Prosperity Bancshares Inc Q2 2026 Earnings Call

And chief operating officer. Randy Hester, chief lending officer, Meigs 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 1st, 2026, and completed the merger of Southwest Bancshares Inc. on February 1st, 2026, and announced the merger of Stellar Bancorp on January 28th, 2026, for which we have now received all necessary regulatory approvals and expect to complete on July 1st, 2026. Additionally, we completed a core system conversion in February We and others believe that prosperity is doing the right thing. Prosperity has been ranked as one of Forbes. Forbes. America's best Banks for 2026 and since the list inception in 2010, was ranked in the top ten 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. 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 31st, 2026. Our net income was $116 million for three months ending March 31st, 2026, compared with $130 million for the same period in 2025. The net income per diluted common share was $1.16 for three months, ending March 31st, 2026, compared to $1.37 for the same period in 2025. During the first quarter of 2026, prosperity incurred incurred merger related expenses from the mergers with American and Southwest of 42.5 million, or $0.34 per diluted common share. Including 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 31st, 2026, an increase of $3.3 billion, or 15.1%, compared with 21.9 billion at March 31st, 2025. The linked quarter loans increased 3.4 billion, or 16%, from 21.8 billion at December 31st, 2025. Loans increased primarily due to the mergers with American and Southwest. Excluding the loan increases due to the mergers and excluding the impact of the net charge off. Total loans decreased 1.2%, or about 4.8% annually. That did include about 100 million plus in warehouse lending increase. So excluding that, the decrease would have been somewhat more.

The deposits were 32.6 billion at March 31st, 2026. And increase of 4.6 billion, or 16.4%, compared with 28 billion at March 31st, 2025. Our linked quarter deposits increased 4.1 billion, or 14.6%, from 28.4 billion at December 31st, 2025. Deposits increased primarily due to the mergers, excluding the deposits acquired from American and Southwest. Our core deposits increased about 1.2% and public fund deposits experienced its normal seasonal decrease. Prosperity has. A strong noninterest bearing deposits of 32.4% of the total deposits as of March 31st, 26, with cost of funds of 1.45% and a cost of deposits of 1.32%, compared with 1.38 1.38% for the same period last year. Our. Net interest margin on a tax equivalent basis was 3.51% for three months ending March 31st, 2026. Compared with 3.3% for the three months ending December 31st, 2025. 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 non-performing assets totaled 122 million, or 33 basis points of quarterly average interest earning assets as of March 31st, 2026, compared with 150 million or 46 basis points of quarterly average interest earning assets at December 31st, 2025. The allowance for credit losses on loans and off balance sheet credit exposure was 421 million at March 31st, 2026, compared with 386 million at March 31st, 2025.

The. 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 31st, 2026. And that's compared with 1.67% at March 31st, 2025. Our. Net charge offs were $41 million, the largest amount in our bank's history. This is mitigated somewhat by the total being comprised primarily of two credits. Both which were unique in nature and we believe do not represent a trend in the potential future losses. This is evidenced by the lack of any material additions to nonperforming loans in quarter one, 2026, and only two non-performing relationships of more than $10 million both. Charged off credits were generated out of our Dallas office. Both loans were shared national credits. However, both were initially originated and syndicated by us before the loans were moved to much larger banks that were willing to provide modified loan structures that we were not. The. Larger charge off of approximately 30 million was to a 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 felt it felt to do so this time, the small. Charge off was a customer who. Legacy bank for over 15 years and is reflective that in lending money, sometimes things just don't work out. With regard to acquisitions, as previously mentioned, the merger of American Bank Holding Company was completed on January 1st, 2026, and the operational integration is scheduled for September 2026. And the merger of southwest Bancshares was completed on February 1st, 2026, and the operational integration is scheduled for November of 2026. We are fortunate to have American and Southwest Associates on the prosperity team. We are excited about our pending merger with Sterling. Sterling. Sterling Bank Corp. and expect to complete the transaction on July 1st, 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, healthcare, and finance. Further, its business friendly environment no state income tax population growth that supports spending and workforce expansion and key role in trade and cross-border commerce position. Texas is well for 2026 and the future. While Texas continues to outperform the US on output, on output growth, the labor market has cooled noticeably after years of rapid expansion. The growth in 2026 is expected to be steady, although the state size, diversity and policy advantages position it well for a rebound. Overall, I would like to thank all of our associates for helping create the success we have had. We have a strong team and a deep bench at prosperity and will continue to work hard to keep our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over to 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 31st, 2026 was $321.2 million, an increase of $55.8 million compared to $265.4 million for the same period in 2025. And increase of $46.2 million, compared to $275 million for the quarter ended December 31st, 2025. The net interest margin on a tax equivalent basis was 3.51% for the three months ended March 31st, 2026, an increase of 37 basis points compared to 3.14% for the same period in 2025. An increase of 21 basis points compared to 3.3% for the quarter ended December 31st, 2025. Excluding purchase. Accounting adjustments the net interest margin for the three months ended March 31st, 2026 was 3.44%, compared to 3.1% for the same period in 2025 and 3.26% for the quarter ended December 31st, 2025. The increase in net interest income and net interest margin during the first quarter 2026 is primarily due to repricing of earning assets and addition of American bank and Texas Partner Bank during this period. The fair value Loan income for the first quarter of 2026 was $3.7 million, compared to $3.1 million for the fourth quarter of 2025. The Fair value loan income for the second quarter of 2026 is expected to be in the range of 3 to 4 million.

Non-interest income was 46.5 million for the three months ended March 31st, 2026, compared to 42.8 million for the quarter ended December 31st, 2025 and 41.3 million for the same period in 2025. Non-interest expense. Was 217.3 million for the three months ended March 31st, 2026, compared to 138.7 million for the quarter ended December 31st, 2025 and 140.3 million for the same period in 2025. The linked quarter increase was primarily due to merger related expenses of 42.5 million, and the addition of American Bank and Texas Partner Bank during this period. For the second quarter of 2026, we expect non-interest expense to be in the range of 176 to 180 million. This projection does not include additional one time merger expenses for the quarter. The efficiency ratio was 59.2% for the three months ended March 31st, 2026. Compared to 43.7% for quarter ended December 31st, 2025 and 45.7% for the same period in 2025, excluding merger related expenses, the efficiency ratio was 47.6% for the three months ended March 31st, 2026. The. Bond portfolio metrics at 331 2026. Have a modified duration of 3.8 and projected annual cash flows of approximately 2.1 billion. And with that, let me turn it over to the presentation to Tim Timanus. From some details on loan and asset quality. Timanus.

Thank you. Asylbek. Non-Performing. Assets at quarter end. March 31st, 2026. Totaled $122,107,000, or 48 basis points of loans and other real estate. Compared to $150,842,000, or 69 basis points at December 31st, 2025. Since March 31st, 2026. $7,936,000 of non-performing assets have been removed or put under contract for sale. The March 31st, 2026, non-performing asset total was made up of $108,714,000 in loans, $136,000 in repossessed assets. And. $13,257,000 in other real estate. Net charge offs for the three months ended March 31st, 2026. Were $41,309,000. Compared to net charge offs of $5,884,000 for the quarter ended December 31st, 2025. There was no provision to the allowance for credit losses during the quarter ended March 31st, 2026. But $91.4 million total was added via the mergers, with American Bank and Texas Partners Bank. No dollars were taken into income from the allowance during the quarter ended March 31st, 2026. The average monthly new loan production for the quarter ended March 31st, 2026 was $312 million, compared to $314 million for the quarter ended December 31st. 2025. Loans outstanding at March 31st, 2026 were approximately $25.288 billion, compared to $21.805 billion at December 31st, 2025. The March 31st, 2026 loan total is made up of 38% fixed rate loans 20. 8% floating rate loans and 34% variable rate loans.

I will now turn it over to Charlotte Rasche.

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

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

Thanks. Good morning.

Good morning. Morning.

One of the first 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 interested. If you could just help us think about how you're thinking about the margin moving forward next quarter. And then once you add in stellar and then maybe is there anything within the margin this quarter that felt one time in nature, either some kind of one time?, loan payments or anything like that, that we should be aware of that we shouldn't be rolling forward to next quarter. Thanks.

I'll answer. Catherine. So we are pleased with our margin expansion this quarter. You know, it was like, I mentioned, the contributed from our asset repricing during the first quarter and addition of two banks. So helped us with the increase in the margin. But if you look at our rate track model and it's like based on the static balance sheet. Looking for the second quarter, we see that our projected margin for second quarter be flat and a little slightly higher than the first quarter. And the reason is that there was like, there was a few several factors that impacting Q1. We saw continuing, you know, repricing of earning assets, but we also had the we recognized about 4 million of loan income from Non-accrual loans, which we don't expect in the second quarter. And also, I think the having fewer days in the calendar quarter helped our historically helped our margin. So if those two things had impact on it. But overall, we are very pleased with the expansion. That's for.

Do you want to go ahead and give them some kind of guidance? Yeah. So we can add..

So we continue on the guidance. If you kind of long term and I'm going to include the Stellar Bancorp in our model for,, for 2026,, I think the model shows that we'll be exiting combined around. 370 and, but for having full year of prosperity and half year stellar, I think average, we model shows around 360 for 2026.

Okay, great. And then on the bond book, there's a big increase in bond yields. I assumed you restructured the portfolios that you acquired. is this a good run rate for the, the current 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, we did, in addition to bringing the bond book from the acquired banks, we also did buy, you know, some securities. That's why you saw almost $1.4 billion, including bond portfolio. I think we also continue to buy. So from now on, we I. I see that, you know, the yield on bonds should increase a little bit. Than 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's,, between. We were able to get between 450 and we were able to get around 485. So it was kind of in between when rates, you know, as with the Iran war, the rate fluctuated. So we were able to secure some. 485.

Great. Thank you. Great work guys.

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

Hey good afternoon. Can you hear me? 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,, is kind of cooling right now., and then, you know, maybe if I add on to that, there's,, you know, clearly a lot more competition, especially from some out of banks,, can you put that together for us in terms of how you're thinking about ,, you know, competition overall loan spreads, deposit rates, loan growth, and, you know, just your, your bigger picture thoughts on,. The. The dynamics in the state.

Well, that's a big question ., but. I, you know, even though it may be slower growth, it's probably still better growth than anywhere else in the United States. So I still think that Texas is probably the best place to be as far as growth goes. I mean, there has it's really kind of a it's kind of split. You know, everybody complains about,, prices going up and, you know, when they go to the grocery store or they,, or they go buy gas or, you know, a car that used to cost 60,000, now cost 100,000. And everybody complains about it. But when I talk to people,, again, I think probably middle class and upper middle class. It still hasn't slowed people down. People still have a lot of money and they're still spending money., probably it's affecting,. Lower. Earning group than maybe the other group, but I think for the long run,, Texas has still had tremendous growth. You're still seeing. I mean, every time California does a thing like they're going to tax people 5% on net worth, it only makes people it only makes states like Texas and Florida better. So for the foreseeable future, we still see it very good.

Talking about the competition, that is a big deal because you have a lot of banks that want to be in Texas. They it's hard for them to get market share, and we're competing against them on loans on a day to day basis. And,, you know, the,, some of the, some of the bigger deals that we competed on,, where we were in the six, 6% price range, they were down in the 5.5.9 percent range. I understand it when we ever go into a new market, that's exactly what we do. We, we try to underprice something and try to get some market share. So that's what we're looking at from the out out of state banks coming in on the deposit side, you still see them throwing sometimes if you're a non customer right now like truce is advertising like a 4% rate on a money market rate on a money market account, we're closer to the three, you know, so it's so they're trying to buy the business. We understand that at the same time we haven't. We haven't acquiesced. We lost several big deals where we haven't come down on the price. We haven't come down on the price yet.

We're still trying to maintain our margin. I think that we will continue., and I think that overall, in the long run, we've been through this before. It's not our first rodeo. We'll continue to do good. Our partners, you could saw stellar. They did much better than we did. This time, you know, and I think it just shows that things happen over a period of time. They were up over $200 million where they might have been lagging before. And I think that's the same thing for us. We'll win. We have a a number of big deals that we're looking at right now that,, you know, we, I think we've agreed to, to the price. We're just making sure that we want to do the deal. So I do see that. Having said that, we have three mergers with banks. And if you look at it, it's historically, you know, I'd like to tell you that you're going to see this mid single, the single digit loan growth or double digit loan growth. And that just doesn't happen. I think that, you know, if we can stay, you know, we can stay flat. That's pretty good., this year, I mean, because I think that as you do these deals, you just see some, you see some change in that.

And just historically, I'd like to say that you're going to be there. We're going to make it. But historically that's not happening. Kevin you may have some comments on the deal or No. I agree with it with you, David. I think,, I. To, to get to granular. Prosperity X acquisitions,. Has not had growth in the last couple of quarters., I think as I, as I think about the whys to that, the market has gotten more competitive, particularly on very large ,, construction. Deals, which we've always played a part in. The market's gotten cheaper in terms of the rates that they're willing to do those deals at. And they've come off levels of recourse, much, much lower levels of recourse. And we have not we've we have not played in that game. And it's it's cost us we've missed out on some deals.. I think to, to augment that or to, to fight that. Off a little bit, we're likely to set aside a bucket of, say, 750 million to $1 billion worth of, of commitments where we'll play in those markets ,, with. Certain clients very well known,, folks that have been clients for a very long period of time,, so I think we'll fight some of that off.

Ourselves. Ex what happens in the acquisitions, as David said ,. And this is no surprise to any of you when we do acquisitions, it is it is more likely than not that there's some asset runoff from those acquisitions in the ensuing 18 months, it's been the case. Time and time and time again. And we've got three of them. So we'll we'll be fighting those headwinds., for. For the next. You know, next year to 15 months, 18 months ., and I think if we are flat during that period of time, overall, we'll have done pretty well.

Well. And I'd even say, you know, in some of the out of state banks are offering five, eight, five, nine and we can get for 85 on a security with about a four year average life., pretty hard to pay the lender reserve some money for loan loss and, and really, really go that low. But again, at the same time., you know, we, if a customer is able to bring in, it's just not a dry relationship and that customer is really able to bring over a deposit relationship. That's a whole different story. And we'll give you credit for that. And we'll probably get as low as that. If it's not a dry relationship. But all in all, we still we still stick with the story that,, you know,, Corps. The core deposits are really what makes the bank. And that's what we're really focused on. And we're really focused on increasing net interest income and net income for the shareholder over the next 1 or 2 years. And I have to tell you right now, I'm probably more excited than I've ever been in the last three years about our future. When I look at the numbers, I mean, we were going, as you all know, our net interest margin was what it got as low as 2.75 or something like that.

To 90. Our our numbers that we're looking at right now, we're really looking at some really great net interest margin going forward. I think we're looking at probably for the next two years, net interest income increasing. And so,, I'm, I'm terribly excited for where we're at right now today.

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

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

Great. Thanks very much.

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

Hey, good morning guys.

Good morning.

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

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

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

As a loan repricing I mean I think we're we're kind of good where we're at. I mean I don't I don't see us. I'm not saying we won't jump to maybe 1 or 2 deals to compete on the 5.9 under six. But for the most part we're really not going to play that game. And we'd rather buy securities, I think, than just try to play a game just to have a dry relationship, to beat somebody out and take a lot of risk.

Yeah.

Okay. So new loan yields are where the book is right now. Are they still a little bit higher?

A little bit higher.

A little higher.

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

Yeah. Post any, you know, what I would call normal for us?, post acquisition runoff. I, I do think,, particularly with stellar hitting its stride that that will return to, you know, kind of low to mid single digit kind of stuff, but that's, that's going to take a little while.

I think even American bank and Texas partners are talking, they're excited with where their position is too, and has done pretty good.

Yeah. Okay. Thanks guys.

We just want to be cognizant of the fact that it is typical for us to have some loan declines. Post acquisitions. And we've done three acquisitions, and we want to be realistic about it.

Yep. Understood. Thanks.

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

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

I think I think our deposit side is really not going to be affected. We should have our normal our normal organic growth on the deposit side., with the exception of seasonal fluctuations with public funds. And I think we've always done at least 2% to 3% more. Now, having said that, one of the banks that joined us has a has some really larger accounts that,, you know, that really operate under their treasury., their treasury, their treasury system that they have, they feel comfortable that we, that they won't lose any of those accounts. On the other hand, it's always possible there's a, there's a handful of those accounts that, you know, are 30, $40 million. And that could always affect to some degree. But for the most part, I mean, all the banks that are joining us were in Texas. We should have growth on the deal. I think that I think that we're fine. You'll still continue to see you'll still see core deposit growth with seasonal drops with public funds. As far as as far as. As the loan deposit ratio is, I think I didn't answer that, you know, we have a policy that we it doesn't say we can't go above 85%.

But once we start hitting, we hit 85%. We have to go in front of the board and discuss that with them. So unlike a lot of the other banks or a number of the other banks that are at 90 or 100%, I don't think you'll see us doing that. I think we feel we feel more comfortable at the 75 and 80% for the most part.

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

I think that,, you know, we're we're going to make a lot of money, or at least it looks like we're going to be making a lot of money, at least combined. And so I think that as long as whenever we see this, you'll see the price we saw buyback, when the price of the stock was I forgot what the average time was $68 or something like that. So,, I think you'll still see us as when the price is an opportunity. Like it is right now. You'll see us continue to buy back. And again, we have a lot of capital, even with the combination of stellar bank. And I know we're paying 25 or 30% cash on that, but we still have a lot of capital. And, you know, I think going forward, you'll see us continue to buy back if prices stay where they're at, for sure.

Yeah. And on the Basel three benefits, we did high level analysis of impact of the mortgage loans. And it will benefit. But I think it's ,, when we calculate maybe 50 basis points on the capital that what we saw benefit on the,. Once the rule passes on the mortgage loans.

From a capital standpoint, I mean, we're real rich and It's going to benefit.

When we look at a pro forma based on. A combined earnings of both of these banks, even after you take out dividends, you're talking about 5 or $600 million a year in excess after dividends to do something with. So we have we have a strong capital going in, and I think we'll have a stronger capital going forward. Really. And the ability to purchase our own stock back.

Very helpful. Thank you.

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

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

Matt, thanks for the question. It is a clean number. We actually feel great about the earnings prospects entering into the second quarter, taking the cumulative nature of the growth that we had in the first quarter. So we feel good about the path that we're on and what that implies.

Okay. I appreciate that.

We paid down. On April 1st, the last remaining piece of subnet. So we actually see benefit to margin that will come back come out as a byproduct to.

Okay.

That that was Paul CFO at stellar. Okay.

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

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

Okay. Thanks for the.

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

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

You. Yeah. The big one. This is Kevin., Brett. The, the big one was an insurance company., they were in the business of,, selling., Medicare. Products. So Medicare plus Medicare Advantage kind of products ., and if you. Want to get to the core of it.. Their business was doing pretty well for the first 18 to 24 months and not to get too deep into the accounting, but, but if you called them and you did a Medicare Advantage program through them and your annual premium for the year was, let's just say 240 bucks to make it easy, 20 bucks a month. You they would accrue,, $20 for that first month paid by the government, largely ., and then the rest of it would be booked as a receivable. So $220 in account receivable. In that business. What you do is, is you model and project what your what your. Account turnover is going to be. So you may wake up three months from now and cancel that policy because you think you can get a better deal or, you want. A different deal. You're unhappy with the deal. You've got. So there is. There is some modeling of, of,, the turnover of your receivables of people canceling.

And what happened here was the cancellation rates were way higher than the model reflected. And that that causes obviously two things. A write down of receivables by, by the remaining balance that has not been accrued in the income. And it can cause you to have to restate prior period earnings and that was the big factor in that overall deal. The deal was backed by a very large, very well known. Private equity firm that our bankers have had some ,, experience with in the past. And they have typically ,, back their. Deals in this case, at least to this time, they have not backed the deal. I think we began talking about this deal probably in the in the third quarter. Of last year,, talked about it again in the fourth quarter., and. We chose to, to write the thing down this quarter. All, all the way so that I would call that a one off in our case, if we look across the remaining Non-accruals in our book, I think the largest Nonaccrual loan we have is $10 million. So there's nothing else out there that looks anything like this. This is a this is truly a one off.

David mentioned the other one. It's been a long time client. It was a legacy client in the buy here. Pay here. Car space.. High performing company for 1518 years with us that we bank them and they, they got a little more aggressive in their business model coming out of Covid., poor timing and I would differ. The first one, which was a one offer and, and probably should never happen again alone. We probably should not have made easy to say today., the second one is the loan we would make would have made today., and it's just basic business. The guys changed their strategy a bit. The strategy was not successful and it cost them dearly and it cost us a bit. So. I'd say. One is, one is a way out there., nothing else looks like that in the portfolio kind of thing that we're worried about. And the other one, you know, like it's a, it was a bad day.

Well, and you'd have to say the original insurance deal, we did have the backing of this big, big sponsor. We didn't want to we didn't want to release it. They wanted it released. And so a huge, major, major bank took it and they released the guarantee on it. Our stupidity enough. Us being stupid. We bought a percentage back. However, a lesser percentage than what we had originally.

Okay, that's ,, that's very detailed call. I appreciate that., and then David wanted to ask, you know, when I look at your map, I mean, you're, you're pretty dense in Texas., you know, is, is the. Strategy from here. You're obviously very focused on integrating these three acquisitions, but with the strategy from here, be more density., or would you look to new markets or other markets? Are there other smaller markets in Texas that might have great deposits? Other community banks, you know, just any thoughts on how you see the environment from that perspective?

You know, as we mentioned before, first of all, I'd say, you know, we don't want to grow just to be grow. But but having said that, you know, scale has just become very, very important. I look, I look at our income statement and I see, you know, just buying equipment from technology is like $2 million a month sometimes that doesn't account what the technology. We spend 75, 80, $90 million a year on that. So scale is important, but we don't want to just say we grow to grow ., we still, as we mentioned earlier, I think that,, we, we really think that a real bank, the real value in it is the core deposits where if you don't want to grow loans that you can still,, still buy bonds and still have a good 1.5% plus return,, I think that we've all talked about it. We like where we're at right now, but we also, we still, we still, again, our primary objective is still to put these deals together. But our real, you know, our, our deal is to really be. And we grew up in the times when you had a Texas commerce and a first city and an allied and all that.

And it's still our plan and goal to continue to, to make one of the Texas biggest banks, not just because it's big, but it can offer services., from a. Technological technology standpoint to the biggest customers, to the smallest customers. And we'll continue to do that. But we're going to do it at a pace. We're not going to do it at a pace until we really can put these deals together and really show you that everything that we can make the $6 and something cents this year, and we make the $7.70 next year. And we, we want to show everybody that we can do that and that like in the past, when we promised we'd bring the net margins up, we want to we want to do what we say that we're going to do. But but the future is still building that, that that larger bank that we want to be for everybody.

Okay. That's great. Thanks so much, David.

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

Hello. Morning. I appreciate that the near term guidance you provided on expenses for the second quarter, just given a lot of moving pieces with some cost saves and stellar in the third quarter. Is there some sort of fuller expense guide you could give for for the year or, or where the efficiency ratio could trend is? It is this, you know, mid 40s. Level a good place to be? Or how should we think about the trajectory.

For Janet dot. Know if I can give a specific guidance long term, because we're still trying to integrate two banks and then stellar coming in the second half of the year. But what we you know, said earlier on at least two banks that we merge cost savings that we announced that we are working toward it and we're going to achieve those cost savings. I mean, we're already getting some of the cost savings now, but most of the time, when the integration of the system, what we mentioned in September, November, then what we're going to see that also, you know, with the stellar addition, we're going to probably see most of the cost savings next year. And we said, what, 35% cost savings. We feel very comfortable about the cost savings on that side of it. So if you combine all together, I think the goal for us to get back to that with all the cost savings and get back to the mid 40s, that Will ran historically 44, 45, 46%. So that's the goal. And I think it is achievable.

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

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

That was for loans and loans and.

Securities for loans and securities is going to reprice. I think,, stellar was about what, three, three and a half. Margin. So that's going to reprice a little bit, right? In maybe 100 basis points or so.

Right.

Got it. And the 370 Nim, that was the that was the, the target for the., Yeah.

That was a three sport.

Yeah. That's going to be our exit. Meaning the end of the year combined prosperity Bank and stellar together.

For three. Six average.

Six average for the year. Because we just kind of have stellar for half a year.

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

You're welcome.

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

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

Yeah. For that specific, we had a reserve half of it last year because I think when we kind of start seeing that and we reserved the rest of it and charge off this one, that's why we didn't say see any of the PNL impacts this, this, this quarter, because we provisioned half last quarter and we charge off the remaining half this quarter.

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

Kevin can jump in a minute, but again, I think we're just trying to prepare everybody that, you know, you have stellar, you have Texas Partners Bank and American,, that just from an historical and from historically, you know, that we have, we have lost loans through, through these deals. And again, don't, we don't want to give somebody a deal that says, okay, you know, we thought it was great that they increased 200 and something million dollars. But again, we don't want to come here and tell you we're going to have a 5 or 6% loan growth when historically we've seen things that I guess we're just being cautious really.

Yeah, I'd say it's it's being cautious. I do think they they underwrite much like we do ., it does take and again, I went through this on the other side in 2019 with the, with a large lending staff, it takes 6 to 9 months to, to get integrated into the system and how the underwriting,, is done at prosperity and the, the forms and the process. It takes a while and then lenders get used to it. And, and things stabilize.

I think it's even more than that. Kevin. I think, you know, even I looked at what we did in our production, this, this first quarter, and it was definitely impacted by,, you know, doing a DNA conversion, people trying to get their loans to the loan committee., doing three, working with three different banks to put it all together.

So I think there's when you're doing this, I mean, you know, we increased our assets. You can do the math between 38 and 54 billion., that's a lot of increase. And so to try to massage and put all this together, things are not going to be just exactly the way they were. And if you and I would say this, that if you if you think they're going to be, you're going to have this exponential growth. I think it would be a mistake. I think right now we really need to focus on putting all this together, making sure everybody fits in good and take our time and doing it right.

Great.

Thanks and Jared. Just to clarify, in my mind, I call provision, but that's what I meant. Like specific reserve, we put specific reserve on that loan, provision expense.

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

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

Yeah., we're. A house.. As you know, John averaged 1,000,000,207, I think, for the quarter. But but we closed out at a billion for 30 something, maybe a billion for 32 billion for 33. So it ended up the quarter really strong. It's backed off a bit from there. I think yesterday it closed at about 1 billion to 40 billion. 238, something like that I think it will be higher on average in the in the second quarter than it was in the first. So I'll call it a billion, 3 to 1 billion, 325.

Because even our own mortgage company, we're finally seeing where they're making money. And most of our mortgage companies are doing okay. Doing all doing. Well. Yeah. So probably ought to be a little better.

Okay, good., and then,, maybe also, Kevin, you talked about construction and being a little more cautious there due to competition, but there was still decent growth for the quarter. Was that acquisition driven or is there?, activity that you. Guys are putting on the balance sheet now No. Construction has been weak. What I was saying is we're losing out on a lot of construction deals because of the competition in the market is willing to do it with less recourse. And way cheaper., spreads to to sofr ., and that we are looking at establishing a bucket for, for a handful of clients that would be our A+ rated clients where ,, we might. Be willing to do things a little cheaper rate and a little less recourse.

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

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

I couldn't I couldn't be happier. I think it's a great deal. I mean, I think there's a I think there's a huge difference between one bank and another bank. And I think I'm not just saying this because these guys are in here., if we were ever to sell our bank, I wouldn't I wouldn't sell for anything less on a multiple that these guys that we paid for. So I think it's top notch. I think y'all are going to I think all the analysts in 2000, the end of 2027, when we make the money, we're going to make, I think everybody's going to say I knew it the whole time. But you know, right now I got to prove it. But but you guys are all going to say, well, we knew it the whole time. And that's when the stock was going to go to 95 or $100. But, you know, which I'm telling you, it's going to happen. And it's and I feel better than I have in three years about all these different deals.

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

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

No, absolutely.

David.

But I'm kind of thinking now we didn't pay enough.

Okay.

I knew that was coming. That was coming. Nice try, Bob. Yeah.

All right. Thanks a lot. I appreciate it.

Thanks, John.

Thank you.

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

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

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