Stellar's adjusted pre-tax, pre-provision net income was $42.1 million, an increase of $2.9 million compared to the first quarter of 2026. Now let me turn over the presentation to Tim Timanus for some additional detail on loan and asset quality. Timanus?

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

Thank you, Asylbek. Our non-performing assets at quarter end June 30, 2026 totaled $130,576,000, or 52 basis points of loans and other real estate, compared to $122,107,000, or 48 basis points at March 31, 2026. Since June 30, 2026, $5 million of non-performing assets have been removed or put under contract for sale. The June 30, 2026 non-performing asset total was comprised of $119,271,000 in loans, $9,000 in repossessed assets, and $11,296,000 in other real estate. Net charge-offs for the three months ended June 30, 2026 were $2,183,000 compared to net charge-offs of $41,309,000 for the quarter ended March 31, 2026. There was no provision to the allowance for credit losses during the quarter ended June 30, 2026. No dollars were taken into income from the allowance during the quarter ended June 30, 2026. The average monthly new loan production for the quarter ended June 30, 2026 was $454 million.

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

Compared to $312 million for the quarter ended March 31, 2026. Loans outstanding at June 30, 2026, were approximately $25.028 billion, compared to $25.288 billion at March 31, 2026. The June 30, 2026 loan total is made up of 34% fixed rate loans, 33% floating rate loans, and 33% variable rate loans. I will now turn it over to Charlotte Rasche.

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

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

[Operator]

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're using a speaker phone, 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. Our first question comes from Janet Lee with TD Cowen. Please go ahead.

[Janet Lee, Analyst at TD Cowen]

Good morning.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Good morning.

[Janet Lee, Analyst at TD Cowen]

From the last call, you talked about that net interest margin reaching the 3.70% level as you exit 2026, and then getting into 3.80% range in 2027. Do you still have a good line of sight into reaching that level, or is there any changes to outlook versus before?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Janet, no. Our models are still showing us hitting, I think, Asylbek may want to jump in on this, but we're still saying that we'll end up with 3.75% at the end of the year, but our models are still showing 3.70%-3.80%.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah. So our answer, yes, it is. We've provided guidance of 3.70%. I think we're going to increase to 3.70%-3.75% because with addition, still very accretive to us. So the guidance stays the same. For 2027, we said 3.80%. I think it's still for whole year, 3.80%, 3.85%. That will be updated guidance.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

The only caution I would put as we start getting past the 3.7% in net interest margin, we're still very competitive. We offer some of the competitive CD rates, but we've been a little bit lower on our money market accounts, and we may want to raise our money market accounts rate just a little bit. So that may temper the net interest margin a little bit anyway. We may be, again, maybe trying to grow more organically at that point in time once we hit 3.7%.

[Janet Lee, Analyst at TD Cowen]

Okay. Makes sense. But the 3.80%+ range still contemplates that you're raising rates on your deposits?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Some rate, yes. We have increased some of them, so yes.

[Janet Lee, Analyst at TD Cowen]

Okay. Got it. I understand that the priorities is on the integration part, but on the Stellar side, perhaps, or even on the legacy Prosperity side, what are you seeing in terms of loan growth and demand there? It looks like outside of the mortgage warehouse, it was fairly stable quarter-over-quarter. Just wanted to see what you're seeing on that front.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Yeah. This is Kevin. I'd say for the remainder of the year, company-wide, still relatively flat for the remainder of the year. That does include Stellar has got a pretty robust pipeline, [$1.2 billion-ish]. Right?

[Kevin Hanigan, President and COO at Prosperity Bancshares]

They feel as though they'll grow their loans. They grew them about $200 million in the first half of the year. They'll probably grow them another $200 million in the back half of the year. But overall for the company, I would call it flattish for the remainder of the year. Maybe on the better news front, as Tim said, production has been picking up, and we have several hundred million, probably closer to $400 million of construction deals, which we've approved so far this year that are booked. They're in our pipeline. They will not provide any fundings this year as all the equity has to go into those deals first. But beginning in the first quarter and more materially in the second quarter of next year, the pull-through of those deals is going to start generating some positive overall company growth.

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

This is Tim. Everything that Kevin said is accurate, in my opinion. We do forecast stability going forward. We have a decent pipeline of loans. We see decent loan activity out there in the marketplace. Really, the only thing we see that is a hindrance is some of the very, very aggressive structure and pricing that the competition is putting forward. We have to be cognizant of that and careful with it. Basically, everything looks decent right now.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Yeah. As Tim said, it is no news to all of you on the call, but credit spreads are at 25 or 30 year lows across the risk spectrum. Some things out there are just getting to the point of being ridiculous. We have looked at two meaningfully large transactions in the last two weeks priced at SOFR 125. The math on that yields you an opening day coupon of like 483. Which is ridiculously low. It is not like either one of those things came with massive amounts of demand deposits in a relationship. Just risk reward across the spectrum right now is, I think slightly mispriced.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I'll give you a little bit more color because I think that, no disrespect, but the analysts continue to want to show just the growth in the loans and growth all the time. But I think you need to take profitability into consideration. Just to give you a little color, last week we had a loan at loan committee, and it was a grade A company, there's no question about it. But it was a $20 million credit, and it was priced at, with especially some of the regional banks coming from outside the state trying to make a mark inside the state, they priced it at a seven-year fixed rate at 5.5% with a 25-year amortization. Of course, there's not many of any deposits with that.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

You have to consider, okay, do I want to make a loan at 5.5% or can I go with a pretty high duration or do I want to just go buy a mortgage-backed security with a 4.8 year duration and get 5%? So can we really operate on 50 basis points? I would tell you the difference is, no, you can't pay the lender, the officer, reserve for loan loss, and make it off of 50 basis points. So I guess my point is, we're really paying attention to profitability at the same time. It's not an excuse, but I think that you guys just need to know that too. We're not going to just put loans on. Most of the loans that come, the bigger loans that come, they're really more of a dry relationship.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

If you're really bringing over a customer, and you're bringing over the customer deposits and total relationship, that's a completely different story, and even that rate may make some sense. But the bigger, dry relationships just to grow loans, to grow loans at those kind of pricing, in my opinion, doesn't make a lot of sense.

[Janet Lee, Analyst at TD Cowen]

Got it. Appreciate all the color. I'll step back.

[Operator]

The next question comes from Brett Rabatin with StoneX Group. Please go ahead.

[Brett Rabatin, Analyst at StoneX Group]

Hey, good morning, everybody. Thanks for the questions. Wanted to start on the other income. I know there was some noise in 2Q with the gains in the securities. With the increase in other, was that related to anything in particular, and does that continue from here?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

On the other one, we had just about $2.5 million, just I would say annual income that we get that, but it is not going to be expected maybe next quarter. But it was annual income we generate about $2.5 million. Other than that, everything is a core except the, of course, gain on Visa stock. So if you are thinking going forward, I would say our range around $50 million Prosperity before Stellar, and Stellar has $5 million-$6 million. So I would say between $54 million-$56 million, that would be a good run rate on the non-interest income.

[Brett Rabatin, Analyst at StoneX Group]

Okay, that is great color. Appreciate that. I will step back. David, you were just talking about your thesis on loans versus securities and with where the bond market has moved. I was just curious if there was any maybe increased appetite to actually grow the securities portfolio from here, and just thoughts on how you view the securities portfolio size kind of post-Stellar integration.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Well, again, our first focus will always be loans. But on the other hand, when the price is getting to where it is right now, you really can't. We're not going to put a bunch of stuff on the books just to grow loans and not be profitable and take the risk. I would say, I think you'll continue to see we're focused on building loans first, but whatever we don't, we'll continue to put into the bond market. We still grow organically. It's still hard for you guys to see, but when we strip out the banks that have joined us, I think, Kevin, you did a deal showing yesterday that our deposits actually have grown organically about 3.2%. Once things only stabilize, we'll still have 2%-4% organic deposit growth all the time.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

It's just when you put all these things together and some customers come, some customers leave, it'll take a year or so, but we'll always have organic growth. That in itself always outproduces what we are able to put loans sometimes. I think you'll have a combination of both growth in loans and securities really going forward.

[Brett Rabatin, Analyst at StoneX Group]

Okay. If I could just ask one quick last one just around, it sounds like you guys are still seeing some irrational stuff on the lending side, but the monthly loan production was obviously stronger linked quarter. Would you guys attribute that to just increased activity in the markets, customer gains? Anything in particular you would point to just kind of describe the linked quarter improvement in loan production?

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

Yes. Once again, we see things as being very stable, and maybe growing a bit. Our people are constantly out there trying to bring customers in, and that obviously includes loan customers as well as deposit customers. The problem with the pricing and the structure that we're seeing in the market, those things historically come and go. Right now they're here, we're having to deal with it. But how long it lasts, I guess is anybody's guess. I think there's reason to think that we can improve our loan growth.

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

Therefore improve our loans outstanding. You have to understand that quite often the loans that we put on the books do not fund right away. They are construction loans. There are different types of loans where equity has to come in and get funded first. So it can be a few months before we start funding those loans. So, that is a normal time delay. That is a good thing, not a bad thing. So I see a lot of positive things out there, and not that many negative things other than the current structure that we are having to deal with on a competitive basis.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

The bottom line, Tim and Brett, again, Texas is still growing. You are still seeing businesses move into Texas. You are seeing population growth and business growth. So I think we are still going to have opportunities to grow and build a portfolio. We saw more production this time. A lot of it was pay downs, too. Just the one to four families, if you look at it was over $100 million decrease. Again, we are getting pay downs in that in the housing market. People have not been willing with the higher interest rates to lock in and to buy the one to four families. So a lot of our pay downs were in that category right there. But Texas, it is probably the best market out there. There is just no question about it.

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

That is absolutely correct. Oklahoma is doing well also. From a geographical standpoint, everywhere we operate right now looks good.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Again, we are probably more cautious. We are probably more focused on profitability than some of the other banks, because we do not want to just put loans on the books just to say that we have grown loans too at the same time. We are trying to balance that out.

[Brett Rabatin, Analyst at StoneX Group]

Okay. That is great. Appreciate the color, guys.

[Operator]

The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

[Manan Gosalia, Analyst at Morgan Stanley]

Hi, good morning.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Good morning.

[Manan Gosalia, Analyst at Morgan Stanley]

You spoke about credit spreads being at multi-decade lows and the $20 million credit line. I guess the question is how widespread is that competition on structure and pricing? Is that happening for a specific loan segment like construction or a specific type of client where there might be a higher likelihood maybe of getting other business down the line? Or is it widespread across construction, CRE, middle market C&I?

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Yeah. The SOFR 125s are outliers. That's two deals, both of them pretty recent. I'd say that's two deals that I think we go back all the way back into December, January timeframe. It's two deals from then to now. So it was two recent deals, very large, prominent clientele. Asylbek can probably give you a little bit of color on originations and pricing on originations at both at Stellar and at Prosperity for the last quarter that might help you understand what we are doing.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I would also say, though, that the one that I described with the seven-year fixed rate with 25-year amortization at 5.5% is not unusual, and those are loans that everybody's bidding on. They're not bringing deposits to the bottom line. That's loans like on one to four family, not one to four family, multifamily units, retail centers, office buildings, and stuff like that. It's just going to the lowest bidder for the most part.

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

Asylbek, let me mention before you start that it is not across the board. It is primarily the larger loans. What we're seeing more often than not is the large banks or relatively large banks that have recently entered the Texas market or are trying to enter the Texas market, and they're focused on those larger loans. They make a bigger splash that way, and it's understandable.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I think that is a good point, Tim. Not everybody is doing this.

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

It is not everybody.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

If you ask me, I can put them on one hand, and I do not even need all five fingers.

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

Yes. It is mostly the bigger loans.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

But it's a couple of banks that have come in, more of the big regionals are trying to buy their way into the market. I'm not saying that they're wrong. When we go into a market before we did a lot of mergers and acquisitions, if we started to open up a banking center or something, we would give special deals, too, and I guess that's what they're trying to do at the same time. But it's still not across the board, but these are all very large loans, and it's just rate driven, and I think that's the way they can say that they're making a splash. That's just my opinion.

[H.E. Tim Timanus, Chairman at Prosperity Bancshares]

Right. Asylbek.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah. I was just going to give the facts. The average loan production for Q2 that Tim mentioned was $454 million. The average rate on that blended was around 6.5%, and I think when we looked at Stellar's number, too, I think the new loans they're putting up also around 6.5%. So we're comparable at that point. So we know that our fixed loans and some loans are going to reprice at the higher rate than at this rate.

[Manan Gosalia, Analyst at Morgan Stanley]

That's all very helpful color. I really appreciate it. I guess when we talk to some of the other banks, they've been talking about looking at the all-in returns of their client relationships, not just the loans and deposits, but also I guess cash management, investment banking, et cetera. So I guess the question for you is, as you do more acquisitions, as you grow the size of the balance sheet, is there anything that you need to invest in on the product side or on the fee side to capture more of the economics of the client?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Well, I think that is the good news, is that over the last three years, we spent a lot of time, money, and energy on our new technology. We had our own computer conversion that we had from, we were on Fiserv from one platform to the DNA product. If we would not have done that and spent all that money and time, there is no way that we could have done these three deals that we are doing right now. I think that we are well-positioned because we did spend the time, the money, and the energy to let us know that we did want to be a bigger bank. To do that, we had to have the technology, and I think that you are seeing that growing.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I think that we are even bringing in some really good people, especially at Texas Partners, that has a lot of experience and a lot of big bank experience with treasury management, and I see our treasury management really growing, and our products, I think, are very, very good.

[Manan Gosalia, Analyst at Morgan Stanley]

Got it. Thank you.

[Operator]

The next question comes from Peter Winter with D.A. Davidson. Please go ahead.

[Peter Winter, Analyst at D.A. Davidson]

Good afternoon. I was wondering, Kevin, can you give an update on the mortgage warehouse business? Also, with this increase in mortgage rates, does that kind of virtually shut down refi activity?

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Yeah, refi activity is not all the way shut down. There's always been some, but it has been muted. As I just looked at the first 28 days of the quarter, so through last night, I think we're averaging right at $1.250 billion in outstandings, which is off from the $1.316 billion or whatever it was, $1.316 billion, I think, in Q2. So that's a little unusual for the third quarter. Usually, a third quarter is pretty good, particularly in July and August, with September being a little off. So it wouldn't surprise me if we average $1.2 billion to maybe as good as $1.225 billion in Q3, which is roughly $100 million off the average of Q2.

[Peter Winter, Analyst at D.A. Davidson]

Got it. Thank you. David, just how are you thinking about deposit growth in the second half of the year? You mentioned you might get a little bit more competitive on money market rates, but just how are you thinking about deposit rates going forward, assuming the Fed is on hold?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I was wondering if you were going to ask me a question, Peter. Thank you.

[Peter Winter, Analyst at D.A. Davidson]

You are welcome.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

No. It is hard to tell you that you are going to see a lot of growth because when you do these deals, there are some relationships that come and go. The only thing I can tell you is, and we really believe this, our numbers show this, that on an organic basis, on legacy deposits, we always have continued to grow 2%-4%. We do lose when new banks join us, and they may have been paying a higher interest rate than we have been willing to pay, or there may have been some circumstances where the customer just does not like us to be part of that deal. I think over time, if you ask me to make a guess, first of all, the Fed, a lot of people were talking about them raising rates because of inflation.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I think the Trumpster put this new guy in, Warsh, and he is not going to raise rates, in my opinion. Having said that, I think our modeling guy has put in, what, 0.25 point increase?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

At end of the year.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

End of the year. I don't think they will. Our models really show really great net interest margin, just where they are right now. It shows greater if interest rates go up, and it shows less if interest rates go down a little bit. But again, our customers have been very loyal because if you look at the last, you followed us, Peter, forever, and you just take a look at a graph of the last 10 or 20 years. We've had increased earnings, increased earnings per share, increased assets, increased deposits every year until we get 2022, we start seeing interest rates go up.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

You saw our net interest margin going down, and then we really got bombed in 2023 and 2024 with net interest margins going down to 2.75%, and of course, now we've built it back up to 3.50%, and we're going to 3.80%. Our customers have stayed with us, and they really didn't have to. They could have gotten stuff better at some other places. So when I commented earlier that once we get up to the 3.7%, I would like to see us bump our customers up a little bit. We still want to make good money, but I want to reward them for staying with us at the same time too, and possibly start growing more organically in that phase.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

That thing on the deposit, it's kind of hard to see. When you see our balance sheet, our deposits have decreased, but if you kind of peel off, there's a public fund that has seasonality each time, so it goes down second and third quarter. But if you strip out the public fund, our core deposits have increased in the second quarter.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Yeah. I was extremely excited this time because last year at this time, this is usually one of our worst quarters with public funds being down and we-

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Core deposits being down.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Core deposits, so I thought this was pretty good. We're usually a ceiling, pretty tough deposit deal. Yeah.

[Peter Winter, Analyst at D.A. Davidson]

That's great. Thanks, David.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

You are welcome.

[Operator]

The next question comes from Michael Rose with Raymond James. Please go ahead.

[Michael Rose, Analyst at Raymond James]

Hey, good afternoon, everyone. Thanks for taking my questions. Just wanted to start on the Stellar side. I think maybe Ray is there. Looks like the margin was up pretty meaningfully in the quarter, and looks like maybe there might have been some restructuring. Securities balances were down, and just trying to better understand how much of that benefit is driving the NIM guide that Asylbek laid out. Thanks.

[Ray Vitulli, Houston Area Chairman at Prosperity Bancshares]

Yeah, Michael, this is Ray. So we picked up 9 basis points on the NIM. There was about a $30 million pay down of sub-debt in there, but it is really driven by, as Asylbek said, we booked $525 million, plus we renewed another $600 million or $700 million. So that is about $1.1 billion, $1.2 billion in the quarter at an average rate of 6.50% on the loan side. Deposit costs held in there. And that was really most of the driver of that NIM expansion.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Just to add on the sale of security, it happened the end of the quarter, so there was no impact on the margin. So the margin that they have 9 basis point increase, that was a quarter increase on the margin.

[Michael Rose, Analyst at Raymond James]

Okay. Very, very helpful. Then maybe just one follow-up, just as it relates to the integration efforts and cost savings realizations of the two other deals, not Stellar. But where do you stand with those? I understand you gave the expense outlook. Just trying to better understand the puts and takes. Thanks.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah, on American and Partners Bank, we realized some of them, but most of the cost savings is going to come in after the system conversion, which we are scheduled for September or November. But assuming that all the integration is done, we still expect from American and Texas Partner additional $20 million-$25 million cost savings coming in. So we should see the full impact of it in 2027.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Before tax.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Before tax. Yeah, before tax. 2025, before tax. On the Stellar, we're still in line what we announced on the pre-merger, how much of savings we're going to get. So we expect to get that savings. It might be a little bit pushed back on the timing of it because the system conversion doesn't happen till March of next year because of the timing of everything going on with three acquisitions. So the timing might, but the cost savings that we projected is still in line on Stellar as well.

[Michael Rose, Analyst at Raymond James]

Okay, that's very helpful, Asylbek. Thanks for taking my questions. I'll step back.

[Operator]

The next question comes from David Chiaverini with Jefferies. Please go ahead.

[David Chiaverini, Analyst at Jefferies]

Hi. Thanks for taking the questions. You mentioned a couple times about your focus on profitability. Can you remind us how you're thinking about ROTCE targets once the conversions are done and the cost savings are fully baked in looking out to 2027?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

What kind of targets? I didn't catch that.

[David Chiaverini, Analyst at Jefferies]

Your return on tangible common equity.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Well, right now we are what? Running even right now, we are running about 15% return on tangible capital.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

15.5%.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I'm really hoping, again, you might have these numbers in your model, but I'm thinking if we hit the numbers we say we're going to hit, we should be hitting 17%, 18%.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah, I think initially we're going to take a hit because of the conversion, but we build it up very quickly. Our projection-

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

I think you're talking about tangible capital, not return on tangible. Are you talking about return on tangible capital or where tangible capital is going to be?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

I think return on tangible capital.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

The return on tangible capital.

[David Chiaverini, Analyst at Jefferies]

Yep. You answered it. Yep.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Yeah. Basically, they want to kind of know do you have that in your model? If we are hitting the numbers that we are saying, you can do the math, just add the extra money that he just told you on those cost savings of the $780 million and divide that by the share. I think you are going to start hitting 17% and 18% return on tangible capital.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

That is right. Yeah. That is correct.

[David Chiaverini, Analyst at Jefferies]

Perfect. A follow-up to that on capital with your buyback, you reduced it in the second quarter. How should we think about the buyback going forward?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Whenever people are naughty and we have an opportunity to buy, we are going to buy. Again, you can see the amount of money that we are making or proposed to make. Again, there is no black swan. So we have a runway of $780 million right now. We have a lot of cost savings that is going to add to the bottom line. So I think our projections are $850 million, $880 million. We are paying how much in dividends? $200 and-

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

$200 and- so the difference between that and what we are going to make is, or what we are making is, it is a lot of money. So we have a lot of gunpowder to do something with, and we will. If we see that there are real opportunities and the stock price falls and there is something out there in the market, we would definitely be buying our stock back. We are trading right now at 10x next year earnings or so. So we are pretty cheap.

[Kevin Hanigan, President and COO at Prosperity Bancshares]

Yeah. It was muted in Q2 largely for blackout purposes. We just couldn't buy. We would've loved to have bought a lot more, particularly during certain periods in Q2, but we were blacked out.

[David Chiaverini, Analyst at Jefferies]

Got it. Very helpful. Thank you.

[Operator]

The next question comes from Stephen Scouten with Piper Sandler. Please go ahead.

[Stephen Scouten, Analyst at Piper Sandler]

Yeah. Good morning. Thanks. Going back to the Stellar legacy results a little bit. It seems like with the $33 million in net income you mentioned, maybe that's a fair bit ahead of where consensus numbers have been at one point in time. I'm wondering if their results are kind of ahead of what you guys assumed when you first announced the deal, if it's kind of tracking ahead of expectations and just if there were any material changes to the marks at closing versus what you were expecting?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah, on that, definitely running ahead what we projected. I think when we put together expectation was about $126 million for 2027 on Stellar net income. If you take the $33 million, we are talking about $130 million, so it is ahead of it. But on the mark side of it, I think it is maybe a little bit higher than what we projected, but we are still working on it right now and we have not finalized the marks yet. But I think the preliminary number coming in a little bit higher than what we projected on the marks. Loan marks.

[Stephen Scouten, Analyst at Piper Sandler]

Okay. You had said $6 million-$8 million in expected accretion in the third quarter estimate?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yes. That is including all.

[Stephen Scouten, Analyst at Piper Sandler]

Okay. One question. Oh, sorry.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

No, I just want to say, it always depends if there's some loan pays off with a discount or premium, it could impact, but if you look at the model, it's $6 million-$8 million.

[Stephen Scouten, Analyst at Piper Sandler]

Sure. Kind of scheduled versus accelerated. Yep, that makes sense. In terms of the pro forma loan loss reserve, do you know where that will go to pro forma with the close for Stellar? You guys have had a kind of a zero provision for several years now. Do you think we'll start to see provision be more in line with loan growth moving forward, or is there still some excess that can be worked out over time?

[Asylbek Osmonov, CFO at Prosperity Bancshares]

On the Stellar one, we're still working on it, so we don't have any numbers, but I know it's going to be an addition to and maybe a pretty good healthy addition to that, but we're working through that.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

There's $420 million right now.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Including that unfunded Prosperity Bank.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Prosperity. With Stellar could take us up to $600 million.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah. We're still working on it, so we'll give you that more in the third quarter. On the provision, it's kind of hard to say if we're going to provision or not. We just have to run the models and whatever model tells us if we need to provision, we'll do provision. If it tells us we don't, we're not going to take provision.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

Well, it's hard to provision when you get 3x the amount in allowance compared to your non-performing. I don't see that. If you're asking me personally, unless there's something that I don't know in the loan portfolio that's going to blow up, but we have 3x the amount of money that we have in allowance for loan losses compared to what we have in non-performing right now. I don't see in the next 12 months any provisioning. That's just me.

[Stephen Scouten, Analyst at Piper Sandler]

Very good. Very helpful. Thank you guys for the time.

[Operator]

The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Hey, thanks. Good morning, guys.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Morning, Jon.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Asylbek, can you just walk through the expense cadence again in terms of what you're expecting in the timeline? I know it's way out in the future, but just trying to get an understanding of what you think the run rate looks like when everything is fully converted.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

I'll give you the run rate I gave, $244 million-$250 million. That's including Stellar and have some savings that we pull forward from American Bank and Texas Partners Bank, but not all of it. We expect, as I mentioned earlier, from Partners and American, additional $20 million-$25 million cost savings going to be coming in. That's all pre-tax numbers of what I'm talking.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

For the Stellar, we expect additional probably cost saving around $80 million-$85 million, that is cost save that we announced plus additional of new CDI. So in combination is around $85 million additional cost save on Stellar side, which with all baked in and everything, of course, the timing, as I mentioned-

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

That is pre-tax.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

That is all pre-tax numbers. Yeah.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

You got $85 million and $25 million.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah, $20 million-$25 million.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

You got the tax rate on that.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

Yeah. So between additional $100 million-$110 million.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

But again, we ought to be conservative on that. I mean, these are numbers, and we like to give you a little bit less in case we do screw up or we don't make it. But I think we leave a little room in there.

[Asylbek Osmonov, CFO at Prosperity Bancshares]

And it is also, we are kind of looking long-term, right? We do not know what the inflation is, so the additional cost there might be in, but this is what we have it right now, what we expect, and that is what we are projecting. We feel very comfortable about the savings.

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

We have looked at this up and down two and three times because we did not want to just put something out there that we did not know if it was going to do it or not. But I mean, we feel pretty good with these numbers. I mean- You guys have looked at it.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Yep. Okay. Yeah, you guys have definitely delivered on that in the past. David, you kind of alluded to this, but with your asset size, not that $50 billion is a big deal, but you are a much larger bank. Anything else you need to do at your asset size that maybe you were not thinking about or doing a year ago? You did kind of reference some higher-end products, but anything else to do that could cause some expense pressures, or do you feel like you have what you need?

[David Zalman, Senior Chairman and CEO at Prosperity Bancshares]

No. In fact, we needed to get to this size just to utilize the cost that we had, quite frankly. I mean, the way the regulators treated us, they were treating us like we were $50 billion and $100 billion. So we were geared up to be a bigger bank, and so this really just utilizes all the additional costs that we took on to do that, really.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Okay. All right. Thank you very much.

[Operator]

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

[Charlotte Rasche, EVP and General Counsel at Prosperity Bancshares]

Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

[Operator]

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

Participants

Executives

• Charlotte Rasche, EVP and General Counsel
• David Zalman, Senior Chairman and CEO
• Asylbek Osmonov, CFO
• H.E. Tim Timanus, Chairman
• Kevin Hanigan, President and COO
• Ray Vitulli, Houston Area Chairman

Analysts

• Janet Lee, Analyst at TD Cowen
• Brett Rabatin, Analyst at StoneX Group
• Manan Gosalia, Analyst at Morgan Stanley
• Peter Winter, Analyst at D.A. Davidson
• Michael Rose, Analyst at Raymond James
• David Chiaverini, Analyst at Jefferies
• Stephen Scouten, Analyst at Piper Sandler
• Jon Arfstrom, Analyst at RBC Capital Markets