Prosperity Bancshares - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered steady core performance: diluted EPS $1.45 (+8.2% YoY; +2% QoQ) and revenue (total income ex-gains) $314.7M (+2% QoQ), with net interest margin rising to 3.24% (+6 bps QoQ; +29 bps YoY).
• Versus Street: EPS was essentially in line/slightly above (consensus $1.444*) while revenue modestly missed (consensus $317.4M* vs actual $314.7M), implying a small negative top-line surprise despite stronger margin tailwinds [GetEstimates].
• Balance sheet mix improved: deposits +$308.7M QoQ, borrowings −$500M, noninterest-bearing deposits at 34.3% of total; credit metrics remain solid though NPAs ticked up to 0.36% of average interest-earning assets.
• Capital return and catalysts: dividend raised to $0.60 (+3.45%), and management indicated near‑term buyback activity post blackout; pending acquisitions (American Bank closing Jan 1, 2026; Southwest Bancshares expected Q1 2026) support footprint expansion and deposit-rich mix.

What Went Well and What Went Wrong

What Went Well

• Margin expansion continued: TE NIM reached 3.24% (3.21% ex-purchase accounting), with management reiterating multi‑year repricing tailwinds from fixed loans and a ~$10B securities book yielding just over 2% today.
• Core deposit growth and funding mix: deposits +$308.7M QoQ to $27.78B; noninterest-bearing deposits remained strong at 34.3% of total, with management emphasizing no brokered deposits and seasonally stronger Q4 deposits.
• Capital return increased: Board approved Q4 dividend to $0.60 (+3.45%), marking the 22nd consecutive annual increase; management signaled buybacks to resume imminently (“next week we should be out there buying”).

What Went Wrong

• Top-line vs estimates: revenue (total income ex-gains) of $314.7M modestly missed consensus ($317.4M*), despite net interest income strength; noninterest income slipped QoQ ($41.2M vs $43.0M) largely on lower asset sale gains [GetEstimates].
• Loan balances softened: total loans declined $169.6M QoQ (to $22.03B), with 1‑4 family residential showing the largest category pressure; management cited competitive pricing/structures and borrower paydowns as headwinds.
• Credit optics: NPAs rose to 0.36% of average interest-earning assets ($119.6M), driven in part by regulatory‑pressured fair‑lending residential programs; management has discontinued aggressive programs and is working through foreclosures/sales.

Transcript

Speaker 8

Good day and welcome to the Prosperity Bancshares Third Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Speaker 11

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Third Quarter 2025 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. Here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Timanus Jr., Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Safady, Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, and Merle Karnes, Director of Corporate Strategy. Bob Dowdell, Executive Vice President, is unable to join us today. 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 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 the 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.

Speaker 6

Thank you, Charlotte. I'd like to welcome and thank everyone listening to our Third Quarter 2025 Conference Call. In the third quarter, we signed a definitive merger agreement with Southwest Bancshares Inc., the parent company of Texas Partners Bank, headquartered in San Antonio, Texas. We are excited about this transaction as it significantly expands our San Antonio metro footprint with four additional branches and increased our deposit market share, and bolsters our presence in the Texas Hill Country and adds an experienced C&I lending team. I would also be remiss not to mention how excited we are about our pending merger with American Bank Holding Corporation in Corpus Christi, Texas. The combination will strengthen our presence and operations in South Texas and the surrounding areas and enhance our presence in Central Texas, including San Antonio.

Combined with the Texas Partners acquisition, we will have 10 banking centers in the San Antonio area. I am pleased to announce that the Board of Directors approved increasing the fourth quarter 2025 dividend to $0.60 per share from $0.58 per share that was paid in the prior four quarters. The increase reflects the continued confidence the board has in our company and our markets. The compound annual growth rate in dividends declared from 2003 to 2025 was 10.7%. We continue to share our success with our shareholders through the payment of dividends and opportunistic stock repurchases, while also continuing to grow our capital. Prosperity reported net income of $137.6 million for the quarter ending September 30, 2025, compared with $127.3 million for the same period in 2024.

Net income per diluted common share was $1.45 for the quarter ended September 30, 2025, compared with $1.34 for the same period in 2024, an increase of 8.2%. Our earnings were primarily impacted by a higher net interest margin. The net interest margin on a tax-equivalent basis was 3.24% for the three months ending September 30, 2025, compared with 2.95% for the same period in 2024. As mentioned in previous calls, our net interest margin should continue to improve over the next 24 to 36 months, with interest rates either increasing or decreasing 200 basis points. Prosperity continues to exhibit solid operating metrics, with annualized return on tangible equity of 13.43% and return on assets of 1.44%. Our loans, excluding the warehouse purchase program loans, were $20.7 billion at September 30, 2025, compared with $20.9 billion at June 30, 2025, a decrease of $160 million or 77 basis points.

We continue to work through credits acquired in previous mergers, and we are experiencing borrowers using their own cash to pay down balances or not drawing on their lines. It is also an extremely competitive lending environment, with aggressive terms and conditions being offered, and in some cases, we've just elected not to participate. Deposits were $27.7 billion at September 30, 2025, an increase of $308 million or 1.1%, 4.5% annualized from the $27.4 billion at June 30, 2025. We are encouraged that the core deposits have grown. Importantly, Prosperity Bancshares does not have any brokered deposits. Our non-performing assets total $119 million or 36 basis points of quarterly average earning assets at September 30, 2025, compared with $110 million or 33 basis points of quarterly average interest earning assets at June 30, 2025. There is a slight increase in non-performing assets, however, credit remains strong with some isolated incidences.

The allowance for credit losses on loans and off-balance sheet credit exposure was $377 million at September 30, 2025, compared to the $119 million in non-performing assets as of September 30, 2025. We remain focused on completing our pending acquisitions of American Bank Holding Corporation and Southwest Bancshares Inc. We also continue to have conversations with other banks considering strategic opportunities. We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns, and regulatory burden all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value. As of October 2025, Texas boasts one of the world's strongest and most diverse economies, ranking the eighth largest globally with a GDP of approximately $2.7 trillion in 2024. The state produces 9.3% of the U.S.

GDP and continues to outpace national growth in many metrics. Although the economy is showing some signs of moderation, influenced by factors such as tariffs and immigration policies, we believe Texas remains the best place for business with a pro-business attitude and no state income tax. This is evidenced by major corporations continuing to move their operations to Texas and Oklahoma. As of October 2025, Oklahoma's economy is demonstrating resilience and modest growth, outpacing national averages in key areas like unemployment and population expansion, despite broader U.S. slowdowns from tariffs and policy uncertainties. Thanks again for your support of our company. Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss the specific financial results we achieved. Asylbek?

Speaker 1

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended September 30, 2025, was $273.4 million, an increase of $11.7 million compared to $261.7 million for the same period in 2024, an increase of $5.7 million compared to $267.7 million for the quarter ended June 30, 2025. Fair value loan income for the third quarter of 2025 was $2.9 million compared to $3.1 million for the second quarter of 2025. The fair value loan income for the fourth quarter of 2025 is expected to be in the range of $2 to $3 million.

The net interest margin on a tax-equivalent basis was 3.24% for the three months ended September 30, 2025, an increase of 29 basis points compared to 2.95% for the same period in 2024, an increase of 6 basis points compared to 3.18% for the quarter ended June 30, 2025. Excluding purchase accounting adjustments, the net interest margin for the three months ended September 30, 2025, was 3.21% compared to 2.89% for the same period in 2024 and 3.14% for the quarter ended June 30, 2025. Non-interest income was $41.2 million for the three months ended September 30, 2025, compared to $43 million for the quarter ended June 30, 2025, and $41.1 million for the same period in 2024. Non-interest expense was $138.6 million for the three months ended September 30, 2025, and for the three months ended June 30, 2025, compared to $140.3 million for the same period in 2024.

For the fourth quarter of 2025, we expect non-interest expense to be in the range of $141 to $143 million. The efficiency ratio was 44.1% for the three months ended September 30, 2025, compared to 44.8% for the quarter ended June 30, 2025, and 46.9% for the same period in 2024. The bond portfolio metrics at 9/30/2025 have a modified duration of 3.8 and projected annual cash flows of approximately $1.9 billion. With that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality.

Speaker 4

Thank you, Asylbek. Our non-performing assets at quarter end September 30, 2025, totaled $119,563,000 or 0.54% of loans and other real estate, compared to $110,487,000 or 0.50% at June 30, 2025. This is an increase of $9,076,000. Since September 30, 2025, $1,121,000 of non-performing assets have been removed as a result of the sale of homes. The September 30, 2025 non-performing asset total was made up of $105,797,000 in loans, $16,000 in repossessed assets, and $13,750,000 in other real estate. Net charge-offs for the three months ended September 30, 2025 were $6,458,000, compared to net charge-offs of $3,017,000 for the quarter ended June 30, 2025. This is an increase of $3,441,000 on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended September 30, 2025. No dollars were taken into income from the allowance during the quarter ended September 30, 2025.

The average monthly new loan production for the quarter ended September 30, 2025 was $356 million, compared to $353 million for the quarter ended June 30, 2025. Loans outstanding at September 30, 2025 were approximately $22.028 billion, compared to $22.197 billion at June 30, 2025. The September 30, 2025 loan total is made up of 36% fixed-rate loans, 34% floating-rate loans, and 30% 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 will assist us with questions.

Speaker 8

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Catherine Mealor with KBW. Please go ahead.

Speaker 5

Thanks. Good morning.

Speaker 3

Morning.

Speaker 5

I wanted to start maybe with your outlook for loan growth. I wanted to see with, you know, the loans have been declining for the past few quarters, and I think we were hopeful that we would see that inflection this quarter. I'm just kind of curious if you could talk about the push and pull between paydowns and the decline in some of your acquired books, and then your outlook for organic growth moving forward. Thanks.

Speaker 3

Hey, thanks for the question. This is Kevin. I'll take the first cut at that. I think for the fourth quarter, first of all, year to date for the fourth quarter, loans are down slightly, maybe $40 to $45 million. As David said in his lead-in comments, you know, we're seeing some structure and pricing aspects that are not favorable in terms of the way we're thinking about credit, still, and maybe on an accelerated basis. Between that and some elevated payoffs in the fourth quarter, I think this is going to be a flat quarter, which I know is disappointing, but I think that's really where we're going to kind of come out of this.

Going into next year, we feel a little bit better about it in that we've got a bunch of construction deals that we have approved over the course of this year that have not funded up yet. We're still waiting for all the equity to go into those deals. Just off of a steady state book, I would say low single digits for next year. As you know, we expect to have both of the acquisitions that we have announced closed and on the books into next year, probably by the end of the first quarter of next year, which will help out, obviously, for just the total volumes. The only thing I would caution out of all of what I've said is, you know, once we buy a bank, a couple of banks like that, there's typically some loan runoff even for a good bank.

These are both pretty good credit quality banks. One of the headwinds for overall next year, not just organic off of today's balance sheet, will be any payoffs we get out of those two acquisitions. I think that's probably a fair summary, but David or Tim may want to add to that.

Speaker 4

I would just remind everybody that when you're in a market that's very aggressive in terms of pricing and terms, and that's what we have had for some time now, you just simply have to be careful and prudent. There's still loans to look at out there. We have active loan committees, but we don't want to make a mistake and end up having a problem with our net interest margin because we've priced too low and things of that nature. We see a lot of that going on in the market. We just need to be careful and prudent, and things will be fine.

Speaker 3

The last thing I probably should have mentioned is, it's not lost on you or us that the competitive landscape in Texas has taken on some major changes over the last couple of months. I would expect some of the new out-of-state players who've bought banks here to be aggressive into this market. Offsetting that aggressiveness, and maybe this isn't as prevalent as it's been, you know, 15, 20, 30 years ago, there's a fair amount of Texas-based businesses that want to bank with a Texas bank. Just the fact that you've got an out-of-state competitor taking over a local institution, there'll be more than a handful of clients who say, you know, we're Texans and we want to bank with a Texas bank, somebody we can look in the eye in terms of the top decision makers.

I think net net, that probably plays out on a positive basis for us.

Speaker 4

Yeah, that's a very real aspect and always is.

Speaker 5

How should we think about if, because I think you're right. I think the competitive landscape, I mean, if you see stress in structure and pricing that you don't think are acceptable today, my gut is just given all the M&A that you've seen in Texas, that's only going to get worse next year. I appreciate the comment on, you know, Texans wanting to bank with other Texas banks. That helps that. In the scenario where we don't see a pickup in loan growth next year, I was excited to see the buyback activity this quarter and the new authorization. How aggressive do you think you can get on this buyback given where your stock is trading and the slow growth? Is it appropriate for us to incorporate this entire 5% buyback into our estimates over the next year?

Speaker 3

I'm going to let David take that one. I'm going to say that's going to be price-dependent. My goodness, we sure wish we could have been buying more in the previous quarter. We were blacked out for a good part of the period, you know, when we got S-4s out there on acquisitions. I do expect very soon we'll be active again.

Speaker 4

Katherine, I would say that, you know, I've read a lot of the analysts, things that came out this morning. I think once the herd gets into a certain motion, they all run in that same motion and they all focus on the net interest income. The bottom line is, our balance sheet, we reduced our balance sheet in size, and that primarily came from borrowings that we had at the Fed or Federal Home Loan Bank. If you looked a year ago, we were probably borrowing about $4 billion. Today, we might have closed at $2 billion, but we probably average about $1.5 billion borrowings a day, maybe $1.5 billion to $1.8 billion. We really lowered our balance sheet. The things that I guess are missing, I don't know, maybe I just need to bring it up.

If I told you a year ago that we're going to increase our earnings by 15% and we're going to take our net interest margin from 2.95 to 3.24 in one year, I think everybody would be hysterical. That's what's happened. Our earnings from nine months last year to nine months this year has grown over 15%. Our net interest margin went from 2.95 to 3.24. I mean, that's just magnificent. The beautiful part about that is, based on y'all's projections, you have that to look forward for 2026 and 2027, double-digit growth. Yes, we're very excited about the quarter. At the low prices that we're at right now, we're going to back up the truck. There's no question. With the earnings we have and the price that it's at right now, it's ridiculous.

I noticed, you've noticed some other bank sales that have gone through, like the FirstBank deal in Colorado. That bank is similar to us. I think we're better, however, but a lot of the same good core, same good core deposit structures went for 15 times earnings. Anybody take your earnings of next year, $6 and something, multiply that times, that's our real price. That's the real value of our bank, you know, $90 to $100 a share. Where we're trading at today is just absolutely ridiculous. We will be buying, and we will be buying strong.

Speaker 5

Great. Love to hear that. Thank you.

Speaker 8

The next question comes from Michael Rose with Raymond James. Please go ahead.

Hey, good morning. Thanks for taking my questions. Maybe just following up on the loan growth discussion, you know, just given the amount of dislocation that we're going to see, and I know it's competitive, but I think one, maybe one area that you guys haven't talked up as much over the years and others have is just, you know, hiring efforts and hiring more lenders, bringing more bodies on staff. You guys have a great efficiency ratio, but any thoughts given to being a little bit more active on the hiring front to really bolster that loan growth, you know, potential? Because certainly I appreciate the margin expansion, the fixed asset repricing, but you know, it's kind of price times volume, right? I think we'd like to, we'd all like to see some greater earning asset growth to, you know, really reap the benefit of that margin expansion. Thanks.

Speaker 4

Yes, we're constantly looking at people that potentially can come in and help to grow our bank. I've approved three or four just within the last month that we think have a very good opportunity with us. That's something we're constantly focused on. Likewise, if we have somebody that's just simply not performing and enough time has gone by where that should not be the case, we typically look at those people and try to determine, you know, should they still be with us or not. There are two sides to that coin, but we absolutely are looking at bringing people in, and we have approved a fair number here over the last year, really, and some recently. We're active in that regard.

Okay, helpful. Kevin, maybe if I can just ask quickly the kind of the warehouse question and kind of expectations for, you know, the next quarter. It looks like we're going to get a rate cut here in a couple of hours. Just wanted to see what you guys are seeing. Thanks.

Speaker 3

Yeah, thanks for the question, Michael. First of all, I have to say after a six or seven-year run of really hitting the nail on the head on our thought process about a forward look in this space, I missed it this quarter. I said $1.25 billion, we averaged $1.218 billion. So, the record is broken. You know, Michael, quarter to date, through last night, we're averaging $1.222 billion. So basically flat to the average of last quarter. Typically, the warehouse is decent in October, and November and December are relatively weak months. In fact, it wouldn't surprise me if we saw a week or two below $1 billion or below $900 million before the year is out. Now, all that's rate dependent. I would say, for the quarter, we probably average $1.1 billion.

Speaker 4

Yeah, the only hopeful thing you could say, I saw some numbers today. I don't know if they're accurate or not, where refinancings are up 111% over last year, simply because of rate and that.

Speaker 3

Believe it or not, there's another mini refi boom going on.

That's good to hear. I'll step back. Thanks for taking my questions.

Speaker 8

The next question comes from Dave Rochester with Cantor. Please go ahead.

Hey, good morning, guys. Maybe if I could just start on the margin. I know that's continuing to trend higher. What's the medium-term outlook on that or the one-year view on that expansion you're looking for? Maybe the more normalized margin that you expect, just given your rate outlook. If you could just quantify or update the number that you're seeing in terms of fixed-rate loans that are going to be repricing over the next year or two, that'd be great. Thanks.

Speaker 4

I can probably start on the margin, Asylbek, if it's okay. I mean, we have, as we said last year, we really felt the margin, I think we gave numbers like we'd end up at 3.25% or 3.30%, I think, at year-end, this year. We feel comfortable. I think we've hit the, I think we've got really close to what we said right now. We still see margin increasing over the next 12, 24, and 36 months. Sometimes these models that we have, they look too good. I don't want to give you these numbers because I think that our rates are lower. For example, like on a money market, you know, if you have $1 million with us, it may be 3%. At our bank, if you're at one of the other banks, they're maybe making 4%.

As interest rates come down, we may not go down as much as some of the other banks go down, right up front. The exception rates absolutely will go down on those. The overall rates, we probably won't see as much rate going down as the other banks are. Having even said that, time is on our side. They will go up. It's just maybe not as fast as we would like them to go up, either with their interest rates going up or down. We still see margin improvement for 12, 24, and 36 months. It looks really good for us. There's no question. You've got a $10 billion portfolio of bonds at a little over 2%. That's with a three-point-something year duration. As those are maturing, it's just, it'll be a home run for us.

Speaker 1

I agree. What we just discussed, the security and the fixed loans will be a tailwind for us that continue to reprice for several years. That is why we see expansion of the margin continue to do. Specific to your question, how much of fixed loans we have, if you look at loans without warehouses, 39% of the loans are fixed-rate loans.

In terms of just what's rolling over the next year or two, any sense for dollar amounts there?

I think if you look at it, it's rolling off probably from a requesting standpoint. Of course, floating and variable will be faster than fixed one. I think it will have a good value or volume of repricing. If you look at the big picture, we have about $5 billion of loans gets repaid or paid down every year for opportunity to, out of that $5 billion, about $3 billion has opportunity to reprice because $2 billion is already at the floating rate.

Speaker 4

You get another $2 billion of our security.

Speaker 1

Exactly. That's why we have about $5 billion in repricing opportunity between loans and securities.

Speaker 4

I would point out that some of the fixed-rate loans that we think will reprice were made back when loans were made at quite a bit lower rates, 3.5% to 4.5% to 5%. We will see what rates are at the time that repricing occurs. I expect a pickup in the rate on those loans. We will see.

I agree. Yeah, it should be pretty decent. Where are your new loans pricing now?

Speaker 3

I'd say between $650 and $725.

Speaker 4

That's correct. Once again, we see some competitive pricing at 5% or even below, and we've tried.

Speaker 1

Those we aren't doing.

Speaker 4

We've tried to stay away from those. That's correct.

Speaker 3

Yeah. What's the way I think the lowest one we chased was probably $6.25, maybe.

Speaker 4

If we went that low, it was only because a customer had as much in deposits as we had in loans. For the most part, we're seeing some people pricing a 30-day sell for plus two. We just haven't gone to those kind of levels, no.

Speaker 3

Yeah. Okay. Appreciate the call. Maybe just switching to expenses real quick. Appreciated the 4Q guide there. How are you thinking about the step up in that run rate as we get into next year? I know sometimes you've had a little bit of a step up in the first quarter, and then you've got merit and other stuff kicking in for 2Q. Anything lumpy that you're expecting over the next year or so, just in terms of platform enhancements or anything like that that we should be aware of? Thanks.

Speaker 1

Yeah, I think you know the guidance of what I gave you for the fourth quarter. In the first quarter, it usually goes up because of the Merritt situation. In the longer term, I think I don't see significant increase in any expenses. It's going to be normal inflationary increase we see throughout. I know we're working on the platform change for next year, and we kind of looked at it in numbers. It provides about an additional 1% and then to 1.5% additional expense for the run rate I provided. That's going to be baked in starting next year. Overall, I think we have pretty good expense management, and we'll continue to do that next year.

Speaker 3

Okay, great. If I can just sneak in one more, just on the M&A picture in general, you know, obviously a lot of eyes are on Texas. A lot of big bank guys are on Texas. I know you've been a strong acquirer for a long time. You're very well known in the market as a buyer of banks. I'm just curious how you guys would field an inbound call from one of these larger bank CEOs who loves your footprint, your lower cost of deposits, you got stellar credit quality. What would you look for in one of those combinations potentially? Are you starting to see any of that interest come your way at all? You got a future in politics the way you phrased that.

That was okay.

Speaker 4

I really think that's what the market's missing. I mean, again, our bank's not up for sale, but at the same time, what is the real value of our bank when you look at the banks that have sold like FirstBank in Colorado? They're 15 times earnings. Just take that multiple where we're at and what's out there in the market. You can see how underpriced that we are today. We will always do what's right for the shareholder. We probably wouldn't be bullied in one way or another depending on one hedge fund owning the stock or another hedge fund owning the stock. We're always going to do right by the shareholder. We always have in the past, and we'll continue to do that. I think that the market's really missing the optionalities that we do have.

Speaker 3

Yeah, our scarcity value is increasing.

Speaker 4

Yeah, I mean, we're the second largest bank based in Texas right now. I mean, it's one of the best growing states in the United States. I just think people are really missing the boat here.

Speaker 3

Yep. Totally agree. Thanks, guys. Appreciate it.

Speaker 8

The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Speaker 7

Hi, good morning all.

Speaker 4

Good morning.

Speaker 7

Just a follow-up to your comments that things are looking a little bit frothy on the loan side and competition is only increasing from here, and you have to be careful. Is there anything that you can do to drive loan growth within your risk return parameters? You know, maybe increasing branches or investing in your product set or hiring more. Is there anything else that can be done here?

Speaker 3

You know, outside of hiring people and lowering rates, structurally, we're not going to bend.

Speaker 4

Again, analysts are always on one side. They're always focused just on loan growth. The bottom line is, guys, we have an 80% loan-to-deposit ratio. We don't want to be a 100% loan-to-deposit ratio. A lot of our growth depends on our growth on deposits. That's where your real money is really made, not in deposits that you're paying 4% and 5% for. It's core deposits. That's why when some people ask, "Why did you pay so much for this bank compared to this bank?" Because banks are completely different, and so deposits are the most important thing. We'll take those deposits as they come in, and we will put those into loans. You know, we made the same kind of return when we were 60% or 65% loan-to-deposit ratio as we are now, which is 80%. We're focused on it, and we're going to continue to make loans.

To make loans in a market where it's not profitable or there's too much risk, it's good for the short term because everybody's impressed with the net interest income growth. If you're a long-term shareholder like I am, I'm not looking one year out or six months out. I'm looking five and ten years out.

Speaker 1

Just give us some statistics. I know Tim mentioned what the average monthly production was for the third quarter was $356 million. Our production for the second quarter average was $353 million. If you just compare what we had a year ago in the same periods, the average in the second quarter of last year was $255 million, and the third quarter was $260 million. If you look at just period over period, our production is up almost $100 million. The production is there. Like I think Kevin mentioned, some of those real estates need to put their money first before they start taking out. From that statistic, you can see that we are.

Speaker 4

If you look at the increase, if you look at the amount of loans that we decreased this time, the majority of the loans were in the category of the one to four family residential home loans. People, the home prices were higher, interest rates were higher. We were trying to get out of those more and sell more of those to the market where we could keep more of those. We can easily build our loan-to-deposit ratio we want. We're really focusing not just on loan growth or your net interest growth. We're focusing on earnings per share growth. We're focused on capital growth. I mean, we're focused on the whole bank, not just on one particular area.

Speaker 7

Got it. I appreciate that. I guess just on maybe on the product side, are there any gaps that you might want to invest in there?

Speaker 4

I don't think so on the product side. We've never redlined necessarily very many products, if any. We're willing to look at anything that's reasonable. I don't think there's an obvious gap in products anywhere. I don't know. We're really, we offer just about any type of loan that you could want. We're one of the biggest ag lenders in the state of Texas, in the United States, really. We're in construction lending. We're in commercial and industrial. We're probably in, we're in middle market lending. We're in oil and gas. I can go on and on. There's not many areas that we don't touch. We touch almost all the areas that are out there, actually.

Speaker 7

Got it. Very clear. Maybe a follow-up on the buyback comment. You noted that you would have liked to be more active in the quarter and that you were not because of M&A. You have obviously spoken in the past a lot about M&A being a strong part of your growth strategy, and you are typically in multiple conversations at different stages. I guess you also noted that you will be buying back more aggressively at these prices. Should we take that to mean that you are pivoting away from an M&A strategy to a buyback strategy in the near term while your stock is at these prices?

Speaker 4

I think that we'll always look at M&A, but based right now where our stock price is, we're really focused on getting our stock price up. I will admit, we just heard during this meeting that we have gotten all of our approvals on the American Bank and Corpus Christi. We're excited about that. We're excited about putting the two banks in San Antonio and Corpus together. It would definitely give us, from Victoria all the way to Corpus Christi, a dominant market share along what we call the Gulf of America there. We're excited about that. Our main focus right now will be to get our stock price up. We think it's terribly undervalued. You can never say no to M&A because if it's a cash deal, it really doesn't matter. It's only stock that if we give our stock and it's too low away, that's what matters.

We'll still continue to look at all opportunities, but our main focus right now is to get our stock price up.

Speaker 7

Great. Thank you.

Speaker 8

Next question comes from Peter Winter with D.A. Davidson. Please go ahead.

Speaker 10

Thank you. Kevin, I wanted to follow up with comments that you made earlier about, you know, as you close the deal with American Bank Holding Corporation and Southwest Bancshares Inc., that there'll be some runoff in the loan portfolios to meet your standards. Do you have a sense of how much runoff you'd be expecting from those portfolios?

Speaker 3

Not nearly as much as we experienced this year with the Lonestar acquisition.

Speaker 4

First Capital.

Speaker 3

First Capital. Lonestar has been fine. They're both, first of all, they're both pretty high-quality credit banks. We did a deep, as we do on all acquisitions, we did a deep credit dive on both of these. American Bank is, gee, it's one of the cleaner banks we've seen, ever. I think it's going to be muted compared to what we've experienced here more recently. There's always going to be some, but I think it'll be muted compared to what we have seen in the past. I think Tim and David could probably.

Speaker 4

Yeah. Peter, both of those banks, we did due diligence on both of them. I don't want to say clean as a whistle because there's always issues that come up. Again, nothing like, you know, on our First Capital deal that we did in West Texas, we probably outsourced over $460 million in loans. We don't expect anything like that with these two deals right here. Nothing like that.

Speaker 3

Let's just say I'd be really disappointed if we were talking about a year from now, we lack loan growth due to runoff in those portfolios.

Speaker 4

Our experience, especially along that Gulf Coast right there, our experience with Victoria, we paid a lot for that bank, which we paid a lot for the American Bank at the same time. Both banks are very similar with very core deposits, and really, those banks grew. I mean, I don't think there's any question with the core deposits that American Bank has and that market share that we'll own from along that Gulf of America side down that coast. I think it's going to be really a good, good deal.

Speaker 10

Got it. That's helpful. Thank you. If I could go back to the margin, I mean, clearly, it's been a good story. It's been progressing the way you guys had thought it would. I was just curious with the third curve suggesting more rate cuts, are you still comfortable with kind of a 3.35% net interest margin in the fourth quarter and 3.40% by the middle of next year?

Speaker 1

Yeah, I think those maybe ticked down a little bit because the numbers we provided was that static balance sheet and the, you know, no rate cuts. If you're looking 12 months, 24 months, our margin showing that with 100 down being still higher than what we projected for average for this year. I will continue to grow the margin. It's going to be ticked down a little bit lower.

Speaker 4

Even at 100 basis points down, it may be slower as accomplished, but 12 months from now, I hate to give these numbers out because then if we're not accurate, but you know, we're still showing close to what you said, I think at 338.

Speaker 10

I'm sorry, just to follow up. When you say, Asylbek, tick lower, tick lower from the $3.40?

Speaker 1

Yeah, what we just said on our model showing 100 basis points down, 12 months, we're showing 3.38%.

Speaker 4

We're 3.48% with no in a static market.

Speaker 10

Got it. Okay, thank you.

Speaker 8

The next question.

Speaker 4

I will say this, Peter, as you go out 24 months and farther, we do still pick up pretty significantly, even with interest rates going down 100 basis points.

Speaker 1

That was just to clarify, that was a standalone, not including American Bank Holding Corporation or partners.

Speaker 4

Right. Right. Correct.

Speaker 3

Am I lost contact?

Speaker 1

Hello?

Speaker 4

Hello?

Speaker 8

Are we ready for the next question?

Yes.

Speaker 4

Yes.

Speaker 8

Okay. Great. Wonderful. Our next question comes from Jared Shaw with Barclays Capital. Please go ahead.

Hi, good afternoon.

Speaker 4

Hi.

Just on the margin for the deposit costs, what should we, or what are you expecting in terms of beta, with that broader rate backdrop?

Speaker 1

Yeah, for our model on the deposit betas, that's non-maturity deposit, we use 13 basis points beta, pretty low.

Okay. Looking at the, you know, I hear what you're saying about the buyback and appreciate all that. When you look at the M&A environment here, especially for smaller deals, does the consolidation that we've seen more recently make it easier for you from a competitive standpoint to maybe get some of those deals with fewer competitors, or maybe the inverse where there's more eyes on Texas that actually makes it harder?

Speaker 4

Candidly, we have more deals than we have money, quite frankly. It's just a matter of what we really want to do.

Okay, thank you.

Speaker 8

The next question comes from David Chiaverini with Jefferies. Please go ahead.

Hi, thanks. I wanted to follow up on the deposit question. Can you talk about deposit competition? You mentioned about the 80% loan-to-deposit ratio. Are you comfortable at that level? Can you talk about the extent to which these kind of out-of-state competitors are coming in and potentially pressing on the deposit pricing front?

Speaker 4

Yeah. I mean, we're at 80%. We probably would go to 85% in our loan-to-deposit ratio. At that limit, we would probably stop. We're still focused on core deposits. We don't have any brokered deposits. When we go out, we really try to go, you know, we're really trying to get a total deposit relationship, not just the certificate of deposits to build up deposits. That's what we're focused on. We do see the people coming in, especially, you know, I may take a different stand because a number of these banks that have bought other banks out in the state, they weren't able to get into the state. Because of that, they've raised their interest rates so much on money they pay here compared to where they pay somebody else because they haven't been successful at building market share, especially in deposits.

I'm almost thinking since now they're making headway into the state and they really have some market share, they may not be under so much pressure to show their other people in the other states that they're having to grow those deals. I think it may become easier for us, quite frankly. I don't know. That's just another spin on it anyway.

Speaker 1

If you look at it, we always had competition, so it's nothing new for us related to the deposits. I know we have grown this quarter in the core deposits. That's all relationship, you know, and that's what brings it, not just the rate, but the relationship we have with our customers.

Speaker 4

We really focus on relationships. Kevin kind of alluded to it a while ago. People want to bank with the Texas bank. I think where we're at in this state and with the other guys coming in, the amount of opportunities we have are just, it's unbelievable. The kind of customers that we have are unbelievable. Customers that have been around their daddy and their daddy's generation have had businesses and they're coming to us. We're getting to handpick those again. We're not here showing you 8% and 10% loan growth, but what we are putting on is really quality stuff and really building a really quality organization.

Thanks for that. Shifting over to credit quality, still very strong. We did see the NPA uptick. Can you talk about the drivers behind the uptick, and are there any pockets or areas you're keeping a closer eye on?

I think I can give you some color on that. Out of the a little over $119 million in non-performing assets, about $57 million of it is single-family homes. Those NPAs with respect to the homes are a result of pressure that we got from a regulatory standpoint to make loans in minority areas, etc. We did not get the down payments that we would normally want, etc. This is the result of it. It's not surprising. The good news is there's a market for the homes. It takes a while to go through the foreclosure process and get them back. We've been able to sell them as we get them back, some at a profit, some break even, some at a very small loss. The point is we've been able to sell them. Yes, if we didn't have those homes, you could take $57 million away from the non-performing.

Speaker 1

Again, we were required under fair lending. We had to get a certain amount that we couldn't.

Speaker 4

That's correct.

Speaker 1

We would be eliminated from doing M&A. We were kind of forced into this, making loans with no money down, very low interest rates, and even giving money for closing costs.

Speaker 4

That's exactly right. It was a regulatory issue. It was a regulatory issue. Please don't misunderstand what I'm saying. I'm not implying that we don't have a good relationship with the regulators. No, the facts are what they are. During the last two or three calendar years, there was very significant pressure from the regulators to address these markets that they felt were underserved. We understood that. When you don't require a down payment and you make loans to people that barely have enough cash flow to make the first payment, you're going to have trouble. What we see right now is the clear evidence of that.

Speaker 1

The challenge is all banks, it's not just us, all banks are required to do this. There are just a certain number of these customers that everybody's trying to get and everybody's fighting for these customers. That's just one of the things that happened, really.

Speaker 4

Right. We have discontinued some of those aggressive programs. We discontinued them a few months ago. We are not putting any more of those on the books. We will just deal with what is there. As I say, we are able to sell these homes. I do not think that is going to change dramatically. I think we will be able to continue to sell them. In another year or so, I think that part of the non-performing will be effectively gone.

Speaker 3

In terms of any pockets we're looking at, we look at the, you know, our credit history is pretty good. We look, we're looking at the entire portfolio. As we look across the entire portfolio, I'd say there's maybe one deal we think has got the potential for some stress.

Speaker 4

Shared National Credit.

Speaker 3

It's a shared National Credit. We don't have a lot of shared National Credits, but it's a shared National Credit that we've got our eye on. It's still performing. It's making its payments, but it's one we got our eye on. It's $35 million. Thank you. Outside of that, the portfolio looks pretty good. I did pull up our shared national total. I think we've got a whopping total of $270 million in shared national credit. It's not a field we play a lot in. Of that number, $153 million of that is stuff we agent. A lot of that is structured and sold by us.

Very helpful. Thank you.

Speaker 8

The next question comes from Ben Jarlinger with Citi. Please go ahead.

Speaker 10

Hey, good afternoon, or good morning, I guess, in Texas.

Speaker 4

You guys are doing New York?

Speaker 10

Yeah, I'm in Georgia, so East Coast.

Speaker 4

Okay, you're in the South.

Speaker 10

When you guys think about the two pending deals, I think you said, Dave, that you just got regulatory approval while we're on the phone here. Would it be fine to define the potential close dates for these two?

I think we're probably looking around fourth quarter, this quarter to close, probably the end of the year, the American deal, and first quarter of 2026 for Southwest.

Gotcha. Okay, that's helpful.

Speaker 4

Yeah, the financial impact is going to be more on the next year, not this year.

We'll probably roll the American Bank Holding Corporation into the first month of next year.

Speaker 10

Right. Yeah, right. Gotcha. Okay, that is helpful. Asylbek, you've done a really good job of making a chainsaw to the expense base of the banks that you guys pick up. Is it fair to assume it's going to be kind of business as usual as extracting the savings, or is there anything kind of long-tailed associated with them that you think about that might bleed into the two or three Q next year?

Speaker 1

Yeah, I mean, definitely when you do mergers with other banks, there's always cost savings regardless. We always strive to get the cost savings just by acquiring banks. I think it also depends on the system conversion. We're going to get some benefit early on because there'll be some departure, and additional costs will be like second half of the year, I would say. Overall, we'll get some cost savings in 2026, but most of all of it we're going to get in 2027 and beyond.

Speaker 10

Gotcha. All right, I appreciate the help. I just wanted to fine-tune the buyback comment of backing up the truck. Does that mean you have to wait until the second one closes and then you could just be there the next day, or is there something else beyond that?

Speaker 4

I think we had an S-4 filed. I know there's probably been some other little people shortages with doing some Tomfoolery or rethinking that we won't be able to buy back. I think we should be able to start buying back.

Next week.

Next week, we should be out there buying.

Speaker 10

Gotcha. I appreciate the help. Thank you, everyone.

Speaker 8

The next question comes from Matt Olney with Stephens. Please go ahead.

Hey, thanks for squeezing me in here. David, can you clarify your commentary about the current balance of the borrowings? I think it was around $2.4 billion at 9:30, and I thought I heard you say it was below that.

Speaker 4

I think on the last day or so, a couple of days we pulled, if you look a year ago, we were at $3.9 or $4 billion.

Speaker 1

Yeah, $3.9 billion, and we ended at $2.4 billion in the 9:30. We were able to reduce some from that for the October month, so we're running.

Speaker 4

You average for the month, you probably weren't near the $2.4 billion.

Speaker 1

No, we're much lower.

Speaker 4

What do you think the average was probably?

Speaker 1

For that month?

Speaker 4

I have a year that you're looking at a quarter, but again, we started reducing it.

Speaker 1

We started reducing it.

Speaker 4

As our bonds started maturing, we started just reducing our cash instead of buying back, you know. We're going to get back into the bond buying business too. There's no question. We're not letting the balance sheet, you know, we've always carried about $2 billion in leverage, and I think we let it maybe get down a little too far. I know I've asked for our guys to buy, and they didn't. We're still going to keep about $2 billion of leverage on the deal, and we're not going the other way. My point is, a lot of it is you just had a lot of the net interest income just came from a smaller balance sheet. We let it get too small, in my opinion.

Speaker 1

The comment we made, right? Currently, we have $1.8 billion borrowing, but like I said, I think we're going to buy some securities. We want to carry about $2 billion leverage a little bit that we've historically done.

Got it. Thanks for clarifying that. On deposit growth, I think the fourth quarter can be a more favorable quarter for deposit growth seasonally. Any color on what you're seeing so far or expectations for the fourth quarter?

Speaker 4

I think you can read us. We're very transparent in what we say. It happens, and we're pretty consistent. Our fourth quarter has always been pretty consistent, and I think you're probably looking at at least another $200 million or $300 million gain in deposits probably.

Speaker 1

Yep, I agree. It's our seasonality of public funds, and we should get.

Speaker 4

There are two to three normal big customer deposits.

Speaker 1

Big customer deposits from the commercial side.

Speaker 4

Getting ready for commercials.

Speaker 1

Yep.

Okay, that's helpful. Thank you, guys.

Speaker 8

The next question comes from Janet Lee with TD Cowen. Please go ahead.

Speaker 2

Hello. Dialing into deposits a little, I believe there was about $150 million of runoffs from the Lonestar acquisition on the deposit side as well through June. Do you expect any sort of deposit runoffs from the two acquisitions as well heading into 2026?

Speaker 4

The American Bank Holding Corporation acquisition is very solid. I mean, their deposit is made up of, they're probably as close to us as you could get. We don't expect anything there. The Texas Partners Bank, their deposit makeup is different. Again, probably the difference because you saw in the prices, they have a big treasury department with a lot of commercial accounts. It's just a bigger part of their deposit makeup, and so there is more risk. We don't, we're not anticipating a lot, but you never know. It's not rate-driven. It's really based on their treasury product that they have. I think that we have a, I think our treasury product is as good, and probably the guy that's running their treasury department will end up running our treasury department. That's good.

Again, a bigger portion of their deposits are in this treasury area, so there is more risk in that for sure.

Speaker 2

Got it. Fee income came in a little stronger than you guided to before. I believe that range was like $38 million to $40 million. How do you feel about the fee income? Is there an updated view on where the fee income could be over the next coming quarters?

Speaker 1

I think I'm going to stick to the guidance I gave, 38 to 40. I know this quarter we were a little bit higher, sometimes we do have one-off items happen. If we come in higher than that, it's good. I would say 38 to 40 is the guidance I would still continue for the fourth quarter.

Speaker 2

Thank you.

Speaker 8

The next question comes from John Arfstrom with RBC Capital. Please go ahead.

Speaker 0

Hey, thanks. Good morning.

Speaker 4

Good morning, John.

Speaker 0

I hope I'm last. David, I put back up the truck in my Excel model on the share counter and it gave me an error. I guess the question for you is, do you have an optimal capital target in mind for the company? I think one of the valuation issues is the returns have gone down as your capital has gone up. I'm just curious how far down you'd like to take your capital ratios.

Speaker 4

We were saving a lot of our capital because we had aspirations of, you know, we were bidding on a bigger bank. We didn't get the bigger bank, and we thought we would have needed the cash as part of the deal. We didn't get it. With our stock being this low, I think we have a lot of room. I mean, if you can do the, we're at 11% plus leverage ratio right now. I mean, you can do the math yourself and what the earnings we make. Even if we spent $500 million, it still wouldn't change the needle very much where we're at. I think we have a lot of bullets.

Speaker 0

Yeah, okay. One other thing.

Speaker 4

If you fell down even to 8%, you still have 3 or 4% of capital. I mean, we got a lot of money. I mean, we really do unless something goes wrong. We got a lot of bullets.

Speaker 0

Yeah. Okay. We'll look forward to that. One other thing I wanted to ask about, you talked about slight moderation in Texas activity. What are you seeing there? Is it a change in tone, or am I misreading that?

Speaker 4

No, you're good. You know me too long. You've been around me too long. I think when, again, when Kevin was talking about the loans this time, normally we see just tons of business out there and, you know, coming in. We're just taking care of it. We're not out there trying to underprice something. It's just coming in. We've sort of noticed when we have our management meeting, the tone in the room from the area managers that were out there, they see a little bit of a moderation from the type of customers we have. I don't want to say it's from the tariffs or maybe the change in policies and they don't know where they're going, but they're definitely feeling that a little bit.

Having said that, I don't think there's any other place in the United States that you would rather be, but there's definitely a tone of a moderation, I think, right now. The economy still overall is very good. You still see, gosh, you have JPMorgan Chase has more employees here than they have in New York City. You just had Wells Fargo open up.

Speaker 8

Biggest operations centers on the other side, I think it was Irving. Everybody's moving to this deal. When I say moderation, there is, I think there's a slight moderation. I think it'll change. I think what Kevin said earlier, you'll see a pickup, I think, in probably the first quarter of next year. Texas, I think, is still going to always be good. Again, compared to where it was, I do feel a little bit, a little bit of moderation.

Speaker 11

Okay, that's very helpful. Yeah, that's helpful. I appreciate that. Thank you.

Speaker 6

This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

Speaker 1

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.

Speaker 6

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.