Prosperity Bancshares Inc 2026 Q3 Earnings Call

Say, and welcome to the Prosperity Bancshares third quarter 2026 earnings 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 telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the comments over to Charlotte Rasche. Please go ahead. Thank you.

Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares third 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'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, and 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, Randy Hester, Chief Lending Officer, Mays Davenport, Director of Corporate Strategy, Bob Dowdell, Executive Vice President, and Ray Vitulli, Houston Area Chairman. 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. 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.

Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in our 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 third quarter 2026 conference call. I am pleased to announce that the board of directors approved increasing the fourth quarter 2026 dividend to $0.64 per share from $0.60 per share that was paid in the prior four quarters, an increase of 6.7%. The increase reflects the continued confidence the board has in our company and our markets. The compound annual growth rate in dividends declared from 2003 to 2026 was 10.4%. We continue to share our success with our shareholders through the payment of dividends and opportunistic stock repurchases while also continuing to grow our capital. We are proud of this year's growth and would like to highlight the following results. Prosperity's total assets reached $54.1 billion at September 30, 2026, up $15.8 billion or 41% compared with $38 billion at September 30, 2025.

Our loans totaled $32 billion at September 30, 2026, an increase of $10 billion or 45% compared with $22 billion at September 30, 2025. Our deposits were $41 billion at September 30, 2026, up $13 billion or 48% compared with the $27.8 billion at September 30, 2025. These increases primarily reflect our three recent mergers. We are highlighting their magnitude because they demonstrate the expertise of our associates, who have extensive experience executing acquisitions and integrating the acquired institutions. Our greater scale strengthens our competitiveness, improves efficiency, and enables technology investments that would be difficult for a smaller bank. We completed the operational integration of American Bank in September. All American Bank locations are now branded Prosperity Bank, and we welcome the American Bank customers and associates to our family.

We remain focused on completing the operational integrations of Texas Partners Bank in November and Stellar Bank in March of 2027 and delivering the outcomes we believe are possible. The Texas Partners and Stellar Bank teams are already an integral part of our organization and operations. We are excited about our future as a larger bank, including the potential growth in earnings. Excluding the one-time expenses listed in the press release, net income was $200 million, and earnings per diluted common share was $1.67 for the three months ending September 30, 2026. Annualized returns on average assets and average tangible common equity were 1.5% and 15.81% on average tangible common equity for the same period. Excluding the merger-related expenses, the efficiency ratio was 48%. We are proud of these earnings and expect them to improve after all merger-related cost savings are realized.

The net interest margin on a tax equivalent basis was 3.73% for the three months ending September 30, 2026, up from 3.47% for the three months ending in June 30, 2026, and 3.24% for the three months ending September 30, 2025. This 49 basis points year-over-year increase reflects the strong net interest margin improvement we expected. Loans totaled $32 billion at September 30, 2026, compared with $22 billion at September 30, 2025. We have seen an increase in our average monthly loan production numbers over the past two quarters. This should help bolster our pipelines next year. In the third quarter of 2026, average monthly new loan production increased approximately $180 million compared to the second quarter of 2026, and approximately $320 million compared to the first quarter of 2026. The overall deposits totaled $41 billion at September 30, compared with $27.8 billion at September 30, 2025.

Our linked quarter core deposits, excluding Stellar Bank, increased 2% annualized during the third quarter of 2026. Our non-interest-bearing deposits of $13.8 billion at September 30, 2026, represented 33.6% of total deposits. The level of non-interest-bearing deposits as a percentage of total deposits continues to remain strong in light of our recent acquisition activity. Looking forward, we believe core deposits will continue to grow in line with our historical run rate of 2%-4% growth, and we remain conservative with our loan growth projections for 2027, projecting flat to slightly increasing loan balances due to the recent acquisitions. We believe that the combination of our growth outlook with our loan pipelines, assets repricing, net interest margin expansion, and the realization of our cost savings will drive meaningful EPS growth in 2027.

Our non-performing assets total $193 million, or 41 basis points of quarterly average interest-earning assets at September 30, 2026, compared with $119 million, or 36 basis points of quarterly average interest-earning assets at September 30, 2025, and $130 million, or 34 basis points of quarterly average interest-earning assets at June 30, 2026. The amount at September 30, 2026, and June 30, 2026, was impacted by non-performing assets acquired in the mergers. The allowance for credit losses on loans and off-balance sheet credit exposures was $629 million at September 30, 2026. The allowance for credit losses on loans was three times the amount of non-performing assets. We are excited about the synergy we have with our new partners, Stellar Bank, Texas Partners Bank, and American Bank. Our top priority is the operational integrations of the remaining two banks, and our combined teams are working very hard to ensure they are successful.

We also continue to have conversations with other bankers considering strategic opportunities and are open to transactions that will be beneficial to our company's long-term future and will increase shareholder value. The Texas and Oklahoma economies continue to expand in late 2026, despite labor supply constraints and headwinds from inflation and energy prices. Texas has a growing population of 31.7 million and continues to attract people and businesses with its business-friendly state government and lack of a state income tax. Major construction projects across Texas include new data centers, factories producing various products from chips to new drugs, and SpaceX and Tesla projects. Both states remain attractive places to live and do business. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss the specific financial results we achieved.

Thank you, Mr. Zalman. Good morning, everyone. The third quarter represents the first full quarter that includes Stellar Bank, and our results reflect both the increased scale of combined company and ongoing integration activities for all three merged banks. Net interest income before provision for credit losses for three months ended September 30, 2026, was $443 million, an increase of $169.5 million compared to $273.4 million for the same period in 2025, an increase of $112.4 million compared to $330.6 million for the quarter ended June 30, 2026. The net interest margin on a tax-equivalent basis was 3.73% for the three months ended September 30, 2026, an increase of 49 basis points compared to 3.24% for the same period in 2025, an increase of 26 basis points compared to 3.47% for the quarter ended June 30, 2026.

The linked quarter increase was primarily due to additional Stellar Bank and higher investment yields. Excluding purchase accounting adjustments, the net interest margin for the three months ended September 30, 2026 was 3.59%, compared to 3.19% for the same period in 2025 and 3.41% for the quarter ended June 30, 2026. Fair value loan income for the third quarter of 2026 was $11.6 million, compared to $4 million for the second quarter of 2026. Fair value loan income for the fourth quarter of 2026 is expected to be in the range of $7 million-$10 million. Non-interest income was $52.7 million for the three months ended September 30, 2026, compared to $60.7 million for the quarter ended June 30, 2026 and $41.2 million for the same period in 2025.

The second quarter of 2026 included a net gain of $8.2 million resulting from the conversion of Visa stock, partially offset by the loss on the sale of investment securities. The non-interest income for the third quarter of 2026 was reduced by $2.6 million net loss due to write-down of assets. Non-interest expense was $308.6 million for the three months ended September 30, 2026, compared to $176.2 million for the quarter ended June 30, 2026 and $138.6 million for the same period in 2025. The third quarter of 2026 included $69.7 million of merger-related expenses. Excluding these merger-related expenses, non-interest expense was $238.9 million. This amount includes the operating expenses of Stellar Bank. During the third quarter, we continued to realize cost savings from the acquired banks, with additional savings expected as we complete the remaining two system conversions.