Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares second 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 and former CEO of Stellar Bancorp; Randy Hester, Chief Lending Officer; Mays Davenport, Director of Corporate Strategy; Bob Dowdell, Executive Vice President; and Ray Vitulli, Houston Area Chairman and former President of Stellar Bancorp.

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.

Finally, we will open the call for questions. 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 Prosperity Bancshares' 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 second quarter 2026 conference call.

I'm excited to announce that on July 1st, 2026, Prosperity Bancshares completed the merger of Stellar Bancorp and its wholly owned subsidiary, Stellar Bank, headquartered in Houston, Texas. Stellar Bank operated 52 banking offices, including its main office in Houston, and banking offices in the Houston, Beaumont, and East Texas areas and in Dallas, Texas.

I'm also pleased to announce that Robert Franklin, former CEO of Stellar Bancorp, and Joe Swinbank, a former Stellar director, have joined the Prosperity Bancshares Board of Directors, and that Ray Vitulli, former CEO of Stellar Bank, and Pat Parsons, a former Stellar Bank director, have joined the Prosperity Bank Board of Directors. Pat was instrumental in building Stellar's Beaumont franchise over the years.

With regard to earnings, excluding the gain on the Visa Class B-2 stock exchange and net of investment security sales that we had and merger-related expenses, net income was $162 million and earnings per diluted common share was $1.62 for the three months ended June 30, 2026, compared with $135 million or $1.42 per diluted common share for the same period in 2025. This represents a 20.4% increase in net income and a 14.1% increase in diluted earnings per share.

These earnings for the second quarter of 2026 do not reflect any contribution from Stellar. Excluding one-time merger-related expenses and charges related to security sales, Stellar had $42.1 million in pre-tax, pre-provision core income.

Assuming a 21% tax rate, Stellar's second quarter net income would have been approximately $33 million. Annualizing this amount for Stellar and Prosperity second quarter core net income after excluding the non-recurring items shows an annual run rate of approximately $780 million.

This does not reflect any cost savings that we expect to achieve after the operational integrations of American Bank in September, Texas Partners Bank in November, and Stellar Bank in March of 2027. As mentioned on prior calls, these are results we expected, and we believe these tailwinds should continue to be positive for the near future.

With regard to loans, loans were $25 billion at June 30, 2026, an increase of $2.8 billion or 12.8% compared with the $22.2 billion at June 30, 2025, and this was primarily due to the American Bank and Texas Partners Bank mergers. Loans excluding warehouse purchase program loans were $23.7 billion at June 30, 2026, compared with $23.8 billion at March 31st, 2026, a decrease of $117 million.

We experienced paydowns this quarter with our one-to-four-family residential portfolio decreasing $100 million-plus, as well as other large paydowns. We also are focusing on the integration with our new partners.

Our deposits were $32.6 billion at June 30, 2026, an increase of $5.1 billion or 18.7% compared with $27.4 billion at June 30, 2025, primarily again due to the American Bank and Texas Partners merger. Our linked quarter deposits decreased $33 million from $32.6 billion at March 31st, 2026.

However, our non-interest-bearing deposits increased $159 million during the second quarter of 2026. Our non-interest-bearing deposits of $10.7 billion at June 30, 2026, represent 32.9% of our total deposits.

The net interest margin on a tax-equivalent basis was 3.47% for the three months ending June 30, 2026, compared with 3.18% for the same period in 2025 and 3.51% for the three months ended March 31st, 2026. The net interest margin in the first quarter of 2026 was impacted by a one-time loan interest income of $4 million from a non-accrual loan.

The net interest margin continues to be positively impacted by the repricing of assets, as we predicted and mentioned during previous calls, and Asylbek will give you a lot more color, but we're really excited where our net interest margin is headed. Asset quality: our non-performing assets totaled $130 million or 34 basis points of quarterly average interest-earning assets at June 30, 2026, compared with $122 million or 33 basis points of quarterly average interest-earning assets at March 31st, 2026, and $110 million, again at 33 basis points of quarterly average interest-earning assets at June 30, 2025.

You saw somewhat of an increase there, but based with the new banks that have come in with us and the amount of assets, we're still basically at the same ratio. The allowance for credit losses on loans and off-balance-sheet credit exposure was $420 million at June 30, 2026.

The allowance for credit losses on loans was 2.9 times the amount of non-performing assets. With regard to acquisitions, 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 integration of all three banks, and our combined teams are working very hard to ensure they are successful. While we continue to have conversation with other bankers regarding potential acquisition opportunities, we remain focused on the integration of our three transactions.

Texas has one of the strongest and most diverse state economies in the US, ranking as the second largest by GDP after California, and approximately the eighth largest economy in the world. Oklahoma has a smaller but stable economy, heavily influenced by oil and gas, with more modest growth.

Texas continues to shine as more people and companies move to the state because of the business-friendly political structure and no state income tax. Prosperity continues to focus on building core relationships, maintaining sound asset quality, and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels.

We intend to continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone involved in our company for helping to make it the success it has become.

Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.

Asylbek.

Thank you, Mr. Zalman.

Good morning, everyone. Net interest income before provision for credit losses for the three months ended June 30th, 2026, was $330.6 million, an increase of $62.8 million compared to $267.7 million for the same period in 2025, and an increase of $9.4 million compared to $321.2 million for the quarter ended March 31st, 2026.

The net interest margin on a tax-equivalent basis was 3.47% for the three months ended June 30th, 2026, an increase of 29 basis points compared to 3.18% for the same period in 2025, and a decrease of 4 basis points compared to 3.51% for quarter ended March 31st, 2026. The linked-quarter margin decrease was primarily due to the previously mentioned one-time loan interest income of $4 million recorded during the first quarter of 2026.

Excluding this one-time loan income, net interest margin increased by 1 basis point on a linked-quarter basis. Excluding purchase accounting adjustments, the net interest margin for the three months ended June 30th, 2026, was 3.41% compared to 3.14% for the same period in 2025, and 3.44% for the quarter ended March 31st, 2026.

The fair value loan income for the second quarter 2026 was $4 million compared to $3.7 million for the first quarter of 2026. Fair value loan income for the third quarter 2026 is expected to be in the range of $6 million to $8 million.

Non-interest income was $60.7 million for the three months ended June 30th, 2026, compared to $46.5 million for quarter ended March 31st, 2026, and $43 million for the same period in 2025. The higher non-interest income during the second quarter of 2026 includes a net gain of $8.2 million resulting from the conversion of Visa stock, partially offset by loss on the sale of investment securities.

The non-interest expense was $176.2 million for the three months ended June 30th, 2026, compared to $217.3 million for the quarter ended March 31st, 2026, and $138.6 million for the same period in 2025. The first quarter included merger-related expenses of $42.5 million.

For the third quarter of 2026, we expect non-interest expense to be in the range of $244 million to $250 million. This includes the additional Stellar Bank operations.

However, this projection does not include any one-time merger-related expenses associated with the Stellar merger. Efficiency ratio was 46% for the three months ended June 30th, 2026, compared to 59.2% for quarter ended March 31st, 2026, and 44.8% for the same period in 2025.

The bond portfolio metrics at 6/30/2026 have a modified duration of 3.7 and projected annual cash flows of approximately $2.2 billion. I will now provide a high-level overview of Stellar financial performance for the second quarter of 2026.

Stellar also delivered strong financial results during the quarter. Stellar's net interest income before provision for credit losses for the three months ended June 30th, 2026, was $106.4 million, an increase compared to $105.9 million for the quarter ended March 31st, 2026.

The second quarter results included one-time merger-related expenses and losses related to the sale of certain investment securities. Excluding these one-time charges, Stellar's adjusted pre-tax, pre-provision net income was $42.1 million, an increase of $2.9 million compared to the first quarter of 2026.

Now let me turn over the presentation to Tim Timanus for some additional detail on loan and asset quality. Timanus?

Thank you, Asylbek. Our non-performing assets at quarter-end June 30th, 2026, totaled $130,576,000 or 52 basis points of loans and other real estate, compared to $122,107,000 or 48 basis points at March 31st, 2026.

Since June 30th, 2026, $5 million of non-performing assets have been removed or put under contract for sale. The June 30th, 2026, non-performing asset total was comprised of $119,271,000 in loans, $9,000 in repossessed assets, and $11,296,000 in other real estate.

Net charge-offs for the three months ended June 30th, 2026, were $2,183,000 compared to net charge-offs of $41,309,000 for the quarter ended March 31st, 2026. There was no provision to the allowance for credit losses during the quarter ended June 30th, 2026.

No dollars were taken into income from the allowance during the quarter ended June 30th, 2026. The average monthly new loan production for the quarter ended June 30th, 2026, was $454 million, compared to $312 million for the quarter ended March 31st, 2026.

Loans outstanding at June 30th, 2026, were approximately $25.028 billion, compared to $25.288 billion at March 31st, 2026. The June 30th, 2026, loan total is made up of 34% fixed rate loans, 33% floating rate loans, and 33% variable rate loans.

I will now turn it over to Charlotte Rasche.

Thank you, Tim. At this time, we are prepared to answer your questions.

Our call operator, Dave, will assist us with questions.

Good morning.

Good morning. Good morning.

From the last call, you've talked about net interest margin reaching the 3.70 level as you exit 2026 and then getting in the 3.80 range in 2027. Do you still have a good line of sight into reaching that level, or is there any changes to the outlook versus before?

Janet, no, we our models are still showing us hitting I think again, Asylbek may want to jump in on this, but we're we're still saying that we'll end up with 3.75% at the end of the year, but our models are still showing 3.70% to 3.80% and

Yeah. Yes, before, we provided guidance of 3.70%.

I think we're going to increase to 3.70% to 3.75% because with the addition of Stellar, very accretive to us, the guidance stays the same. For 2027, we said 3.80%.

I think still for a whole year 3.80% to 3.85%, that's what will be updated guidance.

The only caution I would put, as we start getting past the 3.7% in net interest margin, we're still very competitive. We offer some very competitive CD rates, but we've been a little bit lower on our money market accounts, and we may want to raise our money market accounts rate just a little bit, so that may temper the net interest margin a little bit anyway.

We may be right. Again, maybe trying to grow more organically at that point in time once we hit the 3.7%.

Makes sense. The 3.80% plus range still contemplates that you're raising rates on your deposits?

Some rate, yes. We have increased some of them, yes, but

Okay. Got it.

I understand that the priorities is on the integration part, but on the Stellar side, perhaps, or even on the legacy Prosperity side, what are you seeing in terms of loan growth and demand there? Looks like outside of the mortgage warehouse, it was fairly stable quarter-over-quarter.

Just wanted to see what you're seeing on that front.

This is Kevin. I'd say for the remainder of the year, company-wide, still relatively flat for the remainder of the year.

That does include Stellar has got a pretty robust pipeline, $1.2-ish, Ray? They feel as though they'll grow their loans.

They grew them about $200 million in the first half of the year; they'll probably grow them another $200 in the back half of the year. Overall for the company, I would call it flattish for the remainder of the year.

Maybe on the better news front, as Tim said, production has been picking up. We have several hundred million, probably closer to $400 million, of construction deals, which we've approved so far this year, that are booked.

They're in our pipeline. They will not provide any fundings this year, as all the equity has to go into those deals first.

Beginning in the first quarter and more materially in the second quarter of next year, the pull-through of those deals is going to start generating some positive overall company growth.

This is Tim. Everything that Kevin said is accurate in my opinion.

We do forecast stability going forward. We have a decent pipeline of loans.

We see decent loan activity out there in the marketplace. Really, the only thing we see that's a hindrance is some of the very, very aggressive structure and pricing that the competition is putting forward.

We have to be cognizant of that and careful with it. Basically, everything looks decent right now.

As Tim said, and it's no news to all you on the call, but credit spreads are at 25 or 30-year lows across the risk spectrum. Some things out there are just getting to the point of being ridiculous.

We've looked at two meaningfully large transactions in the last few weeks priced at SOFR 125. The math on that yields you an opening day coupon of 4.83%, which is ridiculously low.

It's not like either one of those things came with massive amounts of demand deposits of a relationship. Just risk-reward across the spectrum right now is I think slightly mispriced.

I'll give you a little bit more color because I think that no disrespect, but the analysts continue to want to show just the growth in the loans and growth all the time, but I think you need to take profitability into consideration. Just to give you a little color, last week, we had a loan at loan committee.

It was a grade A company; there's no question about it. There was a $20 million credit and, with especially some of the regional banks coming from outside the state trying to make a mark inside the state, they priced it at a 7-year fixed rate at 5.5% with a 25-year amortization.

Of course, there's not many of any deposits with that. You have to consider, okay, do I want to make a loan at 5.5% or can I go with a pretty high duration, or do I want to just go buy a mortgage-backed security with a 4.8-year duration and get 5%?

Can we really operate on 50 basis points? I would tell you, the difference is no, you can't pay the lender, the officer, reserve for loan losses, and make it off of 50 basis points.

I guess my point is, we're really paying attention to profitability at the same time. It's not an excuse, but I think that you guys just need to know that, too.

We're not going to just put loans on. Most of the loans that come, the bigger loans that come, they're really more of a dry relationship.

If you're really bringing over a customer and you're bringing over customer deposits and total relationship, that's a completely different story, and even that rate may make some sense. The bigger dry relationships, just to grow loans at that kind of pricing, in my opinion, doesn't make a lot of sense.

Got it. Appreciate all the color.

I'll step back.

Hey, good morning, everybody. Thanks for the questions.

Wanted to start on the other income. I know there was some noise in 2Q with the gains in the securities.

What was the increase in other? Was that related to anything in particular, and does that continue from here?

On the other one, we had just about $2.5 million I would say annual income that we get that, but not going to be expect maybe next quarter, but there was a annual income we generated about $2.5 million. Other than that, everything is a core except that, of course, gain on Visa stock.

If you thinking going forward, I would say, our range around $50 million Prosperity before Stellar, and Stellar has $5 million to $6 million. I would say between $54 million to $56 million, that would be good run rate on the non-interest income.

Okay. That's great color.

Appreciate that, Asylbek. Then, David, you were just talking about your kind of thesis on loans versus securities, and with where the bond market has moved, I was just curious if there was any maybe increased appetite to actually grow the securities portfolio from here, and just thoughts on how you view the securities portfolio size kind of post-Stellar integration.

Again, our first focus will always be loans. On the other hand, when the pricing is getting to where it is right now, we're not going to put a bunch of stuff on the books and just to grow loans and not be profitable and take the risk.

I would say I think you'll continue to see we'll focus on building loans first, but whatever we don't, we'll continue to put into the bond market. We still grow organically.

It's still hard for you guys to see, but when we strip out the banks that have joined us, I think, Charlotte, you were showing yesterday that our deposits actually have grown organically about 3.2%. Once things always stabilize, we'll still have 2% to 4% organic deposit growth all the time.

It's just when you put all these things together and some customers come, some customers leave, it'll take a year or so, but we'll always have organic growth, and that in itself always outproduces what we are able to put in loans sometimes. I think you'll have a combination of both growth in loans and securities really going forward.

Okay. Then if I could just ask one quick last one, just around it sounds like you guys are still seeing some irrational stuff on the lending side, but the monthly loan production was obviously stronger linked quarter.

Would you guys attribute that to just increased activity in the markets, customer gains, anything in particular you would point to to just kind of describe the linked-quarter improvement in loan production?

Yes. Once again, we see things as being very stable and maybe growing a bit.

Our people are constantly out there trying to bring customers in, and that obviously includes loan customers, as well as deposit customers. The problem with the pricing and the structure that we're seeing in the market, those things historically come and go.

Right now they're here; we're having to deal with it. How long it lasts, I guess, is anybody's guess.

I think there's reason to think that we can improve our loan growth and therefore improve our loans outstanding. You have to understand that quite often, the loans that we put on the books don't fund right away.

They're construction loans, they're different types of loans where equity has to come in and get funded first. It can be a few months before we start funding those loans.

That's a normal time delay. That's a good thing, not a bad thing.

I see a lot of positive things out there and not that many negative things other than the current structure that we're having to deal with on a competitive basis.

The bottom line, Tim and Brett, again, Texas is still growing. You're still seeing businesses move into Texas.

You're seeing population growth and business growth. I think we're still going to have the opportunities to grow and build a portfolio.

We saw more production this time. A lot of it was paydowns, too.

Just the one-to-four families, if you look at it, it was over a $100 million decrease. Again, we're getting paydowns in the housing market.

People haven't been willing with the higher interest rates to lock in and buy the one-to-four family. A lot of our paydowns were in that category right there.

It's probably the best market out there; there's just no question about it.

That's absolutely correct, and Oklahoma is doing well also. From a geographical standpoint, everywhere we operate right now looks good.

Again, we're probably more cautious. We're probably more focused on profitability than some of the other banks because we don't want to just put loans on the books just to say that we've grown loans, too, at the same time.

We're trying to balance that out.

Okay. That's great.

Appreciate all the color, guys. Mhm.

Hi, good morning.

Good morning.

You spoke about credit spreads being at multi-decade lows and the $20 million credit line. I guess the question is, how widespread is that competition on structure and pricing?

Is that happening for a specific loan segment like construction or a specific type of client where there might be a higher likelihood maybe of getting other business down the line, or is it widespread across construction, CRE, middle-market C&I?

The SOFR 125s are outliers. That's two deals, both of them pretty recent.

I'd say that's two deals that I think we go back all the way back into December-January time frame, it's two deals from then to now. There's two recent deals, very large, prominent clientele.

Asylbek can probably give you a little bit of color on originations and pricing on originations at both Stellar and at Prosperity for the last quarter that might help you understand what we are doing.

I would also say, though, that the one that I described with the 7-year fixed rate with 25-year amortization at 5.5% is not unusual, and those are loans that everybody's bidding on. They're not bringing deposits to the bottom line.

That's loans like on multifamily units, retail centers, office buildings, and stuff like that. It's just going to the lowest bidder, for the most part.

Yeah.

Asylbek, let me mention, before you start, that it is not across the board. It is primarily the larger loans.

What we're seeing more often than not is the large banks or relatively large banks that have recently entered the Texas market or are trying to enter the Texas market. They're focused on those larger loans.

They make a bigger splash that way, and it's understandable.

I think that's a good point, Tim. This not everybody's doing this.

It's really It's not everybody.

If you ask me, I can put them on one hand, and I don't even need all five fingers.

Yes, it's mostly the bigger loans.

It's been a couple of banks that have come in, more the regionals, the bigger regionals. They're trying to buy their way into the market.

I'm not saying that they're wrong. When we go into a market, before we did a lot of mergers and acquisitions, if we started to open up a banking center or something, we would give special deals, too, and I guess that's what they're trying to do at the same time.

It's still not across the board. These are all very large loans, and it's just rate-driven, and I think that's the way they can say that they're making a splash.

That's just my opinion.

Right. Asylbek?

I just going to give the facts. The average loan production monthly for the Q2 that Tim mentioned, $454 million, the average rate on that blended was around 6.5%.

I think what we looked at Stellar numbers, too, I think the new loans they're putting out also around 6.5%. We are comparable at that point.

We know that our fixed loans and some loans going to reprice at the higher rate at this rate.

That's all very helpful color. Really appreciate it.

I guess when we talk to some of the other banks, they've been talking about looking at the all-in returns of their client relationships, not just the loans and deposits, but also, I guess, cash management, investment banking, etc. I guess the question for you is, as you do more acquisitions, as you grow the size of the balance sheet, is there anything that you need to invest in on the product side or on the fee side to capture more of the economics of the client?

I think that's the good news is that over the last 3 years, we've spent a lot of time, money, and energy on our new technology. We had our own computer conversion that we had we were on Fiserv from one platform to the DNA product.

If we wouldn't have done that and spent all that money and time, there's no way that we could have done these three deals that we're doing right now. I think that we're well-positioned because we did spend the time, the money, and the energy to let us know that we did want to be a bigger bank, and to do that, we had to have the technology.

I think that you're seeing that growing. I think that we're even bringing in some really good people, especially at Texas Partners that has a lot of experience and a lot of big-bank experience with treasury management.

I see our treasury management really growing, and our products, I think, are very, very good.

Got it. Thank you.

Good afternoon. I was wondering, Kevin, can you give an update on the mortgage warehouse business and just also with this increase in mortgage rates, does that kind of virtually shut down refi activity?

Refi activity is not all the way shut down. There's always been some, but it has been muted.

I just looked at the first 28 days of the quarter, through last night. I think we're averaging right at $1.250 billion in outstandings, which is off from the $1.316 billion or whatever it was, 316, I think, in Q2.

That's a little unusual for the third quarter. Usually third quarter is pretty good, particularly in July and August, with September being a little off.

It wouldn't surprise me if we average $1.2 billion, maybe as good as $1.225 billion in Q3, which is, it's roughly $100 million off the average of Q2.

Got it. Thank you.

Then, David, just how are you thinking about deposit growth in the second half of the year? You mentioned you might get a little bit more competitive on money market rates, but just how are you thinking about deposit rates going forward assuming the Fed is on hold?

I was wondering if you were going to ask me a question, Peter. Thank you.

You're welcome.

No, it's hard to tell you that you're going to see a lot of growth because when you do these deals, there are some relationships that come and go. The only thing I can tell you is, and we really believe this, our numbers show this, that on an organic basis on legacy deposits, we always have continued to grow 2% to 4%.

Where we do lose is when new banks join us, and they may have been paying a higher interest rate than we've been willing to pay, or there may have been some circumstances, or the customer just doesn't like us to be part of that deal. I think over time, if you ask me, first of all, a lot of people are talking about them raising rates because of inflation.

I think the Trumpster put this new guy in, Warsh, and he's not going to raise rates, in my opinion. Having said that, I think our modeling guy has put in what, a 0.25 point increase

End of the year. in the

end of the year. I don't think they will.

Our models really show really great net interest margin just where they are right now. It shows greater if interest rates go up, and it shows less if interest rates go down a little bit.

Again, our customers have been very loyal to us. You've followed us, Peter, forever, and you just take a look at a graph for the last 10 or 20 years.

We've had increased earnings, increased earnings per share, increased assets, increased deposits every year until we get 2022. We started seeing interest rates go up.

We saw our net interest margin going down, and then we really got bombed in '23 and '24 with net interest margin going down to 2.75%, and of course, now we've built it back up to 3.50% and we're going to 3.80%. Our customers have stayed with us, and they really didn't have to.

They could have gotten stuff better at some other places. When I commented earlier that once we get up to the 3.7%, I would like to see us bump our customers up a little bit.

We still want to make good money, but I want to reward them for staying with us at the same time, too, and possibly start growing more organically in that phase.

I'll add the thing on the deposit. It's kind of hard to see when you see our balance sheet, our deposits have decreased.

If you kind of peel off, there's a public funds that have seasonality each time, it goes down second and third quarter. If you strip out the public fund, our core deposits have increased in the second quarter.

I was extremely excited this time because last year at this time, this is usually one of our worst quarters with public funds being down and we

Core deposits being down. and

core deposits being down. I thought this was pretty good for usually a seasonally pretty tough deposit, yeah.

That's great. Thanks, David.

You're welcome.

Hey, good afternoon, everyone. Thanks for taking my questions.

Just wanted to start on the Stellar side. I think maybe Ray is there.

Looks like the margin was up pretty meaningfully in the quarter, and looks like maybe there might have been some restructuring, securities balances were down, and just trying to better understand how much of that benefit is driving the NIM guidance that Asylbek laid out. Thanks.

Michael, this Ray. We picked up 9 9 basis points on the NIM.

There was about a $30 million paydown of sub debt in there, but it's really driven by, as Asylbek said, we booked $525 million, plus we renewed another 600 or $700, so that's about $1.1, $1.2 billion in the quarter at an average rate of 6.50% on the loan side. Deposit costs held in there, and that was really most of the driver of that NIM expansion.

Just to add, on the sale of security, it happened at the end of the quarter, there was no impact on the margin. The margin that they have, 9 basis point increase, that was a core increase on the margin.

Okay. Very, very helpful.

Then maybe just one follow-up, just as it relates to the integration efforts and cost savings realizations of the two other deals, not Stellar, but where do you stand with those? Understand you gave the expense outlook, just trying to better understand the puts and takes.

Thanks.

On American and Partners Bank, we realized some of them, but most of the cost savings is going to come in after the system conversion, which we scheduled for September and November. Let's assuming that all the integration is done, we still expect from American and Texas Partner additional $20 million to $25 million cost savings coming in.

We should see the full impact of it in 2027.

That's pre-tax, right?

Before tax, yeah. Before tax, 2027, before tax.

On the Stellar, we're still in line what we announced on the pre-merger, how much our savings we're going to get. We expect to get that savings.

It might be a little bit pushed back on the timing of it because the system conversion doesn't happen till March of next year because of the timing of everything going on with three acquisitions. The timing might, but the cost savings that we projected is still in line on Stellar as well.

That's very helpful, Asylbek. Thanks for taking my questions.

I'll step back.

Hi. Thanks for taking the questions.

You mentioned a couple of times about your focus on profitability. Can you remind us how you're thinking about ROTCE targets once the conversions are done and the cost savings are fully baked in looking out to 2027?

What kind of targets? I didn't catch that.

Return on tangible common equity.

Common equity, yeah. Even right now we're running about 15% return on tangible capital.

15.5%. Yep.

I'm really hoping, again, you might have these numbers in your model, but I'm thinking if we hit the numbers we say we're going to hit, we should be hitting 17%, 18%.

I think initially we're going to take a hit because of the conversion, but we'll build it up very quickly. Our

Are you talking about return on tangible capital, you talking about return on tangible capital or what tangible capital is going to be?

I think it was return on tangible capital.

A return on tangible

Yep, you answered it. Yep.

Basically, they want to kind of know do you have that in your model? If we're hitting the numbers that we're saying, you can do the math.

Just add the extra money that he just told you on those cost savings to the $780 million and divide that by the share, and I think you're going to start hitting 17% and 18% return on tangible capital.

That's right, yeah, by next. That's correct.

Perfect. A follow-up to that on capital with your buyback, you reduced it in the second quarter.

How should we think about the buyback going forward?

Whenever people are naughty and we have an opportunity to buy, we're going to buy. Again, you can see the amount of money that we're making or proposed to make, again, if there's no black swan.

We have a run rate of $780 million right now. We have a lot of cost savings.

It's going to add to the bottom line. I think our projections are 8 $850 to $880 million.

We're paying how much in dividends? 200 and Yeah, 200.

The difference between that and what we are making is, it's a lot of money. We have a lot of gunpowder to do something with, and we will.

If we see that there's real opportunities and the stock price falls and there's something out there in the market, we would definitely be buying our stock back. We're trading right now at 10 times next year earnings or so, we're pretty cheap.

It was muted in Q2 largely for blackout purposes. Right.

We just couldn't buy. We would have loved to bought more, particularly during certain periods in Q2, but we were blacked out.

Right.

Got it. Very helpful.

Thank you.

Good morning. Thanks.

Going back to the Stellar legacy results a little bit, it seems like with the $33 million in net income you mentioned, maybe that's a fair bit ahead of where consensus numbers had them at one point in time. I'm wondering if their results are kind of ahead of what you guys assumed when you first announced the deal, if it's kind of tracking ahead of expectations, and just if there are any material changes to the marks kind of at closing versus what you were expecting.

On that, definitely running ahead of what we projected. I think when we put together, expectation was about $126 million for 2027 on Stellar net income.

If you take the $33 million, we're talking about $130 million, it is ahead of it. On the mark side of it, I think it's maybe a little bit higher than what we projected, but we're still working on it right now and we have not finalized the marks yet.

I think the preliminary number coming in a little bit higher than what we projected on loan marks.

Okay. You had said $6 million to $8 million in expected accretion in the third quarter, Asylbek?

Yes, that is, including all.

Okay. Then one question on Oh, sorry.

No, I just want to say, it's always depends if there's some loan pays off with a discount or premium, it could impact, but if you look at the model, it's $6 million to $8 million.

Sure. Kind of scheduled versus accelerated, yep.

That makes sense. Then, in terms of the pro forma loan loss reserve, do you know where that will go to pro forma with the close for Stellar?

Then you guys have had a kind of a zero provision for several years now. Do you think we'll start to see provision be more in line with loan growth moving forward, or is there still some excess that can be worked out over time?

On Stellar one, we're still working on it, we don't have any number, but I know it's going to be addition to and maybe a pretty good healthy addition to that. We're working

There's 420 There's 420 right now.

Including that unfunded of Prosperity Bank. Prosperity's

Prosperity. Your Stellar one with Stellar could take us up to 600.

We're still working on it. We'll give you that more in the third quarter.

On the provision, it's kind of hard to say if we're going to provision or not. We just have to run the models and whatever model tells us, if we need to provision, we'll do provision; if it tells that we don't, we're not going to take provision.

It's hard to provision when you have three times the amount in allowance compared to your non-performing, I don't see that. If you're asking me personally, unless there's something that I don't know and the loan portfolio is going to blow up, but we have three times the amount of money that we have in allowance for loan losses compared to what we have in non-performing right now.

Mhm. I don't see, in the next 12 months, any provisioning.

That's just me.

Very good. Very helpful.

Thank you, guys, for the time this morning.

Hey, thanks. Good morning, guys.

Morning, Jon.

Asylbek, can you just walk through the expense cadence again in terms of what you're expecting in the timeline? I know it's way out in the future, but just trying to get an understanding of what you think the run rate looks like when everything is fully converted.

I'll give you the run rate. I gave $244 to $250 million.

That's including Stellar and have some savings that we pull forward from American Bank and Texas Partners Bank, but not all of it. We expect, as I mentioned earlier, from Partners and American additional $20 million to $25 million cost savings going to be coming in.

That's all pre-tax numbers, what I'm talking. Yep.

For the Stellar, we expect additional probably cost savings around 85, $80 million to $85 million. That is cost savings that we announced plus additional of new CDI.

In combination is around $85 million additional cost savings on Stellar side, which with all baked in and everything. Of course, the timing, as I mentioned

That's pre-tax,

too. That's all pre-tax numbers, yeah.

You got 85 and 25.

Yeah, 20 to 25 you had. Then

you got to add the tax rate on that.

Yeah. Between additional 100 to $110 million.

Yeah. Again, we ought to be conservative on that.

These are numbers and we like to give you a little bit less than in case we do screw up or we don't make it, but I think we leave a little room in there.

It's also, we're kind of looking long-term, right? We don't know what the inflation is, the additional cost that might be in, but this is what we have it right now, what we expect, and that's what we're projecting.

We feel very comfortable about the savings.

Yeah. We've looked at this up and down two and three times because we didn't want to just put something out there that we didn't know that it was going to do it or not, but we feel pretty good with these numbers.

You guys have looked at it. Mhm.

Yep. Okay.

You guys have definitely delivered on that in the past. David, you kind of alluded to this, but with your asset size, not that 50 billion is a big deal, but you're a much larger bank.

Anything else you need to do at your asset size that maybe you weren't thinking about or doing a year ago? You kind of referenced some hiring and products, but anything else to do that could cause some expense pressures, or do you feel like you have what you need?

No, in fact, we needed to get to this size just to utilize the cost that we had, quite frankly. The way the regulators treated us, they were treating us like we were $50 billion and $100 billion.

We were geared up to be a bigger bank, and so this really just utilizes all the additional costs that we took on to do that, really.

Okay. All right.

Thank you very much.

Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today.

We appreciate your support of our company, and we will continue to work on building shareholder value.