Prosperity Bancshares NYSE: PB reported third-quarter 2026 results that reflected the first full quarter including Stellar Bank, with management emphasizing higher net interest margin, merger integration progress and expected cost savings from its recent acquisitions.
The company said total assets reached $54.1 billion at Sept. 30, up 41% from a year earlier, while loans rose 45% to $32.0 billion and deposits increased 48% to $41.0 billion. Senior Chairman and Chief Executive Officer David Zalman said the increases primarily reflected the company’s three recent mergers involving American Bank, Texas Partners Bank and Stellar Bank.
The board also approved a fourth-quarter dividend of $0.64 per share, up from $0.60 per share paid in each of the prior four quarters. Zalman said the 6.7% increase reflected the board’s confidence in the company and its markets.
Margin Expansion and Earnings
Excluding one-time expenses detailed in the company’s press release, Prosperity reported third-quarter net income of $200 million, or $1.67 per diluted share. The company recorded an annualized return on average assets of 1.5% and an annualized return on average tangible common equity of 15.81%, according to management.
Net interest income before provision for credit losses totaled $443.0 million, rising from $330.6 million in the second quarter and $273.4 million a year earlier. The tax-equivalent net interest margin increased to 3.73%, from 3.47% in the prior quarter and 3.24% a year earlier. Excluding purchase-accounting adjustments, net interest margin was 3.59%.
Chief Financial Officer Asylbek Osmonov attributed the sequential increase primarily to the Stellar Bank acquisition and higher investment yields. He said Prosperity expects fourth-quarter fair-value loan income of $7 million to $10 million, compared with $11.6 million in the third quarter.
Looking ahead, Osmonov said the company expects the fourth-quarter margin to be flat to modestly higher, with an anticipated exit rate of roughly 3.70% to 3.75%. The company maintained its expectation for average net interest margin of about 3.80% to 3.85% in 2027, based on a flat-rate assumption.
Management said higher rates on the securities portfolio and repricing of fixed-rate loans should support margin expansion over time. The bond portfolio had a modified duration of 3.9 years and projected annual cash flows of approximately $2.2 billion at quarter-end. Osmonov said the portfolio’s average rate was 2.92%, while recently purchased securities had yields of roughly 5.50% to 5.75%.
Integration Costs and Savings
Third-quarter noninterest expense was $308.6 million, including $69.7 million in merger-related expenses. Excluding those costs, noninterest expense was $238.9 million, including Stellar Bank’s operating expenses. The efficiency ratio was 62.1% on a reported basis and 48% excluding merger-related expenses.
Prosperity expects fourth-quarter noninterest expense of $235 million to $238 million, excluding remaining one-time merger costs. Osmonov said the company expects an additional $65 million to $70 million of pretax cost savings compared with third-quarter expenses as integration work continues. Once the integrations are completed, management expects a quarterly operating expense run rate of about $220 million to $225 million, beginning more fully in the second and third quarters of 2027.
The company completed American Bank’s operational integration in September. Zalman said all American Bank locations now operate under the Prosperity Bank brand. Management expects to complete Texas Partners Bank’s operational conversion in November and Stellar Bank’s conversion in March 2027.
Deposit and Loan Outlook
Prosperity’s noninterest-bearing deposits totaled $13.8 billion, or 33.6% of total deposits, at Sept. 30. Core deposits, excluding Stellar Bank, increased at a 2% annualized rate from the prior quarter. Zalman said management expects core deposit growth to return to its historical 2% to 4% pace.
The company increased certain deposit rates late in the third quarter. Zalman said Prosperity raised money-market rates by about 25 basis points, from 2.75% to 3.0%, focusing primarily on balances of $1 million or more. Osmonov said average deposit costs are expected to rise 6 to 7 basis points in the fourth quarter, while total funding costs could rise roughly 8 basis points.
Average monthly new loan production was $635 million in the third quarter, compared with $454 million in the second quarter. Management said production improved across the combined company, particularly in the legacy Prosperity portfolio. However, President and Chief Operating Officer Kevin Hanigan said acquired banks historically can experience loan runoff for six months to a year after a transaction.
As a result, Prosperity expects 2027 loan balances to be flat to slightly higher, including potential acquisition-related runoff. Hanigan said the company believes stronger production and the completion of the Stellar integration could support loan growth of roughly 3% to 5% in 2028.
Warehouse mortgage lending averaged $1.229 billion during the third quarter. Hanigan said balances had declined to about $1.1 billion quarter to date and could average $850 million to $900 million in the fourth quarter because of rates and normal seasonality.
Credit Quality, Capital and Strategy
Nonperforming assets totaled $193.9 million, or 60 basis points of loans and other real estate, up from $130.6 million, or 52 basis points, at June 30. The total included $171.0 million of nonperforming loans, $57,000 of repossessed assets and $22.8 million of other real estate. Since quarter-end, $4.3 million of nonperforming assets had been removed or placed under contract for sale.
Net charge-offs were $4.4 million in the quarter, compared with $2.2 million in the second quarter. There was no provision for credit losses during the third quarter. The allowance for credit losses on loans and off-balance-sheet credit exposures was $629 million, which Zalman said was more than three times nonperforming assets.
Management said it expects nonperforming assets to eventually settle in a range of about $125 million to $150 million, assuming otherwise stable conditions.
On capital deployment, Zalman said the company remains open to acquisitions that enhance its Texas franchise and shareholder value, but said the immediate priority is integrating Stellar Bank and Texas Partners Bank. Hanigan said stock repurchases appear more likely in the near term than another acquisition, particularly given the company’s view of its valuation.
Management also said it does not intend to reposition its securities portfolio through sales and purchases intended to improve near-term reported results. Zalman said the company’s approach is to maintain a portfolio it can hold through changing interest-rate environments rather than attempting to predict market movements.
About Prosperity Bancshares (NYSE:PB)
Prosperity Bancshares, Inc is a regional bank holding company headquartered in Houston, Texas. Through its principal subsidiary, Prosperity Bank, the company provides banking and financial services to individuals, businesses, and public entities.
Prosperity Bank offers deposit products, commercial and consumer lending, mortgage and real estate lending, treasury management, online and mobile banking, and other traditional banking services. Its lending activities include financing for commercial businesses, agriculture, residential and commercial real estate, and personal needs.
Founded in 1983, Prosperity Bancshares has expanded primarily through organic growth and the acquisition of community banks.
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