Prosperity Bancshares surges on earnings beat, $2bn Stellar deal
Net interest margin expands to 3.30% as Texas lender announces transformative acquisition creating state's second-largest bank
Prosperity Bancshares shares climbed 1.3% on Wednesday after the Texas lender reported stronger-than-expected fourth-quarter earnings and announced a transformative $2 billion acquisition that will create the second-largest bank by deposits headquartered in the state.
The Houston-based bank reported diluted earnings per share of $1.49 for the fourth quarter of 2025, surpassing analyst estimates of $1.46, according to company data. Net income increased 7.5% year-over-year to $139.9 million, while revenue rose 3.9% to $314.7 million.
The earnings beat was driven by a significant expansion in net interest margin, which surged 25 basis points to 3.30%, a rare positive development in a banking sector where margins have faced pressure from the Federal Reserve's rate cuts. The bank also reported robust deposit growth of $700.4 million during the quarter, representing an annualized increase of 10.1%, bringing total deposits to $28.48 billion as of December 31, 2025.
"We are pleased with our strong financial performance in the fourth quarter, highlighted by double-digit deposit growth and significant net interest margin expansion," said David Zalman, chairman and chief executive officer of Prosperity Bancshares.
Adding to the positive sentiment, Prosperity announced a definitive agreement to acquire Stellar Bancorp in a cash-and-stock transaction valued at approximately $2.002 billion. Under the deal terms, each Stellar shareholder will receive 0.3803 shares of Prosperity stock plus $11.36 in cash, based on Prosperity's closing price of $72.90 on January 27, 2026.
The merger, unanimously approved by both companies' boards, will create a banking powerhouse with over 330 branches across Texas and Oklahoma, solidifying Prosperity's position as a dominant regional player. Stellar, with $10.81 billion in assets and 52 branches concentrated in Houston, Beaumont, and Dallas markets, will significantly expand Prosperity's footprint in key Texas metropolitan areas.
Management projects the transaction will be accretive to earnings by 9.2% in 2027, with expected EPS of $7.34 compared to a standalone forecast of $6.72. The accretion will be driven by cost savings, interest rate marks, and amortization adjustments, according to regulatory filings.
The acquisition comes just weeks after Prosperity completed its merger with American Bank Holding Corporation on January 1, 2026, expanding its presence in South and Central Texas. The rapid succession of deals underscores Prosperity's aggressive consolidation strategy in the fragmented Texas banking market.
The company also announced a new stock repurchase program authorizing the buyback of up to 5% of outstanding common shares in 2026, providing additional support for shareholder returns alongside a dividend yield of 3.2%.
Prosperity's efficiency ratio improved to 43.66% in the quarter, excluding gains and losses on asset sales, indicating strong operational discipline. Nonperforming assets remained low at 0.46% of average interest-earning assets, demonstrating credit quality resilience despite economic uncertainties.
Analysts maintain a positive outlook on the stock, with a consensus rating of "Moderate Buy" and an average price target of $80.75, according to MarketBeat data. However, Raymond James recently downgraded the stock from "outperform" to "market perform" earlier this month, citing valuation concerns.
The Stellar acquisition is expected to close in the second quarter of 2026, subject to regulatory approvals and shareholder votes. Upon completion, Stellar's chief executive Robert R. Franklin, Jr. will join Prosperity Bank as vice chairman, while president Ramon Vitulli will become Houston Area Chairman.
The combined entity will compete directly with other large Texas-based institutions including Comerica and Texas Capital Bancshares, potentially triggering further consolidation in the regional banking sector as institutions seek scale to compete with national banks in an increasingly competitive lending environment.