Catherine Mealor — Managing Director, KBW
Thanks. Good morning.
Tim Timanus — Chairman, Prosperity Bancshares
Good morning.
Catherine Mealor — Managing Director, KBW
I wanted to start just on the Stellar acquisition. Congratulations on that. I noticed in the slide deck you, you're using a different estimate for Stellar versus consensus. Looks like it's about a $2.20 number versus $2 for consensus, roughly. Just curious what's driving that difference and your confidence in that level of earnings coming over from Stellar. Thanks.
Tim Timanus — Chairman, Prosperity Bancshares
Catherine, you probably saw their fourth quarter earnings come out. That's really going to influence that, but Paul's here with us today from Stellar, and I'll let him go over it with you.
Paul Egge — CFO, Stellar Bancorp
Absolutely. Thanks, Catherine.
Catherine Mealor — Managing Director, KBW
... Hey, Paul.
Ray Vitulli — President, Stellar Bancorp
We've been thrilled with our growing momentum in the back half of 2025 and what that portends for 2026. We've been able to grow our earning assets in the back half of the year pretty meaningfully, all while maintaining and growing our core NIM, and that paints a great picture for 2026. We actually feel great about the momentum we're taking from a growth perspective into 2026 as well. So if you were to take 2024, just, or pardon me, the fourth quarter, just to be simplistic, and put a kind of more normalized provision onto it and annualize it, you'd be talking about $0.55 per share EPS run rate, which would annualize to $2.20.
Now, we enter 2026 with about $100 million more in interest-earning assets than our average for the fourth quarter of 2025. That's gonna be, help assist us, and then we'll have the first kind of full quarter benefits of the rate changes, the Fed rate cuts that occurred in the fourth quarter. So all that paints a really good picture for us to, maintain and actually upside to, the go-forward earnings run rate. And then I think the last point I'd note is we assume a more normalized consensus level of net charge-offs, and both us and Prosperity have a great track record of delivering meaningfully lower net charge-offs, which would mean, which would, drive lower levels of credit costs, and potential beats to the numbers we put forth.
Catherine Mealor — Managing Director, KBW
Okay, very helpful. Thank you. And then as we think through, you know, growth moving forward, so it looks like part of that is assuming better growth at Stellar, which is great. You typically, from Prosperity, what we've seen with past deals is you do an acquisition, then you shrink a little bit, and that's been part of the headwinds that we've seen at growth at Prosperity recently. So why is this acquisition different? And what kind of forecast for growth in 2026, in 2026 should we expect for Prosperity? Thanks.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I think this is different. We've, Bob and I have known each other for probably around 10 years plus. And, and there, again, we're across the street, so we can throw rocks at each other. So, to me, it takes a lot of risk out of a transaction like this. I think, we've talked about doing this for a lot of years. It makes a lot of sense. There's -- I think there will be efficiencies through this, through this. And I would say, as far as growth going forward in 2026, I would say that, our plate is pretty full with the transactions that we have. I think that we're gonna primarily focus on the integration of the three banks that we have.
So, and having said that, also, I think the Stellar Bank is very much like our bank, so with some of the banks that we buy, we know that either their deposits are extremely high or their loans, there's something else wrong, and we have to get rid of them. I don't see that in the Stellar acquisition. I think that they're very similar to us. So I feel good about that. But again, I think our focus is really gonna be taking care of our customers, taking care of our associates, and actually putting all these three deals together this year. That'll be our main focus.
Catherine Mealor — Managing Director, KBW
Okay. Understood. Thank you.
Manan Gosalia — Analyst, Morgan Stanley
Hi, good morning, all. David, maybe, can you help us think about the price of the acquisition? You know, 18 times one-year forward does feel a little high, but, you know, I know you mentioned the higher level of NII and the synergies. Maybe if you can help us appreciate, you know, all the synergies and growth prospects that the combined banks have. And also, you know, how you think through the earn back period, 4.5 years, earn back is a little bit higher than what you've done recently.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah, you know, I can start off in saying I think, this, I don't know if this is a good analogy or not, but I think banks are a lot like cars. You know, I can drive a Ford Pinto or I can drive a Range Rover. A Pinto will probably get me wherever I need to go, and I can probably throw it away and not lose a bunch of money when it's gone, or I can really enjoy and have a Range Rover that's, that's gonna really be something and have a good resale value. You know, there's a big difference in, in the price of things, and I wish-- I think some people have a harder time doing that. A bank that's good deserves a premium price. These guys, the, it's just a, it's a premium bank.
The thing that we really look at is, you know, we say the price, but I look at it and I say, okay, in 2027, our combination will be earning $7.34 a share once we get all of this put together. So at $7.34, if we trade just at 13x earnings, our, you know, our stock value would be $95.42. If we traded at 15x earnings, and then somebody may say, "Well, that's high." Well, I would just tell you, the first bank in Colorado went for that much.
You saw these other banks, and I can tell you, I could, I could call up any one of the mid-sized banks underneath Bank of America or, or J.P. Morgan, the guys underneath them, and they would offer us 15 times earnings, probably in a New York minute, which would indicate a price, a value of our bank at least at $110 a share. So there—we paid a lot for it, but I would tell you, too, that it, it should be easy for anybody to see that the, the franchise value, not only, not only is it accretive, but the franchise value is really enhanced by us being one of the largest banks in the Houston market. So I think the combination of the earnings-...
the enhancement of the franchise value, and that's what sometimes, I don't know, what kind—how do you put a price on the enhanced franchise? But I can tell you it's significant, and I think that any, anybody would want to probably acquire us as being one of the bigger banks in the state of Texas and, and the franchise that we have. And so that's, that's kind of the rationale behind it. It also, you know, it, it takes us from being a—these, all three of these deals, it takes us from having a 13% return on tangible capital. I mean, we're looking at a 17% return on average tangible capital in the year 2027. So not only did I like it, not only is it pretty, the metrics make sense for all of these deals.
That's kind of the rationale.
Manan Gosalia — Analyst, Morgan Stanley
Got it. That, that's helpful. And, maybe as you think about, the capital deployment strategy from here, I mean, I guess you're now integrating three deals, together. Is that, you know, is that it for now? Like, would you focus on the integration for the coming months? And, you know, just given where the stock price is, is there, more of a focus on buybacks? You know, I know you guys upped the authorization yesterday, so maybe just help us think through, capital deployment plans from here.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Well, let's say we're gonna do any more deals, they've got me handcuffed in this room, so I can't get out. But you know, if you can look at the projections going forward in the year 2027, I think we're projected to make around $880 million. And so we have about 120 million shares outstanding, and you can do the math. We're paying $2.40 a share in dividends. So that's $288 million or so. I think that's right. So you subtract that 288 from 680, you know, we have about $600 million, so we have a tremendous... Not only do we have a strong capital to begin with, we have just like a, I mean, like a printing press.
You know, if something doesn't go wrong with $600 million, we can do a lot with that. We can buy a lot of stock back, we can increase dividends, and we can buy more banks. It's a high-class problem.
Manan Gosalia — Analyst, Morgan Stanley
But any immediate priorities there? Like, would you tilt more towards buybacks in the near future?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I think that we would, when it's opportunistic, we certainly would look at buybacks, for sure. We just, as I'm—with this last year, our stock went down in the $60s, the low $60s, and I think you saw where we spent $157 million on buybacks this last year, and I think we have another 5% approved for this year. So you're talking, was that $300-something million that we can buy back this year as well, and that's been approved already by the Fed.
Manan Gosalia — Analyst, Morgan Stanley
Got it. I appreciate it. Thanks so much.
David Chiaverini — Analyst, Jefferies
Hi, thanks for taking the question. So, you mentioned about, you know, 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?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Well, again, they're all planned, and somebody may want to talk about the which ones we have in order, but I mean, we've done 40 of these transactions, so I don't think this is gonna be... There may be three of these, but again, we're doing our own operational integration here, rip, probably in the next few weeks or so.
David Chiaverini — Analyst, Jefferies
Yeah.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
And then, right after that, we're going into American Bank, David, what, also back then?
Manan Gosalia — Analyst, Morgan Stanley
So I think, specific to address the question, we have designated teams who does that. So it's not like our people who is out in the field doing the, you know, organic growth, they'll be focused on this. We have specific team focusing on integration. So we have a plan to convert these banks, those two bank, American Bank and Partners Bank this year, in the sense of integration. And in the process, so far it's going well, and we started in advance, so it's not like we're starting now. Overall, we are scheduled to do conversion later this year, and it's working as we planned.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
We feel confident where we're at. It's not to say that you won't ever have any glitches on anything that you do. There always may be something like that, but for the most part, we have a well-seasoned team that's done many of these things, and they feel very comfortable where we're at.
David Chiaverini — Analyst, Jefferies
Great. Thanks for that. Can you talk a little bit about the cultural fit? How did the deal come together, and why now with the deal?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Well, the time seems to be right. I mean, if you look in the previous administration, I think we were trying to do some bank deals and even much smaller deals. I think the last bank we took, I may be wrong, but it took us almost a year to get completed. I think that from a regulatory standpoint, the regulatory things are in place to make this happen. The timing is right and, you know, it was right—I think it was right for us, and I think it's right for them. It just seemed to be the right time.
David Chiaverini — Analyst, Jefferies
Can you talk about the cultural fit and how the deal came together?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah. I mentioned earlier, Bob and I have known each other for 20 years or more. I mean, I would say, I said this in our meeting the other day. I said, "If I got killed and ran over tomorrow, and Bob took my place, I don't think that our bank would change, our combined bank would change at all. I think that, if anything, I think they may be even more conservative than we are on the loan side, and that's hard to believe. So we feel we did our due diligence, and we feel really good. We feel the same way about things.
You know, again, this. We've dated and romanced for probably 10 or 20 years, and it's not like, you know, we just saw this pretty girl across the street, fell in love, and got married in a month, you know? This is something that we really thought about and have thought about and talked about with each other for years and years, and the timing just seemed to be right, right now, and we did it.
David Chiaverini — Analyst, Jefferies
Thanks very much.
David Rochester — Managing Director and Head of U.S. Bank Research, Cantor
Hey, good morning, guys.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Good morning.
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. So I was just curious if you see that buyback opportunity as occurring now? And then I know there are blackout periods related to the outstanding deals. If you could just talk about when you'd be actually able to buy back stock if you saw that opportunity in the near term, and if you had a 10b5-1 plan. Thanks.
Yeah, I don't know what the 75... What, what plan is he talking about?
Charlotte Rasche — EVP and General Counsel, Prosperity Bancshares
The 10b5-1 plan.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
We don't have one.
Charlotte Rasche — EVP and General Counsel, Prosperity Bancshares
Yeah, we don't have a 10b5-1 plan.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah, and David, I would say on the others, you know, basically, I'd probably stick to our statement that you've seen us buy in the past when it's been opportunistic, and we'll do that again.
David Rochester — Managing Director and Head of U.S. Bank Research, Cantor
Okay. Any sense for blackouts, when those pop up, when those end, that kind of thing?
Charlotte Rasche — EVP and General Counsel, Prosperity Bancshares
Well, we're in a blackout today for earnings.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Right.
Charlotte Rasche — EVP and General Counsel, Prosperity Bancshares
So we have formal earnings blackout and things, and there's some blackouts around the merger transaction, of course, around shareholder votes and things like that, when you start soliciting the Stellar shareholders.
Asylbek Osmonov — CFO, Prosperity Bancshares
But at this price-
David Rochester — Managing Director and Head of U.S. Bank Research, Cantor
Before you do that... Sorry, go ahead.
Asylbek Osmonov — CFO, Prosperity Bancshares
I say at this price, and then when it's available for us to buy back, we'll do buybacks.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah.
David Rochester — Managing Director and Head of U.S. Bank Research, Cantor
Sounds good. I wanted to get your thoughts on the trajectory for NII and, and the margin through 2026, just given the three deals you got coming in. Just assuming you close Stellar June 30, can you just help us understand what you see as that path through the year? Thanks.
Asylbek Osmonov — CFO, Prosperity Bancshares
Yeah. If you look at Prosperity, I'm just going to talk about Prosperity and with two smaller acquisition on projection. We definitely see the improvement in the margin as for 2026 and beyond. And it's because the margin on the smaller banks were higher than ours, the standalone, so that's have accretion there. But if you look at our balance sheet with, you know, repricing our bond portfolio, as we mentioned, as I mentioned, that we have $1.9 billion cash flowing from that, so we'll be repricing that. Our yield on the bonds are 2.50 into pricing. I think we can get around 4.50 right now, so 200 basis points there. If you look at our fixed loans, that's getting repriced as well.
So, putting all together, our kind of projection for 2026, standalone, showing about around 3.50 margin for 2026. But, if you add the Stellar Bank together, I think you're the margin on Stellar about more 4.2%, so that will be very accretive, too. So combined together, you can do the math. It will be looking very, very good for 2026 and-
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
A minimum of 3.5.
Asylbek Osmonov — CFO, Prosperity Bancshares
Yeah.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
A minimum of 3.5.
Tim Timanus — Chairman, Prosperity Bancshares
3.5 without Stellar.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah, without Stellar.
Asylbek Osmonov — CFO, Prosperity Bancshares
Yes. So that's looking really good.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
That comes a long way. It, you know, it goes back to where 2 years ago, somebody said: Well, you know, the bank in your peer group, you know, you didn't perform as good as your peer group over the last couple of years. Well, the truth of the matter is, we didn't. I mean, our bank has never tried to call rates one way or another, and we bought in every market. In fact, we should be buying more, but I think we're still scared from what happened last time. So for the most part, we said, you know, we try to buy and have a 3.7, 3.8 year duration, and we said 2 years ago, we got caught in that, and as this thing turns, we would turn it around.
We went from a 2.75, 2.75 net interest margin to 3.5 today. So we did everything we said, and candidly, we have very, very strong tailwinds in back of us, and I think that not only looking at 2026, 2027, without anything, we have some very, very strong tailwinds going at the same time, so.
Asylbek Osmonov — CFO, Prosperity Bancshares
Yeah, want to add to that. I think we mentioned a year or two ago that we wanna reduce our borrowing levels. You know, we were almost at $3.9 billion borrowing two years ago, and we have concerted program that we're gonna reduce it to level that we are right now. So now we are—we believe that, borrowing level is what we expected, within $1.5-$2 billion, and now we're gonna be, you know, with, growth in deposits and addition of the two banks, we're gonna start growing our average earning assets, while past two years we were shrinking because we wanna-
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I think it was just a matter of the time that somebody could make an argument, and this email, the sharp email that I got this morning made that argument. I can make an argument that you could go back...
Anybody can pick the year and time that they want to, but if you go back and for the last, since 2000 till today, and you compare us to the S&P 500, and you compare us to the Nasdaq Bank Index, our bank has returned 1,447% compared to the Nasdaq Bank Index of about, I'm thinking, 181%, and it's compared to the S&P 500, 665%. So I think if you're a long-term player, you need to jump in and buy this stock because I did the math for you a while ago, what, what this, what this thing should trade for. And, so it just. I think it's one of the greatest opportunities, and you, you will benefit if you're a long-term investor right now.
David Rochester — Managing Director and Head of U.S. Bank Research, Cantor
All right, great. Appreciate all that color. Maybe just one last one on the, the cost save estimate. I know historically, you guys have been pretty conservative or have outperformed your cost save expectations. I'm just wondering how you feel about, about this level here that you've, you've talked about, and if there are any branch closures that, you'll have to take care of as a result of the higher concentration of branches in Houston. Thanks.
Asylbek Osmonov — CFO, Prosperity Bancshares
So regarding the cost save, we feel very comfortable with the 35% cost save that we printed, and it's a combination of the combining two banks that have the same footprint, so of course, there'll be some consolidation of branches. Also, there's, you know, as you know, the system conversion going to help. So we took deep dive, and we feel very comfortable with the cost saves.
David Rochester — Managing Director and Head of U.S. Bank Research, Cantor
Great. Thanks, guys.
Janet Lee — Analyst, TD Cowen
Good afternoon.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Afternoon.
Asylbek Osmonov — CFO, Prosperity Bancshares
Good afternoon.
Janet Lee — Analyst, TD Cowen
Back to M&A, if I were to ask it in a different way. So if I look at your pro forma CET1, it will be about 13.5, which is slightly above peers, but definitely more normalized. In the past, or at least over the 5 years, you've had CET1 running above peers. Just given the size of the deal, which was more meaningful than the recent ones and the pro forma CET1 post the Stellar deal, does this change your appetite for M&A, whether it's your appetite for M&A itself or the type of deals that you might be potentially looking at in the future?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
No, even like I mentioned a while ago, we're, when these things are combined, you're going to have over $600 million a year just in excess cash flow. We had excess capital, and everybody was asking what we were going to do this time. Again, we didn't have, it wasn't a requirement that we pay 30% in cash down. We did to try to utilize our capital to get a better return on our average tangible capital. And I think probably just, just in earnings over a couple of years, if you've done the ratios telling to see where, if, what, we're back up within a year or two, aren't we, on-
Asylbek Osmonov — CFO, Prosperity Bancshares
Excuse me, on how fast we build our capital back?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Right.
Asylbek Osmonov — CFO, Prosperity Bancshares
Yeah, we'll be back in a couple of years at minimum.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Minimum, a couple of years, we'll be back to exactly where we're at.
Janet Lee — Analyst, TD Cowen
Got it. That's fair. For loan growth, so it seems like the potential acquired portfolio runoffs from loans or deposits from the Stellar deal would not be material or meaningful. So in terms of 2026, I believe you were hoping for that, you know, low single digits or low to mid single digits kind of growth on the balance sheet. Is that the fair way to assume? Or I don't want to put words in your mouth, but how should we be thinking about the overall trajectory there?
Kevin Hanigan — President and COO, Prosperity Bancshares
Yeah, I think that's a good assumption. This is Kevin. Low single digits is good. As you know, Stellar's been growing faster than that, and we don't see any reason that that would change. I think American Bank has been growing faster than that as well. And we talked about the quality of the Stellar portfolio. I'd say the same about the American Bank portfolio. They were. We talked about Stellar maybe being cleaner than us. I think American Bank was cleaner than us.
Asylbek Osmonov — CFO, Prosperity Bancshares
Right.
Kevin Hanigan — President and COO, Prosperity Bancshares
So in terms of the quality of the assets we've purchased here between American and Stellar, they are stellar.
Janet Lee — Analyst, TD Cowen
Great. Thank you.
Peter Winter — Analyst, D.A. Davidson
Hi, good morning. Thank you. Can you just talk a little bit? You mentioned the increase in nonperforming assets. If you could give a little bit more detail. Last quarter, you highlighted the, like, $35 million SNC credit. Just wondering if that was part of the increase in nonperforming assets and, and just how you're thinking about credit quality going forward?
Kevin Hanigan — President and COO, Prosperity Bancshares
Yes. As we said, and I would reiterate what we said last quarter, we, we said the portfolio is, is very clean. We had our eye on one particular asset, which we had downgraded to substandard in the third quarter. It's a $35 million Shared National Credit that, that we're not the agent on. That credit was downgraded further in the fourth quarter to non-performing, so it's still substandard, but now non-accrual. As I said on the call in the third quarter, if, if that became more problematic, and at this stage, it has become more problematic and we, we haven't worked things out, although it is... I will tell you, it is a well-known, very large private equity firm who has a history of backing their deals. That doesn't mean they're backing this one, but they have a history of doing so.
It's just that the resolution conversations have been challenging, or were challenging in the fourth quarter and continue to be challenging. We don't see a need on this or the other credit we talked about last quarter, which is in the buy here, pay here space. We don't see the need at this stage or if something went further wrong with these credits that we need to post a reserve, as a result of it.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I'd add that the other large-
Kevin Hanigan — President and COO, Prosperity Bancshares
Post a provision, I should say. We have reserves up against both.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I'd say the other large credit is a, is a participation from one of the banks that we bought. Actually, we originated and sold the majority of it to another bank from the Lone Star deal, and basically, it's well secured with real estate. In fact, there should be excess equity in that. There shouldn't be any loss in that.
Jared Shaw — Analyst, Barclays Capital
Got it. And with the Stellar deal, what is the purchase accounting accretion going to the run rate? You gave it for the first quarter off the bat, but I'm just wondering what it is after Stellar.
Asylbek Osmonov — CFO, Prosperity Bancshares
So the guidance that I provided on purchase accounting, fair value, loan income, that's for American Bank and Texas Partners Bank. If you look at just Stellar, I think on page 16, we disclose what the loan marks and AOCI marks. So, I think on the loan mark, we're having about $31 million on loan marks at the pre-tax, and we have about $33 million net of tax and AOCI. So for our modeling purpose, we use sum-of-the-years'-digits calculation. So if you look at for the 2027, I think the mark accretion is about $30 million combined, $30, $31 million combined.
Jared Shaw — Analyst, Barclays Capital
Mm-hmm. Okay. Thanks for taking the questions.
Michael Rose — Analyst, Raymond James
Hey, good morning, guys. Thanks for taking my questions. Anything to do, you know, once the deal is either leading up to or once the deal is closed, just on the bond book? I know most of Legacy Prosperity's book is HTM, but Stellar's is AFS. Just wanted to see if there's an opportunity for a potential restructuring that may be not included in the pro formas here. Thanks.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
You know, it's not. We, everybody asks, "Why don't you just do financial engineering, sell your deal, sell your portfolio?" If you can do the math on $10 billion, you make an extra 2%. You know, 2% a year is another $200 million income a year. So you take your loss after tax, $600 million, and you get it back in 3 years. But I just... Again, I just feel like that's just financial engineering. We could do it. It would make us look good, make us look like, well, you do $200 million after tax and see what we have extra in income between us. I mean, we'd be making a whole lot of money, but again, I think that's just financial engineering.
And again, we've always said that we're not trying to call rates one way or play the market. We're just trying to be in every market and buy with a 3.8-year duration. And so sometimes it'll be real good, and sometimes it'll be low. But I, I don't, I don't see any change in that. And again, we will mark to market the-
Asylbek Osmonov — CFO, Prosperity Bancshares
Stellar.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
The top portfolio from Stellar, for sure.
Michael Rose — Analyst, Raymond James
What would that do to the asset liability sensitivity?
Asylbek Osmonov — CFO, Prosperity Bancshares
I think they are a little bit of an asset sensitive on that. I think what we're gonna do I mean, there will be some securities that we're gonna sell and kind of buy back in a mortgage-backed security like we do. So I think from the standpoint, it's gonna be maybe the same as a slight asset sensitive.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
We'll try to buy ahead so that it's not so asset sensitive. We'll try to get back to neutral if we can.
Michael Rose — Analyst, Raymond James
Understood. And then maybe just finally, if there's any Stellar guys in the room, I think Paul was in there. You know, I guess-
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Bob.
Michael Rose — Analyst, Raymond James
Just given how robust the NII forecasts are versus where consensus is. I guess the question is from your point of view, why sell now if the outlook is or merge or you know merge with Prosperity now if the outlook's so good? Thanks.
Bob Franklin — CEO, Stellar Bancorp
Well, I think it's rare to get the opportunity to find somebody that kind of looks like you and thinks about the world the same way as you do. We've always concentrated on a real quality deposit base. I think that's what Prosperity has always done. We're really sensitive around the way we fund ourselves to get a high-quality deposit base, low cost of funds, so that we can control that part of the deal. It's hard to find people to partner with that look like that. But I think the expanded balance sheet, the ability to continue to do kind of where the momentum started back in the third quarter into the fourth quarter, and we can see it in the first quarter, starting to have a real good momentum.
And because we look so similar and we do similar loans, similar types of deals, it's not a heavy lift to understand that we could continue to do those kind of things. So, we think we're going to continue to drive that momentum, and we feel good about what the future looks like, certainly over the next 12 months, because I think we're on a good path.
Michael Rose — Analyst, Raymond James
Makes sense. Thanks for taking my questions, everyone.
Jared Shaw — Analyst, Barclays Capital
Hey, good afternoon. Maybe just, you know, going back to the original comment just about how, you know, your internal expectation for Stellar is better. When we look at their pipeline, are they—David, do you feel like they're able to get the pricing and terms that you said you're not able to get in other markets? And if so, would that cause you to reallocate more internal Prosperity resources to those markets to take advantage of that, you know, maybe disruption or relative difference between their markets and the rest of yours, what you're doing in the state?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I would like to say, to tell you that it would be great if we just use their loan team, and they'll make higher rate loans. But what usually happens is, banks that we join together, the return actually comes down. I mean, the net interest margin, it gets, it's more. They're probably, you know, there's a—what is it, 4.2, you said? And ours is-
Bob Franklin — CEO, Stellar Bancorp
Margin, yeah.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Ours is 6.5. So a part of that margin is because they don't have as big of a bond portfolio. So their margin is better because they have a better loan-to-deposit ratio, too. But even having said that, even as we start merging together, it seems like their pricing from the bank that joined us comes down a little bit. But I just think the number of people, though, that Stellar has on the ground, and even with American Bank that had – they had a loan production office here in the Houston market, too. Together, we should really be able to inundate the market. This is such a big market. I mean, I don't know that people realize how many people move in, what the GDP is of Texas. It's just really phenomenal.
So, I think the opportunities are just unlimited, especially we get momentum, put our guys together, guys and girls. I think the momentum is really going to be good for everybody. And I think it will. They maybe even had a better than us, where we a lot of our payment or pay to lenders is maybe more discretionary. We do look at the actual production. They were more on a formula-driven deal, and so that I think that helps them, too. So we'll probably look, you know, every bank that we join with, it looks like we take the. We try to do the best, we take the best from them and bring it to us.
And so I think they should be able to help us with some of this stuff, too. And hopefully, hopefully, they won't lower their rates that they're charging, let's say that.
Kevin Hanigan — President and COO, Prosperity Bancshares
David, let me, if I can tag on to you on that.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah.
Kevin Hanigan — President and COO, Prosperity Bancshares
I'll be real simple. I think the margin differential is threefold, and then, Bob or somebody from Stellar could comment whether they agree with this or not. But the obvious differences are we, we've got $10.5 billion in securities earning 2.17%. That's a drag. The second big item on our balance sheet that's a drag is $8.3 billion of single-family mortgages that were originated in times where rates were pretty low. And that portfolio is a drag. So those are the two biggies. But the one that doesn't jump out at you all that we see, and we saw throughout due diligence, is on the loan side of the bank, the basic commercial lending side of the bank.
No, forget single-family mortgages and some of the other stuff, just the basic commercial lending. They have a way more granular portfolio. The granularity of that portfolio basically means it's smaller deals for the most part. They still do some big deals, but if it's just on average, smaller deals, for the most part, tend to get higher pricing.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Right.
Kevin Hanigan — President and COO, Prosperity Bancshares
So it's those three factors that really drive their margin relative to ours. And I see ours improving as those low rate assets run off, and I don't see theirs really having to come down all that much. Bob, would you?
Bob Franklin — CEO, Stellar Bancorp
Yeah, I agree, Kevin. I mean, we do have a granular portfolio. I think there's getting to be more and more balance to that over time, but it certainly started off that way when we combined the two banks together. But pricing's competitive. We're in Houston, Texas, and pricing is competitive, so no, we're not, one's not going to be better pricing than the other. You guys are just as good as us with pricing loans, so but for the most part, it is granular, and we do get a little bit higher pricing on the smaller stuff. So yeah, I would agree with that.
Jared Shaw — Analyst, Barclays Capital
Okay, thanks. And then this is a follow-up.
Bob Franklin — CEO, Stellar Bancorp
Which goes with cheap deposits. Yeah. Right. Which is why your non-interest-bearing deposits are generally a bit higher than ours. So, just a little additional inside baseball.
Jared Shaw — Analyst, Barclays Capital
Great, thanks. I guess just as a follow-up, you know, what are some of the assumptions on customer retention, you know, as this will be, I guess, an additional name change over the past few years for Stellar? Do you think that there's... What do you think the risk is of retention?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Well, I'll answer first, or, Bob, you want to go first? I mean-
Bob Franklin — CEO, Stellar Bancorp
I was just going to say, I mean, I think we're doing a good job of retaining our guys. And I think that's the big key, is to make sure that we keep our customer-facing folks out there, that our customers see every day and not changing that, so.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah, I mean, we entered into about 15 non-compete agreements and about 70 letter retention agreements. So we I think the team, the team's on board. It's it doesn't mean you won't lose somebody, but I think for the most part, you know, we'll be able to retain the customers, and it's not like, it's not like another bank that's coming out from another state that's just jumping in. They, they know who we are. We've advertised here. We've... You know, it's, it's not somebody that they're, that they're not familiar with. So I, I, I think the retention is good here. I think... And again, they don't have a lot of high-yield time deposits or something that's going to run off like that. So I I mean, I this is really a great combination, guys. It's truly... It's a, it's a marriage made in heaven.
Bob Franklin — CEO, Stellar Bancorp
And the other piece, David, I think, is the credit cultures are very similar.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Right.
Bob Franklin — CEO, Stellar Bancorp
We've always thought about the world the same way. And so I don't think you see that drastic change that you do in some combinations, where people say: Oh, gosh, you know, this, maybe this is too conservative, or whatever they might think.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Well, you're a lot like me. I mean, some of the guys, I mean, even analysts, they want to say: "Okay, you got to have double-digit loan growth. Got to do this, got to have 6%, 10% every year." Well, your deposits are growing 3%. What do you do when you run out of money? So, I think we have a lot of the same logics that, you know, we're used to around the 80% loan-to-deposit ratio. Again, we bring in new deposits, we'll make more, but we have a lot of liquidity. I think if there's ever a run on our bank, for example, I think we have, like, $16 billion that we can draw in in a minute. So, we have a lot of liquidity. Y'all have a lot of liquidity.
The combined earnings of these two banks, the liquidity of these two banks, they're so similar. I think it's a good deal.
Speaker — Company Representative, Prosperity Bancshares
Thank you.
Jon Arfstrom — Analyst, RBC Capital
Hey. Hello, everybody.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Hey, Jon.
Jon Arfstrom — Analyst, RBC Capital
David, for you, just a couple on the numbers. What's your level of confidence in the 734 estimate for 2027? I don't think you have any revenue synergies in there, so it seems like it's just cost saves. But, you know, consensus 680s, you talk about the accretion. How confident are you in the 734?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Well, Cullen just handed me the $7.34, so if he's wrong, we'll shoot him. We feel very confident, and I think we do have some, we do have some triggers that I think that above beyond expenses. I mean, right now, they don't charge NSFs, the charges. I'm not saying one way or another, we'll go the other way. Their cost of money is a little bit higher than ours. So we do have some other triggers, but I feel very confident in the $7.34. You know, once we get everything combined, I think that's a really real number, and that's why I can't believe trading where we're trading if we're gonna make $7.34. I mean, again, we should have a $95-$100 price target, really. Even you, Jon.
Jon Arfstrom — Analyst, RBC Capital
I hear you,
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
That 75 stuff or 78.
Jon Arfstrom — Analyst, RBC Capital
Well, okay, this begs the next question, then. You kind of opened the door to it,
Well, with your 15 times acquisition multiple math-
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Right
Jon Arfstrom — Analyst, RBC Capital
... that you shared earlier, you know, the question is, I'm not saying you should do it, but do the larger regionals call on you frequently, and is there a bid if you want it? Again, I'm not saying you should, but I'm just curious on that.