Prosperity's Margin Gains Spark Q4 Surge Amid Merger Costs

Date of Call: Jan 28, 2026

Financials Results

• EPS: $5.72 per diluted share for 2025, up 13.3% from $5.05 in 2024; Q4 2025 EPS $1.43 (implied from annual figure)
• Operating Margin: Net interest margin 3.3% for Q4 2025, up 25 bps YOY and 6 bps QOQ

Guidance:

• Fair value loan income for Q1 2026 expected to be $3M-$4M.
• Noninterest expense for Q1 2026 expected to be $172M-$176M, including 3 months of American Bank and 2 months of Texas Partners Bank expenses.
• Approximately $30M-$33M in onetime merger-related charges for the two acquisitions in Q1 2026.
• Net interest margin expected to improve in 2026, with a minimum of 3.5% projected.

Business Commentary:

Financial Performance and Growth:

• Prosperity Bancshares reported a net income of $543 million for the year ended December 31, 2025, compared with $480 million for the same period in 2024, an increase of 13.2%.
• The increase in net income was driven by strong demand for loans and deposits, as well as strategic acquisitions and improved net interest margins.

Net Interest Margin Improvement:

• The bank's net interest margin on a tax equivalent basis was 3.3% for the 3 months ended December 31, 2025, compared with 3.05% for the same period in 2024, reflecting an increase of 25 basis points.
• This improvement was due to strategic repricing of the bond portfolio and efforts to reduce borrowing levels.

Loan and Deposit Trends:

• Loans, excluding warehouse purchase program loans, were $20.5 billion at December 31, 2025, compared with $20.7 billion at September 30, 2025, showing a decrease of $249 million.
• Deposits increased by $700 million from $27.7 billion at September 30, 2025, to $28.4 billion at December 31, 2025, driven by seasonality and strong customer demand.

Nonperforming Assets and Credit Quality:

• Nonperforming assets totaled $150 million or 46 basis points of quarterly average interest-earning assets at December 31, 2025, compared with $119 million or 36 basis points at September 30, 2025.
• The increase was primarily due to two loans from the middle market lending group and a well-collateralized real estate loan acquired in a recent acquisition.

Strategic Acquisitions and Integration:

• Prosperity completed the merger with American Bank on January 1, 2026, and expects the transaction with Southwest Bancshares to be effective on February 1, 2026.
• These acquisitions are part of the company's strategy to enhance its Texas footprint and increase its market position, particularly in the Houston market.

Sentiment Analysis:

Overall Tone: Positive

• Management described Q4 as 'stellar' and highlighted 'net income increased 13.2% YOY' and 'net interest margin increased to 3.3%'. The tone was optimistic regarding acquisitions: 'This transaction marks an important milestone', 'low-risk combination', 'enhances our Texas footprint', and asserted that 'the stock is significantly undervalued'.

Q&A:

• Question from Catherine Mealor (Keefe, Bruyette, & Woods, Inc.): I noticed in the slide deck, you're using a different estimate for Stellar versus consensus... Just curious what's driving that difference and your confidence in that level of earnings coming over from Stellar.
  Response: Confidence driven by Stellar's strong growth momentum in H2 2025, a normalized provision on Q4 2025 earnings annualizing to $2.20 EPS, plus expected benefits from higher interest-earning assets and Fed rate cuts.

• Question from Manan Gosalia (Morgan Stanley): Maybe if you can help us think about the price of the acquisition? 18x 1 year forward does feel a little high...
  Response: Rationalized the premium as warranted by Stellar's quality and the significant franchise value enhancement from becoming the largest Texas-based bank in Houston, citing accretive earnings and a strong return on tangible capital post-combination.

• Question from David Chiaverini (Jefferies LLC): So you mentioned about you've got multiple bank integrations occurring simultaneously. Can you talk about ways you'll be able to juggle these at the same time and not get distracted from the core operations?
  Response: Will use dedicated integration teams; the company has extensive M&A experience (40 transactions) and the integrations are planned sequentially, starting with operational integration followed by system conversions later in the year.

• Question from David Rochester (Cantor Fitzgerald & Co.): I just wanted to go back to the capital discussion real quick. I noticed the shares are trading below the average price of the buybacks this past quarter...
  Response: No 10b5-1 plan in place; buybacks will be opportunistic. The company has significant excess capital post-acquisitions ($600M annual earnings minus $288M dividends) for buybacks, dividends, or future M&A.

• Question from Sun Young Lee (TD Cowen): For loan growth, so in terms of 2026, I believe you were hoping for that low single digits -- or low to mid-single digits kind of growth on balance sheet.
  Response: Confirmed low single-digit loan growth is a fair assumption for 2026, with both American and Stellar Banks having grown faster and maintained high-quality portfolios.

• Question from Peter Winter (D.A. Davidson & Co.): Can you just talk a little bit -- you mentioned the increase in nonperforming assets. If you could give a little bit more detail.
  Response: Increase driven by a $35M shared national credit (downgraded to nonaccrual) and a well-collateralized real estate loan from an acquisition; both are well-reserved and resolution conversations are ongoing.

• Question from Michael Rose (Raymond James & Associates, Inc.): Just wanted to see if there's an opportunity for a potential restructuring that may be not included in the pro formas here?
  Response: No plans to restructure the bond portfolio for 'financial engineering'; the strategy remains to hold a diversified, duration-matched portfolio. The Stellar AFS portfolio will be marked-to-market.

• Question from Jared David Shaw (Barclays Bank PLC): When we look at their pipeline, are they able to get the pricing and terms that you said you're not able to get in other markets?
  Response: Stellar's higher margin is due to a more granular loan portfolio (smaller deals, higher pricing), lower drag from low-rate assets, and a lower-cost deposit base; integration may see some margin convergence but competitive pricing overall.

• Question from Jon Arfstrom (RBC Capital Markets): What's your level of confidence in the $7.34 estimate for 2027?
  Response: Very confident in the $7.34 2027 EPS projection, citing cost saves, potential additional revenue synergies (e.g., NSF fees, cost of funds), and the combined bank's strong fundamentals and undervalued stock.

Contradiction Point 1

Loan Growth Outlook

Contradiction in expected loan growth trajectory for the near term.

What is the outlook for loan growth amid recent declines and the netting of paydowns and acquired loans? - Catherine Mealor (Keefe, Bruyette, & Woods, Inc.)

2025Q4: We anticipate loan growth to be flat in Q4, and low single-digit organic growth for all of 2026. - Kevin Hanigan(COO)

What's the outlook for loan growth considering recent declines and the balance between paydowns and acquired books? - Catherine Mealor (Keefe, Bruyette, & Woods, Inc.)

2025Q3: For Q4, low single-digit organic growth is anticipated...though post-acquisition loan runoff may offset some volume. - Kevin Hanigan(COO), David Zalman(CEO)

Contradiction Point 2

M&A and Buyback Priority

Contradiction in stated priority between share buybacks and mergers & acquisitions.

Do buyback comments indicate a shift away from M&A? - Manan Gosalia (Morgan Stanley)

2025Q4: The priority remains M&A...we are not pivoting away from M&A. - David Zalman(CEO)

How can growth be driven within risk-return parameters in a competitive lending environment (e.g., branches, products, hiring), and does the strong buyback signal a shift away from M&A? - Manan Gosalia (Morgan Stanley)

2025Q3: Management will 'always look at M&A' but is prioritizing buybacks now due to the stock's undervalued status. - David Zalman(CEO), H. E. Timanus(Chairman), Kevin Hanigan(COO)

Contradiction Point 3

Deposit Runoff Expectations from Acquisitions

Contradiction in predicting deposit stability post-acquisition for a specific entity.

Are deposit runoffs expected from the two pending acquisitions in 2026? - Matt Olney (Stephens Inc.)

2025Q4: We expect minimal deposit runoff from the American Bank acquisition. - Asylbek Osmonov(CFO)

Will the two pending acquisitions lead to deposit runoff in 2026? - Sun Young Lee (TD Cowen)

2025Q3: For Texas Partners Bank, there is some risk due to a larger portion of deposits in treasury/commercial products. - David Zalman(CEO), Asylbek Osmonov(CFO)

Contradiction Point 4

NIM Trajectory and Impact of American Bank Acquisition

Contradiction on whether NIM projections include the pending acquisition.

Does the 3.35% NIM projection in six months include the American Bank acquisition impact? - Stephen Kendall Scouten (Piper Sandler & Co., Research Division)

2025Q4: The 3.35% in 6 months NIM projection is based on the existing balance sheet only. The American Bank deal will provide additional NII accretion and should help the margin further. - David E. Zalman(CEO)

What are the key factors influencing the net interest margin (NIM) outlook for upcoming quarters? - Michael Edward Rose (Raymond James)

2025Q2: The NIM model continues to show expansion... With no rate changes, it projects 3.35% in 6 months, 3.48% in 12 months, and 3.76% in 24 months. - Asylbek Osmonov(CFO), David E. Zalman(CEO)

Contradiction Point 5

Capital Deployment Priorities Post-Acquisition

Contradiction on the primary use of capital following the American Bank deal.

What are the capital deployment priorities post-acquisition, including potential for a stock buyback? - Manan Gosalia (Morgan Stanley)

2025Q4: Capital will be used for further mergers and acquisitions rather than a stock buyback. - David E. Zalman(CEO)

What are the capital deployment priorities post-acquisition, including potential for a stock buyback? - Manan Gosalia (Morgan Stanley)

2025Q2: Given the high level of M&A activity, it is suspected that capital will be used for further mergers and acquisitions rather than a stock buyback. - David E. Zalman(CEO)