Prosperity Bancshares: Closing the Stellar Deal and Chasing 3.75% NIM

Closing the Stellar Deal

Prosperity Bancshares closed its acquisition of Stellar Bancorp on July 1, 2026, marking a major milestone in its ambition to become the largest Texas-based bank. CEO David Zalman announced the completion in the Q2 call, noting that former Stellar CEO Robert Franklin and president Ramon Vitulli have joined Prosperity’s boards, and the integration is now the top priority. The company already has a run-rate view of the combined business: “I am excited to announce that on July 1, 2026, Prosperity Bancshares completed the merger of Stellar Bancorp” — David E. Zalman, Chief Executive Officer · 2026-07-29. This is the third acquisition in a row, following American Bank and Texas Partners Bank, and management has been clear that Stellar Bank is expected to be highly accretive.

The combined entity should generate roughly $780 million in annualized core net income, according to management, before any of the projected cost savings. CFO Asylbek Osmonov guided to $20–25 million in additional pre-tax savings from American and Texas Partners, and $80–85 million from Stellar, most of which will be realized after core system conversions in September, November, and March 2027. That gives the company a clear path to a tangible capital return of 17–18% by 2027, up from the current ~15%.

NIM Guidance and the Discipline Trade-off

The core investment thesis remains the net interest margin (NIM). Management reiterated its guidance to exit 2026 at a 3.70–3.80% NIM and reach 3.80–3.85% in 2027. In response to an analyst question, Zalman confirmed: “our models are still showing that we will end up with 3.75 at the end of the year, but our models are still showing 3.70 to 3.80” — David E. Zalman, Chief Executive Officer · 2026-07-29. This is consistent with the trajectory laid out in April, when Osmonov stated: “So we continue on the guidance... we'll be exiting combined NIM around 3.70%” — Asylbek Osmonov, Senior Executive (likely CFO or similar) · 2026-04-29. The expansion is driven by asset repricing—both the bond book (which has seen yields rise from ~2.2% to ~4.5%) and fixed-rate loans rolling off—as well as the addition of higher-yielding acquired portfolios.

However, the margin outlook is being carefully balanced against a competitive lending environment that management describes as having loan production at decent levels but with irrational pricing from out-of-state banks. As Zalman put it, the bank is “paying attention to profitability” and will not chase dry relationships at sub-6% yields just to grow the book. He illustrated the dilemma with a $20 million credit priced at a 7-year fixed 5.5% rate with a 25-year amortization, which he deemed uneconomic versus buying a 4.8-year MBS at 5.0%. This discipline is a consistent theme from prior quarters, where the company has emphasized core deposits and relationship banking.

We are not going to just put loans on... the bigger, dry relationships just to grow loans to grow loans at those kind of pricing in my opinion, does not make a lot of sense.

The company’s deposit growth has remained solid on an organic basis—legacy deposits are growing 2–4% annually—and noninterest-bearing deposits made up 32.9% of total deposits at quarter-end. Management also noted that they may raise money-market rates slightly to reward loyal customers and boost organic growth once NIM reaches 3.70%, a subtle but important shift from the previous “hold the line” posture.

Capital, Buybacks, and the Path to 17% ROTCE

With a strong capital position and a projected run-rate of $780 million in core earnings, management sees significant firepower for capital returns. Buybacks were muted in Q2 due to blackout periods around the Stellar merger, but Zalman indicated a willingness to be aggressive at current levels: “we have a lot of gunpowder to do something with, and we will... if we see that there is real opportunity in the stock price falls, we would definitely be buying our stock back” — David E. Zalman, Chief Executive Officer · 2026-07-29. This opportunistic stance echoes earlier commentary; in October, Kevin Hanigan noted the bank’s sensitivity to loan growth in a competitive market: “year to date for the fourth quarter loans are down slightly maybe $40 million to $45 million” — Kevin J. Hanigan, Chief Credit Officer or Senior Executive · 2025-10-29.

On the fundamental side, the company’s net interest income has been on a strong upward trajectory, but the latest quarter showed a jump in noninterest expense due to merger-related costs, pushing the efficiency ratio to 44.5% (versus ~32% in the prior quarter) and compressing operating margins. Still, the underlying profitability remains robust, and management’s guidance implies that once the integration costs subside and cost savings kick in, ROTCE should reach the high teens. The company’s net interest income rose 21% year-over-year to $321 million in Q2 2026, providing a solid base for the NIM expansion story.

Investment in technology and the core conversion to DNA have enabled the company to take on three acquisitions simultaneously, and management believes the scale is now more appropriate for its cost structure. As Zalman noted, they had already been spending like a $50 billion bank, and the mergers finally utilize that capacity.

Outlook

Prosperity remains one of the most disciplined Texas consolidators, and the Stellar deal should be a significant step toward the $7.34 EPS estimate management has floated for 2027. The key risk is the aggressive pricing competition from out-of-state banks, but management’s consistent focus on profitability over raw loan growth suggests they are willing to cede market share in the short term to protect long-term returns. With NIM guidance intact and a clear cost-savings roadmap, the company appears well-positioned to deliver on its promises.