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DATE

  • Wednesday, July 23, 2025, at 11:30 a.m. EDT

CALL PARTICIPANTS

  • Senior Chairman and CEO — David Zalman
  • President and Chief Operating Officer — Kevin Hanigan
  • Senior Executive Vice President and Chief Financial Officer — Asylbek Osmonov
  • Senior Chairman of the Board — Tim Timanus
  • Executive Vice President and General Counsel — Charlotte Rasche

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RISKS

  • Nonperforming assets increased by $29.1 million to $110.5 million in Q2 2025, primarily due to three identified portfolios, including $51 million in single-family home loans where management noted, "we continue to tick up just a little bit on the single family mortgage portfolio."
  • Deposit balances declined sequentially by $553 million, or 2%, from $28 billion at March 31, 2025, to $27.4 billion at June 30, 2025, with management citing "seasonality" but noting underlying pressure from disciplined deposit pricing.
  • No addition was made to the allowance for credit losses, despite the rise in nonperforming assets, reflecting management's ongoing monitoring of reserve coverage.
  • Linked quarter net charge-offs rose to $3 million from $2.7 million, indicating a modest uptick in credit costs.

TAKEAWAYS

Pending Merger: Prosperity Bancshares (PB -4.61%) announced a definitive agreement to acquire American Bank Holding Co., which is expected to enhance its footprint in South Texas and Central Texas, including four additional branches in San Antonio and the potential for No. 1 market share in Corpus Christi.

Net Income: Net income was $135 million, a 21% increase in net income, or 16% when adjusted for prior-year nonrecurring items, compared to $116 million (adjusted) in Q2 2024.

Earnings Per Share: Earnings per diluted share (GAAP) reached $1.42, up from $1.17, or $1.22 adjusted, for Q2 2024, an increase of 21% and 16.4%, respectively, compared to the same period in 2024.

Return Metrics: Return on average assets rose to 1.41% and return on average tangible common equity to 13.44%, both higher than 1.17% and 12.34% in Q2 2024.

Net Interest Income: Net interest income before credit loss provisions was $267.7 million, an increase of $8.9 million compared to the same period in 2024 and $2.3 million compared to the quarter ended 03/31/2025.

Net Interest Margin: Net interest margin (tax equivalent basis) was 3.18% for Q2 2025, up from 2.94% in Q2 2024 and 3.14% in Q1 2025.

Loans: Period-end loans totaled $22.2 billion; linked core loans increased by $219 million, or 1%, from $21.9 billion at 03/31/2025. Core loans increased by 4% on an annualized basis. Total loans declined by $123 million year-over-year.

Deposit Trends: Deposits were $27.4 billion, down $459 million, or 1.6%, compared to $27.9 billion at 06/30/2024, and $553 million, or 2%, sequentially, with noninterest-bearing deposits making up 34.3% of total deposits.

Noninterest Income: Noninterest income (GAAP) was $43 million, up from $41.3 million for the quarter ended 03/31/2025, and slightly below $46 million in Q2 2024 due to a $10.7 million gain on securities in Q2 2024.

Noninterest Expense: Noninterest expense was $138.6 million, down from $140.3 million for the quarter ended 03/31/2025 and $152.8 million for the same period in 2024, reflecting the absence of $4.4 million in merger expenses and $3.6 million FDIC special assessment in Q2 2024.

Efficiency Ratio: The efficiency ratio improved to 44.8% from 51.8% last year and 45.7% in the prior quarter.

Credit Quality: Nonperforming assets increased to $110.5 million, or 50 basis points of loans and OREO, from $81.4 million, or 37 basis points, in Q1 2025; $51 million was attributed to single-family home loans previously originated for minority lending programs.

Allowance: Allowance for credit losses on loans stood at $346 million, representing 3.47x coverage of nonperforming assets.

Merger NII Impact: Osmonov stated the American Bank deal is expected to yield $85 million–$90 million in additional annual net interest income on a run rate basis, plus $15 million–$16 million per year from the AOCI adjustment, resulting in mid-single-digit margin accretion annually.

NIM Guidance: Management's model projects net interest margin expanding to 3.35% in six months, 3.48% in 12 months, and 3.76% in 24 months under stable rates, excluding merger effects.

Fee Income Guidance: Osmonov raised the noninterest income run rate guidance from $36 million–$38 million to $38 million–$40 million, citing volume-driven increases in service and debit card fees.

Expense Guidance: Noninterest expense (GAAP) for Q3 2025 is expected to range from $141 million to $144 million.

Loan Production: Average monthly new loan production increased to $353 million from $317 million in Q1 2025; management noted that commercial loan growth and mortgage warehouse balances contributed to improved volumes.

Loan Portfolio Mix: Portfolio composition at period end was 36% fixed rate, 34% floating rate, and 30% variable rate loans.

SUMMARY

The announced merger with American Bank Holding Company is positioned to expand Prosperity Bancshares' geographic reach and is projected to provide immediate net interest income and margin accretion. The company reported sequential and annual improvements in profitability metrics and cost efficiency, while also noting a sequential decline in deposits driven by seasonal and pricing factors. Nonperforming assets increased -- primarily in single-family mortgages and legacy loan portfolios -- while reserves remained unchanged, reflecting management's assessment of limited loss exposure but highlighting ongoing portfolio monitoring needs. The management reiterated confidence in ongoing loan growth, disciplined deposit pricing, and further M&A activity, including consideration of expansion beyond Texas and Oklahoma if strategically beneficial.

  • Zalman stated, "Our models still continue to show great expansion in the net interest margin," and reconfirmed the target range of 3.25%–3.3% for the full year 2025 on a standalone basis.
  • Hanigan said, "Loan demand's okay," and described recent stabilization in both core loans and core deposit growth, with $40 million and $90 million increases, respectively, so far, as discussed on the Q2 2025 earnings call.
  • Timanus explained that the rise in nonperforming assets was concentrated in a $13 million real estate secured loan, $119 million in used vehicle notes from the LegacyTexas portfolio, and $51 million in single-family homes, most of which were either fully reserved or collateralized, and said, "we think we're dealing with all those effectively."
  • Management confirmed that no material run-off in loans or deposits is expected as a result of the American Bank merger, based on the similarity of customer bases and funding costs.

INDUSTRY GLOSSARY

  • AOCI (Accumulated Other Comprehensive Income): An equity account reflecting unrealized gains and losses on certain assets not included in net income, significant here due to its adjustment impact in the American Bank merger.
  • OREO (Other Real Estate Owned): Foreclosed real estate held on the balance sheet, relevant due to nonperforming asset disclosures.

Full Conference Call Transcript

David Zalman will lead off with a review of the highlights for the recent quarter, He will be followed by Asylbek Osmanov, 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 the 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 actual results to be materially different than those in the forward-looking statements can be found in our filings with the Securities and Exchange Commission. Including Forms 10-Q and 10-Ks and other reports and statements we have filed. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

David Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2025 conference call. I'm proud to announce that we entered into a definitive agreement with American Bank Holding Company and Corpus Christi to merge. We have followed American Bank closely for more than two decades and have tremendous respect for the bank and for the people that have contributed to its success. Our banks have a complementary footprint and we are familiar with and remain committed to the communities that American Bank serves including with both financial products and community support. This combination will strengthen our presence and operations in South Texas and surrounding areas and enhance our presence in Central Texas.

Including in San Antonio, a highly desirable high growth area. With regard to earnings, our net income was $135 million for the three months ending 06/30/2025, compared with $111 million for the same period in 2024. An increase of $23 million or 21%. The net income per diluted common share was $1.42 for the three months ending 06/30/2025, compared with $1.17 for the same period in 2024. An increase of 21% Net income for three months ending 06/30/2024 included the impact of a merger-related credit loss provision and merger-related expenses from the Lone Star transaction the FDIC special assessment, a net gain on the Visa stock exchange, and the Sullivan investment securities.

Excluding these one-time items, for the three months ending in 06/30/2024, The net income was $116 million. And earnings per share was $1.22. When comparing these results, with the quarter ended 06/30/2025, net income increased $18 million to $135 million or 16% and our earnings per share increased $0.20 or 16.4%. Our annualized return on average assets and average tangible common equity for the quarter ending 06/30/2025 compared with the same period in 2024 were 1.41% return on average tangible on average assets It compared with 1.1713.44% return on average tangible common equity compared to 12.34%.

The net interest margin on a tax equivalent basis was 3.18% for the three months ending 06/30/2025, compared with 2.94% for the same period in 2024 and with 3.14% for the three months ending 03/30/2025. As mentioned on prior calls, these are the results we expected. And we anticipate these tailwinds should continue to be positive for the near future. Loans were $22.1 billion at 06/30/2025, a decrease of $123 million compared with $22.3 billion at 06/30/2024. Our linked core loans increased $219 million or 1% 4% annualized from $21.9 billion at 03/31/2025. Overall, the bank grew loans by $220 million in the 2025 or 4% on an annualized basis.

With most of the growth attributable to the seasonal strength of the mortgage warehouse business. However, we remain positive on our ability to grow loans in the second half of the year We saw consistently higher monthly new production numbers in the second quarter and core commercial loans excluding mortgage warehouse loans, were up $73 million or 2.4% annualized We have been focused on using our liquidity to fund commercial loan growth we are starting to see progress. Deposits were $27.4 billion at 06/30/2025, a decrease of $459 million, or 1.6% when comparing to that compared with $27.9 billion at 06/30/2024. The linked quarter deposits decreased $553 million or 2% from $28 billion at 03/31/2025.

Primarily due to decreases in public fund deposits higher cost deposits acquired in the recent acquisitions, and business deposits and our dis our disciplined deposit pricing. Prosperity generally experiences seasonality its public fund deposits as public funds customers use the top tax dollars that they receive in December and January throughout the year. Resulting in lower deposit balances in the second and third quarters of the year. Our bankers' focus is on building core deposits. Our non interest bearing deposits represented 34.3% of our total deposits at 06/30/2025.

Our with regard to asset quality, our nonperforming totaled $110 million or 33 basis points of quarterly average interest earning assets at 06/30/2025 compared with $89 million or 25 basis points of quarterly average interest earning assets at 06/30/2024. And $81 million or 24 basis points of quarterly average interest earning assets at March '10. 03/31/2025. With a significant portion of the balance for each period attributable to the acquired loans. At 06/30/2025, the allowance credit losses and loans was $346 million, and the allowance for credit losses on loans and off balance sheet credit exposure was $383 million. The allowance for credit losses on loan was 3.47 times the amount of non performing assets.

We are very excited about our pending merger with American Bank Holding Company and American Banking Corpus Christi We also continue to have conversations with other bankers considering strategic opportunities. We believe that higher techno technology and staffing costs funding cost, staffing cost and funding cost, loan competition, succession planning concerns, and increased 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 companies long term future and increase shareholder value. Texas was rated as a second-best state for business in 2025 by CNBC. However, we believe we should have been number one That's just a little humor, guys. Okay. Go on.

Texas continues to shine as more people and companies move to the state. Because of the business-friendly political structure and those state income tax. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank in an efficient manner, while investing in ever-changing technology and product distribution channels. We intend to continue to grow the company both organically and through mergers and acquisitions I want to thank everyone involved in our company helping to make it the success it has become. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmanov, our chief financial officer, to discuss some of the specific financial results we achieved.

Asselbeck,

Operator: you, mister Zalman. Good morning, everyone.

Asylbek Osmonov: Net interest income before provision for credit losses for the three months ended 06/30/2025 was $267.7 million. An increase of $8.9 million compared to $258.8 million for the same period in 2024. An increase of $2.3 million compared to $265.4 million for the quarter ended 03/31/2025. Fair value loan income for the second quarter 2025 was $3.1 million compared to $3.3 million for the first quarter of 2025. The fair value loan income for the third quarter 2025 is expected to be in the range of $2 to $3 million. The net interest margin on a tax equivalent basis was 3.18% for the three months ended 06/30/2025.

An increase of 24 basis points compared to 2.94% for the same period in 2024 an increase of four basis points compared to 3.14% for the quarter ended 03/31/2025. Excluding purchase accounting adjustments, the net interest margin for the three months ended 06/30/2025 was 3.14%, compared to a 2.86% for the same period in 2024 and three point one percent for the quarter ended 03/31/2025. Noninterest income was $43 million for the three months ended June 30025, compared to $41.3 million for the quarter ended 03/31/2025 and $46 million for the same period in 2024. The prior year noninterest income included $10.7 million in net gain on sale of securities.

Noninterest expense for the three months ended 06/30/2025 was $138.6 million compared to $140.3 million for the quarter ended 03/31/2025 and $152.8 million for the same period in 2024. The prior year noninterest expense included $4.4 million in merger-related expenses, and $3.6 million in FDIC special assessment. For the third quarter of 2025, we expect noninterest expense to be in the range of $141 to $144 million. The efficiency ratio was 44.8% for the three months ended 06/30/2025 compared to 45.7% for the quarter ended 03/31/2025 and fifty-one point eight percent for the same period in 2024.

The bond portfolio metrics at $632,025 have a modified duration of three point eight and projected annual cash flows of approximately $1.9 billion And with that, let me turn over the presentation to Tim Kimenes for some details on loan and after quality.

Tim Timanus: Thank you, Asylbek. Nonperforming assets at quarter end 06/30/2025 totaled $110.487 million or 50 basis points of loans and other real estate. Compared to $81.419 million or 37 basis points at 03/31/2025. This is an increase of $29.068 million on a linked-quarter basis. Since 06/30/2025, $1.138 million of nonperforming assets have been put under contract for sale. The 06/30/2025 nonperforming asset total was made up of $102.607 million in loans, $6,000 in repossessed assets, and $7.874 million in other real estate. Net charge-offs for the three months ended 06/30/2025 were $3.017 million compared to net charge-offs of $2.704 million for the quarter ended 03/31/2025. This is an increase of $313,000 on a linked-quarter basis.

There was no addition to the allowance for credit losses during the quarter ended 06/30/2025. No dollars were taken into income from the allowance during the quarter ended 06/30/2025. The average monthly new loan production for the quarter ended 06/30/2025 was $353 million compared to $317 million for the quarter ended 03/31/2025. This is a $36 million increase on a linked-quarter basis. Loans outstanding at 06/30/2025 were approximately $22.197 billion compared to $21.978 billion at 03/31/2025. The 06/30/2025 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.

Charlotte Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.

Operator: We will now begin the question and answer session. To ask a question, If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Michael Rose Raymond James. Please go ahead.

Michael Rose: Hey, good morning, everyone. Thanks for taking my questions.

David Zalman: Good morning. Good morning. Just wanted to get some call good morning. Just wanted to get some color. You know, looks like there was some purchase loan decline this quarter, but we just get an update on any sort of revised expectations for loan growth ex warehouse? Seems like, the industry is starting to pick up a little bit here. I assume you had some paydowns as well that were kind of impacting this quarter's growth. I did sense some optimism at the front of the call, so just trying to get an update there. And then if Kevin's there, we'd love the update on the warehouse.

Just looks like it did a little bit better on average than what he talked about last quarter. Thanks. Yeah. Thanks, Michael. I'll I'll try to tackle both.

Kevin Hanigan: And see if anybody wants to add on. I think in terms of loan growth, the quarter has started off a little better than the prior quarters. We do have some loan growth, not a ton, call it $40 million worth, so far for the quarter. Pipeline looks pretty good. So I think single low single-digit growth for the rest of the year is probably achievable. Just as a side, we've also had some okay core deposit growth, I think, almost maybe $90 million so far for the quarter. So both of those seems to have stabilized at bit. Loan demand's okay.

If there's a if there's been another point of weakness, it's been usage on corporate middle market kind of revolvers. Usage is down quite a bit from where it had been where with people taking excess cash and paying down debt rather than growing their balance sheets and it and you know, we'll we'll see whether that shifts around or not. I think a lot of that was tariff-related. On the warehouse, just by way of background, we average for the last quarter a billion $1.79. We thought it'd be about a billion one fifty, so we're just slightly ahead of what we were thinking.

So far for this quarter, Michael, through last night, we have averaged 1.307 to be exact. And, last night, we closed out. A little lower than normal at a billion $2.26. That's not unusual for this time of the month. We get a lot of check Ginnie Mae settlements in the 2020 twentieth, twenty- first, twenty second of every month. On balance, I think we will we will probably average a little better this quarter than last at a at a billion $2.50. Typically, our third quarter is our best quarter in normal times. And these are more kinda normal times.

So I do expect it to be a little bit better, you know, close to a $100 million better on average. Than Q2.

David Zalman: Yeah. I think the thing that we liked about it too rightly or wrongly, we really saw commercial. Our commercial loans pick up and mortgage loans went down. But, again, we have so many mortgage loans that we the same that the were $73 million or more in commercial loans. We'll increase that think that was good, and we do see we do seem to see a lot of don't know. I wouldn't call it production, but there's a lot of stuff going through loan committee now. So things look pretty good, I think. Michael, this is Tim. Yes. With regard to what David just said.

And I do see, coming up the next handful of months, basically, the same way that Kevin does. So I think he's spot on.

Michael Rose: Very helpful. And then maybe one for Asobek. Just on the margin, you know, not as much momentum there, I think, as we would have thought. You have the range that you talked about, three twenty five to three thirty. I noticed that, you know, interest bearing deposit costs were flat. So may maybe just walk us through some of the puts and takes as we think about the next couple of quarters. You know, bond portfolio repricing, pickup, further ability to lower deposit cost, CDs maturing, you know, kind of etcetera. And just how we should think about the trend relative to you talked about earlier this year. Thanks.

David Zalman: Michael, let me just start. I have kind of the model in front of me just to kinda give you some color. I mean, we're look our net interest margin continues in my it continues to go grow, I think. We're showing with no change in interest rates at 3353.35% net interest margin in six months. If interest rates go down a 100 basis points in that six months, it's at 3.3%. On a twelve month time frame, with no change in interest rates, we get to 3.48% And with a 100 basis points down, in twelve months, we're at 3.4 o.

Twenty four months, and I won't go past that, at 3.76% with no change in our net interest margin. And 3.61 with a 100 basis points down. So our models still continue to show great expansion in the net interest margin over a period of time. Sorry to jump in on you. No. That's it. I pulled it right and just give it a little bit of a color on the question why we're achieving these numbers. If you look at our model, our on the cost of deposit, model shows it's gonna continue to stay as is. You know, there's not much downward decrease on the cost of deposit. But what we see is the repricing of two things. Right? First of all, it's our bond portfolio. As we mentioned, we have about $1.9 billion of cash flow in each year, and rate on that is about 2.15 you take give and take. So that's gonna be repricing at least know, depending on if you put it on the loans, repricing it 100 plus basis points.

But if you would kinda put it in securities, it's still more than two and a half percent. On the loan side, we have about $5 billion cash flow coming in. So out of that, we about 60% or $3 billion, it's more like fixed variable rate. That's gonna reprice higher than what we put in currently on the loans. So those drivers showing in our model that it will help us to continue to increase then margin and net interest income. So I think we are our model still continue to show that we should be on average for the year to be the range we provide to mean, 3.25 to 3.3 name for the year.

Michael Rose: Okay. I appreciate all the color, everyone. I'll step back. Thanks.

Operator: The next question is from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor: Thanks. Good morning. I was just wanting to follow-up on the margin. Hey. Hey. Good morning. I just wanna follow-up on the margin with just the size of the balance sheet to kind of think about. Yes, I saw that the cash and average earning assets kinda came down. Your what how do you how should we be thinking about just the size of the bond book and the size of cash? In the next couple of quarters?

David Zalman: Well, again, I'll start off. I mean, I think the balance sheet size, you look year over year, we were down 1.6%. On the deposit side. And then you look at this quarter, as mentioned earlier, this is seasonally a time when we do lose deposits. So we think that the deposits probably are have stabilized, and so I think that you'll probably see probably the third quarter still kind of I guess, just I guess, where we're at kinda right now, but it should start picking up in the fourth quarter for sure. So we should fourth and first quarter pickup in that. And I think that a lot of it depends on interest rates, I think, in general.

I mean, if we really wanted to build the balance sheet, I mean, we weren't as disciplined as we were. It could easily I mean, we don't have any broker deposits We could easily bring in a bigger balance sheet if you're willing to pay you know, the 5%, four and a half percent, four and a half, 5% interest rate. So you can build the balance sheet, but we've we've been trying to be very disciplined And, and really manage our net interest margin. That's that's kinda where we're at right now. Overall, to answer your question, I think that I think that we have stabilized, and I think you will see growth going forward. I Not tremendous growth.

Yeah. Growth. I agree. That's exactly right. And I would just say on the model, fundamental, nothing changed from us. It just was the you drop off we saw in the second quarter impacted NII as we saw it. But, fundamentally, our model is still showing that continued expansion in the margin and net interest income You also reduced your borrowings from the Federal Home Loan Bank compared to last year where we were 3.9 last year. Yeah. In the beginning of 03/2009 and we'd reduced to 2.9 this year, and we end up and again, we again, that was a big drop in the asset size. They shouldn't affect the net interest income, but just a big drop in the asset size.

Catherine Mealor: Correct. Got it. Okay. That's helpful. And then the millennials, also, I feel like mix shift just within your balance sheet is what's driving the margin expansion. But you know, curious if you see some more upward momentum in loan yields as maybe growth improves into the back half of the year as well?

Kevin Hanigan: I'd say, yes. Couple of thing is mixed. Less mortgage, more commercial. So I think we'll we'll pick it up there as Asabek said, shipped out of bonds and into loans. Also improves, And, you know, as we looked at it, you know, you probably someone mentioned early in the early reports this morning that loans held for investment, the yield was down a basis point, and that's really just in terms of inside baseball. We always have, not always, but typically have some nonaccrual pickup income in a quarter. We had more than usual last quarter, maybe $2.324 million, and we had 400 or we had 400,000 this quarter.

And that but believe it or not, on the overall loan yields, that changed loan yields in minus one basis point versus up two or three. So that's just a small inside baseball piece of it. So this quarter maybe last quarter wasn't quite as good as it was advertised or written, and this quarter is not as bad. Just a couple of basis point difference, but, we don't see that number being down this quarter. It's it's an aberration, not a trend.

Catherine Mealor: Okay. That's very helpful. So still upward momentum in loan pricing as expected. Yeah.

David Zalman: That's great.

Catherine Mealor: Okay. Great. Thank you.

Operator: The next question is from Anand Ghosalia with Morgan Stanley. Please go ahead.

Anand Ghosalia: Hey, good morning all.

David Zalman: Good morning. Good morning.

Anand Ghosalia: I wanted to focus on the acquisition and specifically on the on the NII accretion from the acquisition.

Asylbek Osmonov: Can you comment on, I guess, what sort of NII you think you can get from the acquisition? Are there any revenue synergies that you're building in You know, is there any benefit on the deposit cost side? And if there's any loans that you might want to run off after completing the acquisition.

David Zalman: Okay.

Asylbek Osmonov: I'll take that one. And I'll start off with deposit and what we noticed in American West has really good deposit base and very similar to ours. That's what attracted us to American Bank. And if you look at their cost of deposit, this was 1.66%, very close to ours, you know, comparing you look just overall industry, very low. That was we have very strong deposit base. On the loans, they yield in higher than ours. I think they're loan yield about 6.43. So both of them taking those is very gonna be accretive to our margin.

If you look overall, on dollar wise, I think, you know, on an annual basis, it's gonna bring if you just take the run rate, it's about 85 to $90 million on NII on by themselves. But in addition, we're gonna be having some markups on those loans to the fair value. And, also, we're gonna have AOCI adjustment on their bond, which kinda generate additional $15 million per year 15 to 16 million. So combining those, we know it's gonna be pretty strong, expansion on our net interest income. If you look at on margin ones, if we calculate it, it gives about mid single digit on the margin increase, overall.

David Zalman: I think you could say also back also that American Bank is very similar to us. If you look at our cost of deposits, their cost of deposits were very close. And, I don't think you're gonna see a with some banks that join us, we know going in that there's gonna be a pretty good loan runoff and a pretty good deposit runoff. We don't see that. In American Bank. We feel comfortable. They're very much like we are, and I don't see I just I think it's a just a good core bank. Really, it's it's a it's a peach.

Anand Ghosalia: That's helpful. And then, maybe on the capital deployment priorities from here, I think you mentioned in your opening comments that you continue to have conversations as It looks like you're open to more M and A. But this is also an all stock acquisition. Is there is there any ability to maybe buy back some of the stock you've issued in the open market once the acquisition closes?

David Zalman: Right now, there's a lot of activity in m and a. And again, I suspect that we'll be using some of that capital that we have going forward probably in M&A.

Anand Ghosalia: Got it. Thank you.

Operator: The next question is Peter Winter with D. A. Davidson. Please go ahead.

Peter Winter: Good morning. Hey, Peter. I wanted to ask about the Lone Star portfolio. Loans were down about $180 million year over year, and deposits were down about $250 million year over year. So are you nearing a bottom? And then maybe if you can talk about quality of American Bank's loans and deposits, would you expect some runoff?

David Zalman: I'll I'll start. The Lone Star deal Lone Star Bank did have a lot of higher cost deposits. So we're not we're not rattled by that by that amount of deposits. And they were extremely high cost Sometimes a 100 basis points more than what we were paying. So but we suspected that. As far as the loan side, somebody may be able to help me with the loan side. I know that we I think overall, the loan quality was really pretty good. We have one large loan that got thrown into the nonperforming assets. That was 13 or 14 million, but, again, it's 12 securitized. I don't think that we see any loss in that.

They're they're underwriting that Lone Star Bank was very good, I think. I mean, with the exception of this one credit that we have, I think I think they were very good. Going forward with American Bank, again, a little bit different in some underwriting, but I think anybody came and looked at us from another bank, they would think, we're different than them. I think overall, I don't see the deposit loss or the not as you know, there'll always be some, I don't see the deposit loss or the or the loan loss in the American deal. I think it's it's just a really good core bankers.

It's hard to find real good core banks like this, and it's this is really a good core bank.

Peter Winter: And David, one thing I would mention I do think that Lone Star has stabilized in terms of loans and deposits both. Right. Yeah. The future will tell us, but I do feel like they're stabilized. But we knew going in, they there was a certain portion were about a 100%. There were some 5% CDs that were gonna go you know, like That's correct. And from day one, they have worked very closely and very well with us. To address those issues and deal with We knew that even going in, so it wasn't it wasn't anything none of us expected. Let me say that.

Peter Winter: That's correct. Yeah. By recap, I think we're done or near done with Lone Star shrinking, and I think American Bank is just it's a different animal. It's been around fifty plus years. Right. Really, really solid deposit franchise. I mean, very, very solid. Credit quality, good. Maybe underwriting a little different than us, but the credit quality, very good. Does that mean there'll be zero runoff? No. They'll you know, but it's gonna be very mild. Very, very mild. This is not a big shift in terms of what they're paying on deposits versus us. It's a it's a high quality franchise. We're lucky to get it.

David Zalman: Yeah. I think the American Bank deal makes you know, we're we have a big strong position in the in the Houston market. We have a strong position in the Dallas market and a good position in the Austin market, but again, long lived along the Gulf Of America, we have Victoria. And again, it's been it was such a great merger with us. I mean, we they joined us, and they became the number one market share in that whole second-tier market. But right down the road, is Corpus Christi, and this gives us the number one market share in Corpus Christi.

And, I mean, so we're we really have become number one market share or major market shares in these second-tier markets like Victoria, like Corpus Christi, like Odessa, Lubbock, Midland, Bryan College Station, and those are really great markets. And this just fits in just perfectly with that. Not to mention that it gives us we really needed some locations in the in the San Antonio market where we only had one, and I think this gives us, what, four more locations in the San Antonio market. So really helps us get a jump in the San Antonio market as well. So we're really excited about that.

Peter Winter: Alright. Thank you for all that detail. I could ask, on credit. I'm certainly not worried about credit. With you guys, but just curious about the what drove the increase, 29 million increase in nonperforming assets And then just what's the outlook for nonperforming assets going forward? Just given the comment, most of it is acquired loans, which you have reserves against. But I'm just wondering when those starts should start to decline.

Tim Timanus: I think I can address that for you. The increase is really made up of three buckets, so to speak. One is a $13 million loan that David referred to a minute ago from Lone Star State Bank. It's a real estate secured. We think we're probably not going to lose any money from that loan. Time will tell, but that's that's our forecast right now So that's 13 million There's another $119 million. That's from the LegacyTexas portfolio. It's secured by notes on used vehicles We do think there's a bit of a loss there, but it's fully reserved. So we don't see any negative impact from that standpoint.

The biggest change is we've got about $51 million in single-family homes. Included in the nonperforming. We made efforts starting a couple of years ago to increase our minority home loans. And the result is we've we've taken several homes back The good news is as we are able to foreclose on them, we've been able to sell them all relatively quickly. So we think this is something that we're going to work through over the course of the next year. But if you look at those three buckets, one is 51 million, one is 13 million, and one is 19 million. That's a huge percentage of the total non performing assets.

So we think we're we're dealing with all those effectively.

Kevin Hanigan: Yeah. And just to add to the know, what we see in the future, you never know what's gonna happen in the future, but we don't see any anything in our commercial loan system that's particularly worrisome at this stage of the game I would say that there is a chance, maybe even a likelihood that we continue to tick up just a little bit on the single family mortgage portfolio. From that 51 million that it's at today. Unfortunately, that asset class is a very low loss given default.

And I think the bottom line is as we sit here today, we obviously, we went through all of this in our reserve analysis at the end of the quarter for quarter end, and concluded we didn't need to add the reserves, and I don't know, we'll see where we are next quarter, but I don't see anything on the horizon that's gonna change that. We also we also cut the product off that this was a product that was designed just for minority lending, low income lending. That again, that you there's not much money down, and even get some walking around money with you when you go. And this was to help with fair lending.

And, again, it's kind of a catch 22 if you don't produce a certain amount of this kind of production, then if you really wanna expand and grow you're out of the game also. So it's just part of the deal. But, again, I think that we've got all under control. And the good news is that as we repossess this stuff, we've gotten out of it pretty quick with very little loss. That's right. And we did discontinue that type of loan Actually, a over a year ago. Right. Over a year ago.

Peter Winter: Got it. Thanks for taking the questions. I appreciate it.

Operator: The next question is from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten: Yes. Thanks, everyone. Appreciate it. Just going back to American Bank and David, you noted the four additional branches in San Antonio. Given that's I think you guys said the third largest MSA in Texas. Do you look to deepen that franchise further in San Antonio beyond this acquisition? Could you look at new hires, or could incremental m and a in that market be in the cards?

David Zalman: I guess I should just say stay tuned, I guess.

Stephen Scouten: Okay. Fair enough. And then maybe on pricing around the deal, I mean, the three year earn back feels like maybe towards the longer end of what we've seen from you guys. Would you say that was kind of pushing the limits of what you would wanna do from an earn back perspective on a deal?

David Zalman: Is that three year Collin, help me. Does that three year include the you know, the way it was priced, it looks like it was priced higher than some of the other deals at 2.2 times. A little over two times. But, again, when we looked at the bank, and you added back the AOCI, the price was, like, 1.8 times. Which for a bank like that, we thought was a very, very good deal. That three year, was that based on the It does include that. Yeah. It does include that.

So But, again, I think for a bank that's a quality bank like this, it's that three years is not unreasonable at all, and I'd do it again tomorrow. If we get another bank like that, it's really a sweet bank.

Stephen Scouten: Okay. Great. And then just as you think about future targets, I mean, I know the last three deals have been maybe towards the smaller end, more digestible end of the spectrum. Do you think about you know, maybe a more meaningfully sized deal and additionally, would you look at anything outside of Texas and Oklahoma today, or do you wanna continue to deepen that footprint in the in the strength of those markets?

David Zalman: I guess I'd just say stay tuned. I mean, there's a lot of activity going on right now. You know, and hard to give Again, I can repeat what we've said in the past that we always like Texas, and it's always a fill in. And you because we're we're if you're in a car and you drive thirty minutes anywhere, you're gonna see one of our banks. And so when we can fill in I don't think we're in the valley. That may be the first part the valley and probably El Paso. Anywhere else, you go to Texas, you're gonna see us wherever you go.

So I think that our first and foremost is always in Texas, and we're in Oklahoma too. If something developed there. But again, of a of a certain if an asset were outside the, state, again, we're not gonna go outside the state for a 2 and a half billion dollar deal. But, again, if it's if it's a deal that really has true market share and that we can it's really helpful and it helps us from a strategic point of view from where we're going and where we're gonna be with the answer to that would be yes.

Operator: Great. And maybe one last point of clarification on the NIM trajectory you talked about, David. I think you said three thirty five could happen in six months, three forty eight over twelve months, etcetera.

Stephen Scouten: Does that include the mid single digit impact to the margin from American Bank? Or is that kind of on your existing balance sheet?

David Zalman: No. This is just our existing balance sheet, so that should help. No question. Yeah.

Stephen Scouten: Perfect. Thanks for the clarification. Thanks for the time today. Yep.

Operator: The next question is from Ebrahim Poonawala with Bank of America. Please go ahead.

Eric: Hey, everyone. This is Eric on for EB. Just had one on the fee income line.

David Zalman: It has been running above. I know previously, you've talked about 36 to 38 million as kind of the run rate that you view, but it's been above that several quarters now. Is the run rate in your mind higher now? Like, how should we think about that kinda moving forward

Asylbek Osmonov: Yeah, Eric. I agree. I think the I would probably update our run rate to 38 to 40 million now. Because what we've seen very strong, you know, our service fees and debit card fees overall has increased because of the volume. So, yes, we see, increase on overall manager's income. So I would say I would update range to 38 to 40 million.

Okay. That's helpful. And then maybe one more on M and A, David. Based on everything you've said, I have a guess of what you'll say. But does the American deal limit the ability to complete any other deals until that closes, or are you still very active No. We're still very active.

Eric: Got it. Okay.

David Zalman: That was it for me. Thank you.

Operator: Next question is from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom: Hey, thanks. Good morning. Good morning, Hey. Just to follow-up on that. I know you guys had a tough time with the last deal getting it closed on time. Any evidence of less regulatory pressures, David?

David Zalman: I mean, I don't think you're gonna get into that situation again, but any evidence of that?

David Zalman: I hope so. You saw the cadence deal. Closing just a few months. Again, we understand that bank industry bank they wanted to get that off of their books before something else happens. So but everybody else that we've talked to so far, it looks you know, historically, we used to get a bank deal done in three months. And I'm hoping that Charlotte may jump in, but I'm still thinking that you know, we're gonna go back to those three to four months. I think that I think that's what we're looking at. You know? That last deal, it started off with the DOJ in a town of 10,000 people that we were a big bank.

And I mean, there were so many miles from Tyler or something. I don't wanna get into all the details And then there was another deal after that. I from what everybody tells me, they're they're they're more focused on substance instead of form right now and that you know, unless something changes in the administration, which I don't see happening right now, I think I you know, it seems to be a lot much cleaner and clearer path where we're going, and I think everybody kinda knows where they're going right now.

Jon Arfstrom: K. Okay. And then you kind of alluded to this. I have two more questions here, but you kind of alluded to this. But you feel like you have enough branch density in some of your larger markets And then also curious about some of the faster-growing outer suburbs of the big cities in Texas. Do you feel like you have density there or is that a target for you?

David Zalman: Well, that's what we're building right now. I mean, I do think if you look at Houston, Dallas, Austin, that's probably the only place that we don't have enough don't enough stores or locations is probably the San Antonio market, which we would much like being much bigger there. And anytime we can move into a market and be a number one share in the second tier, like, like Corpus Christi, That's that's just stuff we love. And, I mean, we've done that Victoria, Corpus, Midland, Odessa, Lovett area, Bryan College Station. So whenever we can do that, that's really a sweet spot for us, really.

Jon Arfstrom: Okay. And then, Kevin, one for you, follow-up from very early. You talked about revolvers being down a bit. And you thought it was maybe just you know, maybe from some of the uncertainty last quarter. But anything else in your mind driving that change? And you expect that to stabilize?

Kevin Hanigan: I do. I do. We spent the better part of a couple days digging into it here. Last week and this week and talking to clients. And I think it's not only gonna stabilize. It's go the other way.

Jon Arfstrom: Okay. And you and you feel like that's it's starting to turn now?

Kevin Hanigan: It is.

Jon Arfstrom: Yep. Okay. Okay. Thank you very much.

David Zalman: Thanks, John.

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

Charlotte Rasche: 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.

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