Prosperity Bancshares, Inc. (PB) Earnings

Management highlights

- Strategic Transactions & Integration * Completed two acquisitions: American Bank Holding Corporation on January 1, 2026, and Southwest Bancshares, Inc. on February 1, 2026. Announced the pending merger with Stellar Bancorp on January 28, 2026, with all regulatory approvals received and closing expected July 1, 2026. * Completed a firm-wide core banking system conversion in February 2026, moving from a legacy batch system to a modern real-time platform that reduces processing time significantly. * Scheduled operational integration timelines: September 2026 for American Bank, November 2026 for Southwest Bancshares, and March 2027 for Stellar Bancorp. * Repurchased ~837,000 shares of common stock in Q1 2026 for $57 million, at an average price of $68.15 per share, to enhance shareholder value. - Industry Recognition * Ranked among Forbes America's Best Banks for 2026, and has placed in the top 10 for 14 consecutive years since the list launched in 2010. * Recognized by Newsweek as one of America's Best Regional Banks, and ranked 15th in S&P Global Market Intelligence's 2025 Top 50 U.S. Public Bank Rankings. - Market Context * Texas and Oklahoma (the firm's primary operating markets) have strong, diversified economies supported by population growth, business-friendly policies, no state income tax, and cross-border trade activity, outperforming most other U.S. regions in growth even amid a national slowdown. * Texas' labor market has cooled after years of rapid expansion, but steady growth is expected for 2026, with the state's size and diversity positioning it well for future rebound.

Guidance

- Net Interest Margin: Q2 2026 NIM is projected to be flat to slightly higher than Q1 2026's 3.51%. The full-year 2026 average combined NIM (including Stellar, which will be owned for half the year) is projected at ~3.6%, with a combined exit NIM of ~3.7% by the end of 2026. Exit NIM is projected to reach ~3.8% by 2027 if rates hold at current levels. - Non-interest Expense: Q2 2026 non-interest expense is projected to be between $176 million and $180 million, not including additional one-time Stellar merger expenses. The long-term target efficiency ratio is mid-40s (44%-46%), in line with the firm's historical range, achievable once all integration cost savings are realized. - Loan Growth: Organic loan growth is expected to be flattish in 2026, as the firm focuses on integrating three large acquisitions and faces typical post-acquisition loan runoff over the next 12-18 months. After integration is complete, organic growth is expected to return to a low-to-mid single-digit annual trajectory. - Deposit Growth: Organic core deposit growth is expected to continue at 2%-3% annually, excluding normal seasonal fluctuations in public fund deposits. The firm maintains a conservative loan-to-deposit ratio policy, targeting a range of 75%-80%, and will not pursue aggressive growth above 85% without board approval. - Purchase Accounting Accretion: Fair value loan income is projected to remain in the $3 million to $4 million range for Q2 2026. Total pre-tax annual accretion from Stellar acquisition purchase accounting is projected to be ~$10 million to $12 million in 2027, subject to changes in the interest rate environment at closing. - Stellar Bancorp Earnings: Stellar's Q1 2026 adjusted net income of ~$30 million (excluding non-recurring items) is a clean run rate, and the firm is currently tracking above the original full-year 2026 earnings projection of $113 million for Stellar.

Segment performance

Prosperity Bancshares is a single-segment regional bank holding company, so no separate product segment breakdown is provided. Consolidated Q1 2026 results are as follows: - Net income: $116 million ($1.16 diluted EPS), compared to $130 million ($1.37 diluted EPS) in Q1 2025. Excluding $42.5 million in merger-related expenses, adjusted net income was $149.9 million ($1.50 diluted EPS), a 9.5% increase year-over-year. - Net interest income (before credit loss provisions): $321.2 million, up $55.8 million year-over-year and $46.2 million quarter-over-quarter. - Tax-equivalent net interest margin (NIM): 3.51%, up 37 bps year-over-year and 21 bps quarter-over-quarter. Excluding purchase accounting adjustments, NIM was 3.44%. - Non-interest income: $46.5 million, compared to $41.3 million in Q1 2025 and $42.8 million in Q4 2025. - Non-interest expense: $217.3 million, up from $140.3 million in Q1 2025, driven by merger-related costs and acquired bank operating expenses. - Efficiency ratio: 59.2% including merger expenses, 47.6% excluding merger expenses, compared to 45.7% in Q1 2025. - Total loans: $25.2 billion at quarter-end, up 15.1% year-over-year and 16% quarter-over-quarter, almost entirely from the American and Southwest mergers. Excluding merger impacts and net charge-offs, organic loans declined 1.2% quarter-over-quarter. - Total deposits: $32.6 billion at quarter-end, up 16.4% year-over-year and 14.6% quarter-over-quarter, primarily from mergers. Core organic deposits increased 1.2% excluding acquired deposits. - Non-performing assets: $122 million (0.33% of average interest-earning assets), down from $150 million (0.46%) at the end of Q4 2025. Allowance for credit losses: $421 million, with $90 million added via mergers, and a coverage ratio of 1.61% (excluding warehouse loans) at quarter-end. - Q1 2026 net charge-offs: $41 million, an all-time high for the firm, driven by two one-off large credits.

Risks & headwinds

- Increased Competitive Pressure: Out-of-state banks are actively pursuing market share in Texas, underpricing loans on large deals (offering rates 10 bps below Prosperity's target) and offering higher deposit rates to acquire customers. This has caused Prosperity to lose large construction loan deals recently, as the firm has declined to match the aggressive pricing and lower recourse requirements offered by competitors. - Post-Acquisition Runoff: Historically, the firm experiences 12-18 months of organic loan runoff after completing acquisitions, as integration of processes, lending teams and underwriting standards takes time. The firm is currently integrating three large acquisitions simultaneously, which will create headwinds for organic loan growth through 2027. - One-Off Large Credit Losses: Q1 2026 saw an all-time high $41 million in net charge-offs, driven by two large outlier credits: a $30 million loan to a Medicare insurance brokerage where cancellation rates far exceeded underwriting projections, and the lead private equity sponsor failed to back the investment as expected; and a smaller long-standing client loan in the buy-here-pay-here auto space that failed after a post-COVID strategy shift. Management emphasized these are one-off events with no similar large exposures remaining in the portfolio. - Interest Rate Volatility: NIM projections depend on the path of interest rates. If rates fall 100 bps, NIM will decline from current projections, though the impact will be partially offset by the firm's slower adjustment of deposit rates relative to peers. - Integration Execution Risk: Completing three large acquisitions and a core system conversion in a single year requires significant management focus; execution missteps could impact near-term financial results and growth.

Analyst Q&A

• Q: What is the outlook for NIM next quarter after the Stellar merger, and were there any one-time impacts to Q1 NIM? /

  A: Management noted Q1 NIM expansion came from both asset repricing and the two recent acquisitions. Q2 NIM is projected to be flat to slightly higher than Q1, partially offset by $4 million of one-time non-accrual loan income recognized in Q1 that is not expected to repeat. Full-year 2026 average combined NIM including half-year of Stellar is projected at ~3.6%, with a year-end combined exit NIM of ~3.7%.

• Q: How do you compete with out-of-state bank entry into Texas, and what is your expected loan growth trajectory amid this competition and recent acquisitions? /

  A: Management noted Texas still outperforms all other U.S. regions for growth, even with the cooling labor market. Out-of-state competitors are underpricing large loans to gain market share, but Prosperity will not match aggressive low-rate, low-recourse terms for dry loan relationships, preferring to buy higher-yield securities instead. It will allocate a $750 million to $1 billion special bucket for discounted pricing for long-standing core clients with accompanying deposit relationships. Given three simultaneous acquisitions, flattish overall loan growth is expected for 2026 due to typical post-acquisition runoff, with low-to-mid single-digit growth returning after integration. Management remains very optimistic about long-term NIM and net interest income growth.

• Q: What is your outlook for share repurchases, and what impact will Basel III endgame have on your capital position? /

  A: Management confirmed Prosperity has substantial excess capital even after closing the Stellar merger, with ~$500-600 million in annual excess capital after dividends to deploy. The firm will continue active share repurchases as long as the stock price remains at current attractive levels. Basel III endgame is expected to provide a ~50 bps capital ratio benefit from mortgage loan treatment, and the firm is already well-capitalized so the impact is immaterial to its plans.

• Q: Can you give more detail on the two large one-off charge-offs in Q1, and are there similar risks in the portfolio? /

  A: The $30 million charge-off was for a Medicare insurance brokerage that saw policy cancellation rates far higher than projected, leading to large receivable write-downs, and the backing private equity sponsor chose not to support the deal. The second smaller charge-off was a 15-year legacy client in the auto financing space that shifted strategy post-COVID and failed. Management emphasized both are true outliers, with no other similar large non-performing exposures (the next largest non-accrual is only $10 million) and no systemic risk to the overall loan portfolio.

• Q: How does management view the Stellar acquisition a quarter after announcement, given market criticism of the purchase price? /

  A: Management stated it could not be happier with the Stellar deal, noting deep due diligence confirmed Stellar's quality and earnings power, and Stellar is already outperforming the original earnings projections used to price the deal. Management expects that by the end of 2027, when all cost savings and synergies are realized, the deal will be widely viewed as value-accretive, and management feels more confident about the combined future today than it has at any point in the last three years.