Prosperity Bancshares Inc (PB) 2025 Q3 法說會逐字稿

Good day, and welcome to the Prosperity Bancshares third-quarter 2025 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

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, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus Junior, Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; and Mays Davenport, 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 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.

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 headquarter in San Antonio, Texas.

We are excited about this transaction as it significantly expands our San Antonio metro footprint with four additional branches and increase our deposit market share and bolstered 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, are 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 does not have any broker deposits. Our nonperforming assets totaled $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 NPAs.

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 and nonperforming assets as of September 30, 2025. We remain focused on completing our pending acquisitions of American Bank Holding Company 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 of transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value.

As of October 2025, Texas posted one of the world's strongest and most diverse economies, ranking eighth largest globally with a GDP of approximately $2.7 trillion in 2024. The state produces 9.3% of the US 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 October 2025, Oklahoma's economy is demonstrating resilience and modest growth, outpacing national averages in key areas like unemployment and population expansion, despite broader US 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?

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 2025 is expected to be in the range of $2 million 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, and 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. Noninterest 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.

Noninterest 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 we expect noninterest expense to be in the range of $141 million 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.

And with that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality.

Thank you, Asylbek. Our nonperforming assets at quarter end September 30, 2025, totaled $119,563,000 or 54 basis points of loans and other real estate, compared to $110,487,000 or 50 basis points at June 30, 2025. This is an increase of $9,076,000. Since September 30, 2025, $1.121 million of nonperforming assets have been removed as a result of the sale of homes. The September 30, 2025, nonperforming asset total was made up of $105,797,000 in loans, $16,000 in repossessed assets and $13,750,000 and 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.

(Operator Instructions)

Catherine Mealor, KBW.

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

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 were down slightly, maybe $40 million to $45 million. And as David said in his leading comments, we're seeing some structure and pricing aspects that are not favorable in terms of what -- the way we're thinking about credit still and maybe on an accelerated basis. So 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 and 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, but we're still waiting for all the equity to go into those deals. So just off about a steady-state book, I would say low single digits for next year. And as you know, we expect to have both of the acquisitions that we have announced closed on the books in the next year, probably by the end of the first quarter of next year, which will help out, obviously, for the total volumes.

The only thing I would caution all of what I've said is, once we buy a bank, a couple of banks like that, there's typically some loan runoff even for a good bank, and these are both pretty good credit quality banks. So 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.

Well, 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 could be careful and prudent. And there are 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 priced too low and things of that nature. And we see a lot of that going on in the market. So we just need to be careful and prudent, and things will be fine.

Yes. The last thing I probably should have mentioned is it's not lost on you or us. The competitive landscape in Texas has taken on some major changes over the last couple of months. And 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 15, 20, 30 years ago.

There's a fair amount of Texas-based businesses that want to bank with the Texas Bank. So just the fact that you've got another state competitor taking over a local institution, there'll be more than a handful of clients who say, we're Texans, and we want to bank of the Texas bank, somebody we can look in the eye in terms of the top decision maker. So I think they'll -- net-net, that probably plays out on a positive basis for us.

Yes. That's a very real aspect and always is.

And so how should we think about if -- because I think you're right, I think the competitive landscape, I mean if you -- if you see stressed structure and pricing that you don't fear 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. But I appreciate the comment on Texas, lending to other Texas banks. So that helps that.

But in the scenario where we don't see a pickup in loan growth next year, how -- I mean I was excited to see the buyback activity this quarter and the new authorization. Like how aggressive do you think you can get on this buyback and where your stock is trading and slow growth? I mean is it appropriate for us to incorporate this entire 5% buyback into our estimates over the next year?

I'm going to let David take that one. I'm going to say that's going to be price dependent. And 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 and when we got S-4s out there on acquisitions. So I do expect very soon we'll be active again.

Catherine, I would say that I've read a lot of the analyst things that came out this morning. And I think once the herd gets into a certain motion, they're all running that same motion, they are all focus on the net interest income. But 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 Bank.

If you look a year ago, we were probably borrowing about $4 billion. And today, we might have closed that $2 billion, but we probably average about $1.5 billion borrowings a day. So we had $1.5 billion to $1 billion. So we really lowered our balance sheet. The things that every -- I guess you're 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 astatic. Well, that's what's happened. Our earnings from nine months last year 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. And the beautiful part about that is based on you all's projections, you have that to look forward for 2026 and 2027 double-digit growth. So yes, we're very excited about the quarter. And yes, at the low prices that we're at right now, we're going to back up the truck.

There's no question. We'll -- with the earnings we have, and the price that it's at right now is ridiculous. I noticed -- you've noticed some other bank sales that have gone through like the First Bank deal in Colorado. I mean, that bank is similar to us. I think we're better, however, but a lot of the same good core deposit structures, went from 15 times earnings. Anybody take your earnings next year, $6 or something multiply that times -- that's our real price. That's a real day of our bank, $90 to $100 a share. So where we're trading at today is just absolutely ridiculous, and we will be buying, and we will be buying strong.

Great. Love to hear that. Thank you.

Michael Rose, Raymond James.

Hey, good morning, thanks for taking my questions. Maybe just following up on the loan growth discussion, 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 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 potential because certainly appreciate the margin expansion with faster repricing, but it's kind of price times volume, right? And I think we'd like to -- we'd all like to see some greater earning asset growth to really reap the benefit of that margin expansion.

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. So that's something we're constantly focused on. Likewise, if we have somebody that's just simply not performing, and enough time that's gone by where that should not be the case.

We typically look at those people and try to determine, should they still be with us or not. So 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. So 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 the next quarter, it looks like we're going to get rate cut here in a couple of hours. Just wanted to see what you guys are seeing.

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 $1.250 billion. We average $1.218 billion. So the record is broken.

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 at below $1 billion, or below $900 million before the year is out. Now all that's rate dependent. But I would say for the quarter, we probably averaged $1.1 billion.

Yes. The only hopeful thing you could say, I saw some numbers today. I don't know if they're accurate or not where refinancings were up 111% over last year simply because --

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.

Dave Rochester, Cantor.

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? And then maybe the more normalized margin that you expect just given your rate outlook.

And then 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 would be great.

I can probably start on the margin Asylbek if that's okay. 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, there. 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.

I mean, sometimes these models that we have, they look too good, so I don't want to give you these numbers because I think that -- we -- our rates are lower, for example, like on a money market, if you have $1 million with us, it may be 3% at our bank, if you're at one of the other banks they are maybe making 4%. So as interest rates come down, we may not go down as much as some of the other banks go down right up front.

I mean, the exception rates absolutely will go down on those. But the overall rates, we probably won't see as much rate going down as the other banks are. So -- but having even said that, time is on our side. It's just -- if they will go up, it just maybe not as fast as we would like them to go up, with the interest rates going up or down. So we still see margin improvement for 12, 24 and 36 months.

I mean it looks really good, I mean a question. You've got a $10 billion portfolio of bonds that a little over 2%. That's with a 3-point-something year duration. So as those are maturing, I mean, it's just -- it will be a home run for us.

I agree and that's what we just discussed in the security and the fixed loans will be a tailwind for us that continue to reprice for the several years. That's why we see expansion of the margin continue to do. And specific to your question, how much of fixed loans we have if you look at loans without warehouses, 39% of the loans as fixed rate loans.

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

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

Then you get another $2 billion of our security.

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

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%, 5%. So we'll see what rates are at the time that the repricing occurs, but I expect to pick up in the rate on those loans. So we'll see.

Yes. It should be pretty decent. Where are your new loans pricing now?

I'd say between 6.50% and 7.25%.

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

Those we aren't doing.

We've tried to stay away from those.

I think most of the loans we chased was probably 6.25% maybe.

If we went that low, it was only because the customer has a (inaudible) as we added loans. But for the most part, we're -- I mean we're seeing some people pricing 30 days SOFR plus 2. And I mean we just haven't gone to those kind of levels.

Appreciate the color. Maybe just switching to expenses real quick. I 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.

And then 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?

Yes. I think the guidance what I gave you for the fourth quarter. In the first quarter, yes, it usually goes up because of the merit situation. But in longer term, I think -- I don't see significant increase in the expenses is 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 the numbers.

It provides about additional 1% to 1.5% additional expense for the run rate I provided. So that's going to be baked in starting next year. But overall, I think we have pretty good expense management, and we will continue to do that next year.

Okay. Great. And if I could just sneak in one more. Just on the M&A picture in general. Obviously, a lot of eyes are on Texas, a lot of big bank eyes are on Texas. And 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.

But I'm just curious how you guys would feel an inbound call from one of these larger bank CEOs who loves your footprint, your lower cost of deposits, you've got stellar credit quality, what would you look for in one of those combinations potentially? And are you starting to see any of that interest come your way at all?

You got a future in politics the way you phrase that.

I really think that's what the market's missing. I mean, again, our bank is 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 and the -- I mean, they're 15 times earnings. I mean, just take that model where we're at and what's out there in the market. You can see how underpriced that we are today.

So we'll always do what's right for the shareholder. I mean, we probably wouldn't be bullied in one way or another depending on one hedge (inaudible) on the spot or another hedge fund on the stock, but we're always going to do right by the shareholder. And we always have in the past, and we'll continue to do that. But I think that the market is really missing the optionalities that we do have.

Our scarcity value is increasing.

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

Yeah, totally agree. Thanks, guys. Appreciate it.

Manan Gosalia, Morgan Stanley.

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

Outside of hiring people and lowering rates. Structurally, we're not going to bend.

But again, again, analysts are on -- always on one side. They're always focused just on loan growth. I mean the bottom line is, guys, we have an 80% loan-to-deposit ratio. We don't want to be 100% loan-to-deposit ratio. A lot of our growth depends on our growth on deposits.

And that's where your real money is really made, not in deposits that you're paying for and 5% for. Its core deposits. And 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. But we made the same kind of return when we were 60% or 65% loan-to-deposit ratio as we are now is 80%. But again, we're focused on it, and we're going to continue to make loans. But again, take loans in a market where it's not profitable, there's too much risk.

It's good for the short term because everybody is impressed with the net interest income growth. But 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 10 years out.

And just to give you some statistics, i know Tim mentioned what the average monthly production was for third quarter was $356 million, and our production for the second quarter average was $353 million. But if you just compared to what we had a year ago in the same period the average was in the second quarter of last year, it was $255 million and the third quarter was $260 million.

So if you look at just period-over-period, our production up almost $100 million. So we -- the production is there, like I think Kevin mentioned that some of those real estates, they need to put their money first, before they start taking out. So from that statistic, you can see that we are.

If you look at the amount of loans we decreased this time, the majority of the loans were in the category of the 1-4 family residential home loans. And again, people home prices were higher. Interest rates were higher.

And again, we were trying to get out of those more and sell more of those to the market where we could eat more of those, and we can easily build our loan-to-deposit ratio if we want, but 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.

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

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. So I don't think there's an obvious gap in products anywhere.

I don't know -- I mean, we're really -- we offer just about any type of loan that you can want. I mean 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 -- there's probably -- we're in middle market lending, we're in oil and gas. I mean I can go on and on. There's not many areas that we don't touch. So we touch almost all the areas that are out there actually.

Got it. Very clear. And then maybe a follow-up on the buyback comment. You noted that would have liked to be more active in the quarter and that you want because of M&A. And you've obviously spoken in the past a lot about M&A being a strong part of your growth strategy and you're typically in multiple conversations at different stages.

And then I guess you also noted that you will be buying back more aggressively at these prices. So 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?

I think that we'll always look at M&A, but base right now, where our stock price is, we're really focused on getting our stock price up. And we weren't able to buy. We'll admit say that we just heard during this meeting that we have gotten all of our approvals on the American Banking Corpus Christi.

So 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. It will give us a dominant market share along what we call the Gulf of America there. So we're excited about that.

But again, our main focus right now will be to get our stock price up. We think it's terribly undervalued. And again, you can never say no to M&A because if it's -- again, if it's a cash deal, it really doesn't matter. It's only stock that if we give our stock in it's too low way that will matter. So we'll still continue to get all opportunities, but our main focus right now is to get our stock price up.

Great, thank you.

Peter Winter, D.A. Davidson.

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

Not nearly as much as we experienced this year with the Lone Star acquisition. First Capital -- I mean. Lone Star has been fine up. I'm sorry. They're both -- first of all, -- they're both pretty high-quality credit banks. I mean we did a deep as we do on all acquisitions, we did a deep, deep credit dive on both of these American Bank is, gee, it's one of the cleaner banks we've seen ever.

So 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 will be muted compared to what we have seen in the past. I think Tim and David could probably --

Yes. 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. But again, nothing like -- on our First Capital deal that we did in West Texas, we probably -- we probably outsourced over $460 million in loans. We don't expect anything like that with these two deals right here, nothing like that.

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

And our experience, especially along the 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 -- and I don't think there's any question what 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, it will just be -- I think it's going to be really a good deal.

Got it. That's helpful. Thank you. And then just if I could go back to the margins, I mean, clearly, it's been a good story. It's been progressing the way you guys had thought it would. But just I was just curious with the forward curve suggesting more rate cuts. Are you still comfortable with kind of 3.35% NIM in the fourth quarter and 3.40% by the middle of next year?

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

But again, even at 100 basis points down, it may be slower as accomplished but the 12 months from now. I hate to give these numbers out because then if we're not accurate, but we're still showing close to what you said, I think, at 3.30%.

And so I'm sorry, just to -- so when you say Asylbek, tick lower from the 3.40%?

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

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

Got it. Okay. Thank you.

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

And that was -- just to clarify, that was a stand-alone, not including American or (inaudible). Right.

Are we ready for the next question?

Yes.

Jared Shaw with Barclays Capital.

Hi, good afternoon. Maybe 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?

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

Okay. And then looking at the -- I hear what you're saying about the buyback, and I appreciate all that. But when you look at the M&A environment here, especially for smaller deals. Does the consolidation that we've seen more recently, does that 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?

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.

David Chiaverini, Jefferies.

Hi, thanks. So I wanted to follow up on the deposit question. Can you talk about the positive competition. You mentioned about the 80% loan to deposit ratio. Are you comfortable at that level? And 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?

Yes. I mean we're at 80%, we probably would go 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 broker deposits. And really when we go out, we really try to go -- we're really trying to get total deposit relationship, not just the certificate of deposits to build up deposits. And so I mean that's what we're focused on.

We do see the people coming in, especially I may take a different spend because under these banks that have bought other banks out in the state, they weren't able to get into the state. And because of that, they've raised their interest rate so much on money they pay here compared to where it pays somebody else because they haven't been successful in 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, there are other people in the other states that they're having to grow those deals. And I think it may become easier for us, quite frankly. I don't know that's just another -- that's another spin on it anyway.

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

We really focus on relationships. I mean, Kevin kind of alluded to it a while ago, I mean, people want to bank with the Texas bank and 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 in the kind of customers that we have are unbelievable customers, that have been around their daddy and their daddy's generation have had businesses where they're coming to us.

And again, we're getting to handpick those again. We're not here to show any 8% and 10% loan growth, but what we are putting on is really quality stuff and really building a really quality organization.

And then 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. And those NPAs with respect to the homes are a result of sure that we got from a regulatory standpoint to make loans in minority areas, et cetera. And we did not get the down payments that we would normally want et cetera. And this is the result of -- 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, but we've been able to sell them as we get them back, some at a profit, some breakeven, some at a very small loss. But the point is we've been able to sell them. So yes, if you -- if we didn't have those homes, you could take $57 million away from the nonperforming.

We were required under Fair Lending, we had to get a certain amount -- we would be eliminated from doing M&A. So we were kind of forced into this making loans with no money down, very low interest rates and even give them money for closing costs.

That's exactly right.

It was a regulatory issue.

It was a regulatory issue, and please don't misunderstand what I'm saying. I'm not implying that we don't have a good relationship with the regulators, but the facts are what they are. And during the last two or three calendar years, there was very significant pressure from the regulators to address these markets that they felt were under-served.

And we understood that. But 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. And what we see right now is the clear evidence of that.

One of the challenge is -- all banks, it's not just as all banks are required to do this. So there are just certain number of these customers that everybody is trying to get and everybody's fighting for these customers, and that's just one of the things that happened relatively.

We have discontinued some of those aggressive programs. We discontinued them a few months ago. So we're not putting any more of those on the books, and we'll just deal with what's there. And as I say, we're able to sell these homes I don't think that's going to change dramatically. I think we'll be able to continue to sell them. So in another year or so, I think that part of the nonperforming will be effectively gone.

Yes. And in terms of any pockets we're looking. We look at the our credit history is pretty good. We're looking at the entire portfolio. And as we look across the entire portfolio, I'd say there's maybe one deal, we think it has got the potential for some stress. 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've got our eye on. And it's $35 million.

Outside of that portfolio looks pretty good. And if we pull up our shared national total. I think we've got a whopping total of $270 million in shared national credit. So it's not a field we play a lot in and of that of that number, $153 million of that is stuff we (inaudible). So a lot of it is structured and sold by us.

Very helpful, thank you.

Ben Gerlinger, Citi.

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

Depends if you're in New York.

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

(inaudible)

When you guys think about the two pending deals, I think you said, David, that you just got regulatory approval while we're on the phone here. Do you find the potential close dates for these two?

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

Gotcha. Okay, that's helpful.

Financial impact are going to be more on the next year and not this year.

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

Got you. Okay. That is helpful. And then Asylbek, you've done a really good job of taking a change out of 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?

Is it extracting the savings? Or is there anything long tail associated with (inaudible) things might bleed into 2Q or 3Q next year?

Yes. I mean definitely, when you do mergers with other banks, there's always cost savings regardless -- so we always strive to get the cost savings just by acquiring banks. And I think it also depends on the system conversion. We're going to get some benefit early on because there will be some departure, but -- and additional cost will be like second half of the year, I would say. But overall, we'll get some cost savings in 2026, but most -- all of it we're going to get in '27 and beyond.

Got you. I appreciate the help. And then I just wanted to fine-tune the buyback comment or 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 in that?

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

Next week.

Next week. Yes. So we should be out there buying.

Got you. All right. I appreciate the help. Thank you.

Matt Olney, Stephens.

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. I thought you heard you say it was below that.

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

Yes, $3.9 billion, and we ended at $2.4 billion in the 9/30, but we were able to reduce some from that in October month. So we're running.

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

No, no, we're much lower.

What you think the average was probably. You're looking at the quarter, but again, we started reducing that. As our bonds started maturing, we started just reducing our cash instead of buying back -- and again, we'll -- we're going to get back into the bond buying business, too. There's no question. We're not letting the balance sheet we 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, but we're not going to -- we're not going to -- we're still going to keep about $2 billion of leverage on the deal. So we're not going the other way. But 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 like to get too small in my opinion.

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

Okay. And then 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?

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

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

On a big customer deposits.

And big customer deposits from the commercial side.

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

Janet Lee, TD Cowen.

Hello. Diving into deposits a little. So I believe there was about $150 million of runoff from Lone Star acquisition on the deposit side as well through June. Do you expect any sort of deposit runoff from the two acquisitions as well heading into 2026?

The American Bank acquisition is very solid. I mean their deposit is made up of -- they're probably as close to as you could get. So I don't -- we don't expect anything there. The Texas Partners Bank, their deposit makeup is different. And again, probably the difference as you saw in the prices. They have a big treasury department with a lot of commercial accounts that it's just a bigger part of their -- it's a big part of their deposit makeup and so there is more risk.

Again, we don't -- we're not anticipating a lot, but you never know it could be. 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 be end up running our treasury department. So that's good. But again, there's a bigger portion of their deposits are -- a bigger portion of their deposits are in this treasury area. So there is more risk in that for sure.

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

Yes, 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. But sometimes we do have one-off items happen. But if we come in higher than that, it's good, but I would say 38% to 40% is the guidance would still continue for fourth quarter.

John Arfstrom, RBC Capital Markets.

Hey, thanks, good morning. I hope I'm last. Just David, I put back up the truck in my Excel note on the share count (inaudible) given. 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. So I'm just curious how far down we'd like to take your capital ratios?

We were saving a lot of our capital because we had aspirations of -- 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 you can do what, 11%-plus leverage ratio right now. So I mean, you can do the math yourself and what the earnings we make. If we spent $500 million, it still wouldn't change the needle very much where we're at. So I mean we have a lot of bullets, I think.

Okay. One of the same --

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 did. Unless something goes wrong, but we got a lot of bullets.

We'll look forward to that. The -- and one other thing I wanted to ask about, you talked about moderation slight moderation in Texas activity. What are you seeing there? Is it a change in tone? Or am I misreading that?

No, you're good. You know me too long. You've been around me too long. I think when Kevin was talking about the loans this time. Normally, we see just tons of business out there and coming in we're just taking care of -- we're not out there trying to underprice something, that's just coming in.

We 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 the -- 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, again, I don't think there are any other place in the United States that you would rather be, but there's definitely a ton of a moderation, I think, right now. But again, the economy is still overall very good. You still see you have JPMorgan Chase has more employees here than they have in New York City. You just had Wells Fargo open up one of the biggest operations centers on the other side. I think it was early, everybody is moving to this deal.

So when I say moderation, there is -- I think there's a slight moderation. I think it will change. I think what Kevin said earlier, you'll see a pickup, I think, in probably the first quarter of next year. And so Texas, I think, is still going to always be good. But again, compared to where it was, I do feel a little bit of moderation.

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

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

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.

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