KBRA Places Ratings for Stellar Bancorp, Inc. on Watch Upgrade Following Merger Announcement
30 Jan 2026 | New York
KBRA places the ratings for Houston, Texas-based Stellar Bancorp, Inc. (NYSE: STEL) ("Stellar") on Watch Upgrade, including the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 following the announcement on January 28, 2026, that Prosperity Bancshares, Inc. (NYSE: PB) ("Prosperity") has entered into a definitive agreement to acquire STEL in a mixed stock-and-cash transaction (70% stock / 30% cash). In addition, KBRA places the ratings for its subsidiary, Stellar Bank, on Watch Upgrade, including the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2.
Key Credit Considerations
Pursuant to the merger agreement, STEL will merge with and into PB. Stellar shareholders will receive 0.3803 shares of PB common stock and $11.36 in cash for each outstanding share of STEL common stock. The transaction is valued at ~$2 billion (1.8x P/TBV) with an expected dilution of ~8% towards PB's TBV, and a projected earnback of ~4.5 years. The transaction is expected to close in 2Q26, subject to regulatory and shareholder approvals.
The transaction would make PB the second-largest Texas-headquartered bank with more than 330 banking centers, deepening its presence in the Houston-Beaumont MSA. On a proforma basis, the combined entity will have ~$54 billion in assets, $33 billion in loans, and $42 billion in deposits. While the transaction is expected to meaningfully impact PB's regulatory capital levels, which have historically tracked above peers, capital levels are expected to remain solid. Specifically, the CET1 ratio is anticipated to decline to 13.6% from 17.6% at 4Q25, upon closing. Moreover, PB has a long operating history and a proven track record of successful M&A execution, having completed 31 M&A transactions since 2000. PB currently has two pending transactions, inclusive of STEL and completed its acquisition of American Bank Holding Corporation on January 1, 2026.
PB displays conservative balance sheet management, with loans accounting for 65% of average earning assets, and solid funding flexibility, as evidenced by a loan-to-deposit ratio below 80%. PB is supported by a strong, low-cost deposit franchise largely derived from its TX footprint, reflecting top 10 statewide market share (top 3 when excluding money centered and super regionals), upheld by a meaningful NIB deposit mix representing ~one third of total deposits. STEL provides PB with an established commercial banking platform and local market expertise, which management expects will enhance client relationships through Prosperity’s broader product suite. Given STEL’s higher concentration in CRE and C&I loans, the proforma loan mix is expected to be more commercially focused though remain well diversified with CRE (proforma 35% of total loans) and residential mortgage loans (29%) representing the largest loan concentrations. We further recognize PB's long-term track record of low net charge-offs, which have remained at or below 0.20% since 2011. Notably, PB generally outperformed peers through the GFC when its NCO ratio peaked at 0.4% in 2009 and 2010.
Upon completion of the merger, STEL’s current CEO and Chairman of Stellar Bank, Robert R. Franklin, Jr. is expected to join Prosperity Bank as Vice Chairman. In addition, Ramon Vitulli, STEL’s President and Stellar Bank’s CEO, will join Prosperity Bank as Houston Area Chairman. Other members of Stellar Bank management are expected to retain leadership roles in the combined entity. Furthermore, Mr. Franklin and one additional member of Stellar’s BOD will join the BOD of Prosperity, and Mr. Vitulli and Pat Parsons, a director of Stellar Bank, will join the BOD of Prosperity Bank.
Rating Sensitivities
The Watch Upgrade reflects KBRA's view of Prosperity's strong and stable operating performance, underpinned by its low-cost deposit franchise which is supported by a solid NIB deposit mix (33% of total deposits), conservative balance sheet management, and a long-standing record of stable credit quality metrics, as evidenced by contained net charge-offs. Additionally, in the unlikely event that the proposed merger does not receive regulatory approval - an outcome KBRA currently views as improbable given recent regulatory approval trends - the ratings would be reassessed.
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