PROSPERITY BANCSHARES INC (PB) stock intrinsic value fair value estimate & owner earnings analysis

Prosperity Bancshares owns Prosperity Bank, a Texas and Oklahoma community bank that has grown for more than four decades by gathering low-cost local deposits, lending conservatively and buying smaller banks. In 2026 it closed three acquisitions: American Bank Holding of Corpus Christi (4.44 million new shares), Southwest Bancshares and its Texas Partners Bank in San Antonio, Austin and the Hill Country (4.09 million shares), and the much larger Stellar Bancorp of Houston and Beaumont (52 offices, closed July 1). Stellar holders received 0.3803 Prosperity shares plus $11.36 in cash per share, about 19.4 million new shares and about $578 million of cash. That leaves roughly 120 million shares, against about 95 million a year ago. At June 30, 2026, before Stellar, the bank had $43.9 billion of assets, $32.6 billion of deposits and $8.3 billion of shareholders' equity, of which about $3.8 billion is goodwill. How we measure earnings. For a bank, deposits are the raw material, not financing, and loan growth is funded by deposits. We start from operating cash flow and remove three things: year-to-year swings in accrued interest and other receivables and payables and in mortgages held briefly for resale (timing effects), stock-based pay, and spending on branches and technology other than a small share tied to growth. These owner earnings were $4.83 a share in 2016 and $5.75 in 2025. Since the LegacyTexas merger created today's business they have ranged from $4.93 (2023, when deposit costs jumped) to $6.12 (2021). The 2020-2025 median, $5.77, is our base level; that window spans both near-zero rates and the 2022-2023 rate shock. The figures tie to net income plus non-cash charges within a few percent once securities premium amortization and loan-discount accretion are accounted for. Owner earnings grew 9.9% in 2025, and first-half 2026 net income of $284.9 million was up 7% on the prior year despite merger costs, so the base level is not stretched. How debt is treated. Interest is this bank's main operating cost, so we value earnings after interest and do not subtract deposits or Federal Home Loan Bank borrowings again; doing both would count the same cost twice. There is no preferred stock and no outside ownership of subsidiaries; holding-company debt is a small amount of subordinated notes inherited from acquired banks. Each case value below is what the business is worth to shareholders with nothing further owed. Leverage is charged instead through a credit cycle in the bear case. Stellar and the cost savings. Stellar earned $102.9 million in 2025, down from $115.0 million in 2024. After stripping out non-cash accretion from its own earlier merger we credit about $90 million of cash earnings, less about $17 million a year of after-tax income lost on the $578 million of cash paid. Management targets cost savings of 35% of Stellar's expenses. We treat that as a target, not a fact; partial credit rests on structural evidence: Prosperity runs at roughly 44 cents of expense per dollar of revenue against Stellar's near two-thirds, and Prosperity has a long record of folding acquired banks onto its own systems. Stellar's systems conversion is scheduled for March 2027. Base case, about $93.80 a share, a business worth about $11.3 billion. Owner earnings dip to about $4.94 a share in the first year, when roughly $70 million after tax of merger costs land and the savings are only partly in place; that is below both the 2025 level and the 9.9% growth achieved in 2025, so no acceleration is assumed. They settle at about $5.78 in year two, which is the existing base level with Stellar's earnings and half the targeted savings (about $50 million a year before tax) roughly offsetting the new shares. From year three to year ten we credit 1.5% a year of per-share growth, below the roughly 2% a year Prosperity actually achieved from 2016 to 2025 through its steady, self-funded program of acquiring smaller banks, which ran through the 2016 oil bust, 2020 and the 2023 deposit scare. We do not credit Texas population growth, market-share gains, or management's projected boost to 2027 earnings per share. After year ten we hold earnings flat (about $6.50 a share) for thirty more years: a deposit franchise of more than 300 offices has lasted four decades through several credit and rate cycles, and the bank has repeatedly replaced the deposit value that wears off acquired banks by buying more of them. Bear case, about $53.82 a share, a business worth about $6.5 billion. This case runs one full credit cycle of the kind Texas banks actually went through in 2008-2010 and, for energy-linked borrowers, the 2015-2016 oil collapse. Prosperity's own earnings drop to their 2023 trough of $4.93 a share as deposit costs return to the 2023-2024 pattern (interest paid rose from $86 million in 2022 to $459 million in 2023 and $590 million in 2024). Stellar loses customers in integration and earns about $55 million, and only a quarter of the savings arrive. On top of that we charge about $1.0 billion of pre-tax credit losses and reserve building spread over years two to four, about 3.4% of a combined loan book near $29 billion, which is in line with cumulative losses at Texas and Southwest commercial-real-estate-heavy lenders through the last cycle and far above Prosperity's own history (net charge-offs were only $18.1 million in 2025 and $14.6 million in 2024). Owner earnings fall to about $1.65 a share in year three before recovering to the $4.62 trough level. Because the bank never stops earning money and equity of over $8 billion dwarfs the losses, capital stays well above regulatory minimums and no share issuance at depressed prices is needed. After year ten earnings shrink 3% a year as the low-cost deposit advantage wears away. This bear value is above tangible book value of roughly $40 a share because even at its 2023 trough the franchise earned close to 13% on tangible equity, funded by deposits about a third of which pay no interest; that earning power survives a downturn. Bull case, about $109.90 a share, a business worth about $13.2 billion. Prosperity's own earnings hold at the roughly $6.10 a share already being produced in 2026 as the net interest margin rose to 3.47% in the second quarter while older, low-yield securities matured and were reinvested, and the full Stellar savings arrive, lifting owner earnings to about $6.40 a share in year two. Per-share growth then runs at 2.5% a year to year ten, matching the long-run earnings-per-share record from 2014 to 2025, and the franchise keeps earning at the year-ten level thereafter. What changed since our previous analysis. Very little in the business has changed in the two weeks since; the base case is essentially unchanged. We have made the bear case harsher by charging a fuller credit cycle sized from the region's historical record rather than a smaller extra loss on Stellar's loans alone, which lowers it from about $60 to about $54. We have also trimmed the bull case from about $122 to about $110 because its earlier level assumed the full Stellar savings on top of a 2026 run rate that already includes part of the margin recovery, which counted part of the same improvement twice. Margin-of-safety price. We are reasonably confident in the earnings level: ten years of filings put it between about $4.30 and $6.10 a share, the bank has never had a losing year in that span, and the 2023 deposit shock cut it by only about 17%. The worst plausible outcome is a Houston commercial-real-estate and energy downturn arriving while Stellar's 52 offices are still being converted, with deposits leaving and losses several times anything Prosperity has recorded. The structure would survive it: equity is about a fifth of assets before goodwill is counted, there is no meaningful holding-company debt, and no single customer or regulator decision controls the outcome. If we are wrong on the Stellar savings, on deposit costs and on credit at the same time, the shares are worth roughly the bear figure in the low-to-mid $50s. During the holding period the bank pays a dividend of about $2.40 a share a year and has raised it every year for more than two decades. The margin-of-safety price is $62: at that price the dividend is close to 4% of the price, the bear-case value is only modestly lower, tangible capital alone covers about two-thirds of the price, and the earnings the bank has already demonstrated, without any credit for growth, imply a value of $90 or more within an assumed three-year holding period, which with dividends implies about a 20% annual return. Above about $65, that return depends on the Stellar integration going well, which our cases do not assume. One item we could not reconcile: later filings show 2021 diluted earnings per share as $5.05 rather than the originally reported $5.60. Net income and share count were not restated and still work out to $5.60, so this appears to be a reporting error. It does not affect our cash-based figures.