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Date
Wednesday, October 29, 2025 at 11:30 a.m. ET
Call participants
Senior Chairman and Chief Executive Officer — David Zalman
President and Chief Operating Officer — Kevin J. Hanigan
Senior Executive Vice President and Chief Financial Officer — Asylbek Osmonov
Vice Chairman and Chief Lending Officer — Tim Timanus
President and Chief Legal Officer — Charlotte M. Rasche
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Risks
Nonperforming assets — Timanus stated, "Out of the a little over $119 million in nonperforming assets, about $57 million of it is single-family homes," attributing the increase to regulatory-driven lending with "no money down" and minimal borrower cash flow.
Tim Timanus noted, "We discontinued them a few months ago. So we're not putting any more of those on the books." Asset resolution efforts may persist into next year.
Hanigan highlighted loan growth headwinds from "some elevated payoffs in the fourth quarter," and projected "a flat quarter." Ongoing competitive pressure and aggressive terms are inhibiting origination volume.
Takeaways
Net income -- $137.6 million for the quarter ended September 30, 2025, compared to $127.3 million in 2024, reflecting an 8.2% increase in diluted net income per share to $1.45.
Net interest margin -- 3.24% (tax-equivalent) for the three months ended September 30, 2025, up from 2.95% in 2024, indicating a 29 basis point expansion from 2024 to the three months ended September 30, 2025, and up six basis points sequentially from 3.18% in the prior quarter.
Return on tangible equity -- 13.43% annualized return on tangible equity, with a return on assets of 1.44%.
Noninterest income -- $41.2 million for the three months ended September 30, 2025, compared to $41.1 million in 2024, and $43 million in the prior quarter.
Noninterest expense -- $138.6 million, with fourth quarter guidance of $141 million to $143 million for the fourth quarter.
Efficiency ratio -- 44.1% for the three months ended September 30, 2025, improved from 46.9% in 2024, and 44.8% in the prior quarter.
Deposits -- $27.7 billion at September 30, 2025, a $308 million increase from $27.4 billion at June 30, 2025, with core deposit growth and no broker deposits reported.
Loans -- $20.7 billion (excluding warehouse loans), down $160 million, while average monthly new loan production rose to $356 million, up from $260 million in the third quarter of 2024.
Nonperforming assets (NPAs) -- $119 million (36 basis points), up from $110 million (33 basis points) in the prior quarter; $57 million attributable to single-family homes mandated by regulatory lending programs.
Allowance for credit losses -- $377 million, with no net additions or income reversals recorded during the quarter.
Dividend -- Quarterly dividend increased to $0.60 per share for the fourth quarter, up from $0.58 per share in the prior four quarters, representing a 10.7% compound annual growth rate since 2003.
Pending M&A -- Definitive agreement signed for Southwest Bancshares, and regulatory approvals received for American Bank Holding Corporation, expected to close by year-end and early 2026; management noted "more deals than we have money."
Buybacks -- Zalman said, "we will be buying and we will be buying strong," emphasizing imminent short-term repurchase activity post-blackout window.
Loan pricing -- Hanigan reported new loan pricing "between $6.50 and 7," but noted avoidance of competitive deals pricing at 5% or lower.
Margin outlook -- Management projects net interest margin (tax-equivalent basis) expansion over the next 12 to 36 months, with Osmonov stating, "our model shows that with a 100 basis point decrease over twelve months, we project 3.38%," and static scenarios reaching 3.48%.
Deposit beta -- Osmonov stated, "we use 13 basis points beta" for non-maturity deposits in rate modeling.
Balance sheet borrowings -- Borrowings reduced from $3.9 billion–$4 billion last year to $2.4 billion at quarter-end; currently at $1.8 billion, with intent to maintain approximately $2 billion in leverage as of October 2025.
Bond portfolio -- $10 billion portfolio as of September 30, 2025, with a modified duration of 3.8 and projected annual cash flows of approximately $1.9 billion, with reinvestment expected to support margin as securities reprice upward.
Geographic expansion -- M&A activity strengthens footprint in San Antonio, Central Texas, and Corpus Christi, consolidating regional presence with the addition of 10 banking centers.
Summary
Prosperity Bancshares (PB +3.00%) delivered higher net income and continued margin expansion, driven by prudent balance sheet management and disciplined pricing. Management confirmed regulatory approval for the American Bank acquisition, positioned for near-term closing, and anticipates further strategic consolidation with the Southwest Bancshares deal in early 2026, expanding the company's core Texas footprint. Operating metrics improved, including returns on equity and assets, alongside enhanced cost efficiency and an increased dividend, signaling long-term capital strength and shareholder focus.
Zalman characterized the company as significantly undervalued, stating, "where we're trading at today is just absolutely ridiculous," and emphasized imminent aggressive buybacks to capitalize on the current valuation.
Hanigan clarified that loan runoff from upcoming acquisitions "it'll be muted compared to what we have seen in the past," mitigating integration risk for the core loan book.
Osmonov highlighted that average monthly loan production is up nearly $100 million compared to the third quarter of 2024, indicating underlying origination strength despite portfolio runoff.
Management expects deposit growth to continue in the fourth quarter, forecasting an additional $200 million–$300 million, supported by seasonal inflows and commercial relationships.
Timanus disclosed elevated nonperforming asset levels are concentrated in single-family homes linked to discontinued regulatory-driven lending programs, with ongoing asset resolution anticipated to continue into the next year.
Industry glossary
Warehouse purchase program loans: Short-term, revolving loan facilities used to fund mortgages prior to their sale or securitization.
Net interest margin (NIM): The difference between interest income generated and interest paid out, expressed as a percentage of average earning assets.
Deposit beta: A measure of how sensitive bank deposit rates are to changes in market interest rates.
Efficiency ratio: Noninterest expense as a percentage of net revenue, indicating cost efficiency of bank operations.
Shared national credit: A loan or loan commitment of $100 million or more shared among three or more federally supervised institutions.
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 Osmonov, who will review some of our financial statistics, and Tim Timanis, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements.
Additional information concerning factors that could cause the actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-Ks 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.
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 headquartered in San Antonio, Texas. We are excited about this transaction as it significantly expands our San Antonio Metro footprint with four additional branches and increases our deposit market share, bolstering our presence in the Texas Hill Country and adding 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 09/30/2025, compared with $127.3 million for the same period in 2024. Net income per diluted common share was $1.45 for the quarter ended 09/30/2025, 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 09/30/2025 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 an annualized return on tangible equity of 13.43% and a return on assets of 1.44%. Our loans, excluding the warehouse purchase program loans, were $20.7 billion at 09/30/2025 compared with $20.9 billion at 06/30/2025, a decrease of $160 million or 77 basis points. We continue to work through credits acquired in previous mergers and we are experiencing borrowers using their own cash to pay down balances or not drawing on their lines.
It is also an extremely competitive lending environment with aggressive terms and conditions being offered, and in some cases, we've just elected not to participate. Deposits were $27.7 billion at 09/30/2025, an increase of $308 million or 1.14% annualized from the $27.4 billion at 06/30/2025. 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 09/30/2025, 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 09/30/2025, compared to the $119 million in nonperforming assets as of 09/30/2025. 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 a transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value.
As of October 2025, Texas boasts one of the world's strongest and most diverse economies, ranking as the 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 of October 2025, Oklahoma's economy is demonstrating resilience and modest growth, outpacing national averages in key areas like unemployment and population expansion despite broader US slowdowns from tariffs and policy uncertainties.
Charlotte M. Rasche: 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?
Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended 09/30/2025 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 06/30/2025. Fair value loan income for 2025 was $2.9 million compared to $3.1 million for the second quarter of 2025. The fair value loan income for the fourth quarter of 2025 is expected to be in the range of $2 million to $3 million.
The net interest margin on a tax-equivalent basis was 3.24% for the three months ended 09/30/2025, an increase of 29 basis points compared to 2.95% for the same period in 2024, an increase of six basis points compared to 3.18% for the quarter ended 06/30/2025. Excluding purchase accounting adjustments, the net interest margin for the three months ended 09/30/2025 was 3.21% compared to 2.89% for the same period in 2024 and 3.14% for the quarter ended 06/30/2025. Noninterest income was $41.2 million for the three months ended 09/30/2025, compared to $43 million for the quarter ended 06/30/2025, and $41.1 million for the same period in 2024.
Noninterest expense was $138.6 million for the three months ended 09/30/2025, and for the three months ended 06/30/2025, compared to $140.3 million for the same period in 2024. For the fourth quarter of 2025, we expect noninterest expense to be in the range of $141 to $143 million. The efficiency ratio was 44.1% for the three months ended 09/30/2025, compared to 44.8% for the quarter ended 06/30/2025, and 46.9% for the same period in 2024. The bond portfolio metrics at 09/30/2025 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 Timanis for some details on loan and asset quality. Thank you, Asylbek.
Tim Timanus: Our nonperforming assets at quarter-end 09/30/2025 totaled $119,563,000 or 54 basis points of loans and other real estate, compared to $110,487,000 or 50 basis points at 06/30/2025. This is an increase of $9,076,000. Since 09/30/2025, $1,121,000 of nonperforming assets have been removed as a result of the sale of homes. The 09/30/2025 nonperforming asset total was made up of $105,797,000 in loans, $16,000 in repossessed assets, and $13,750,000 in other real estate. Net charge-offs for the three months ended 09/30/2025 were $6,458,000 compared to net charge-offs of $3,017,000 for the quarter ended 06/30/2025. 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 09/30/2025.
No dollars were taken into income from the allowance during the quarter ended 09/30/2025. The average monthly new loan production for the quarter ended 09/30/2025 was $356 million compared to $353 million for the quarter ended 06/30/2025. Loans outstanding at 09/30/2025 were approximately $22,028,000,000 compared to $22,197,000,000 at 06/30/2025. The 09/30/2025 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 M. 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. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, at this time, we will pause momentarily to assemble our roster. Our first question comes from Catherine Mealor with KBW. Please go ahead.
Catherine Mealor: Thanks. Good morning. Good morning. Wanted to start maybe with your outlook for loan growth.
Kevin J. Hanigan: Hey, thanks for the question. This is Kevin. I'll take the first cut at that. I think for the fourth quarter, first of all, year to date for the fourth quarter loans are down slightly maybe $40 million to $45 million. And as David said in his lead-in 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 maybe on an accelerated basis, so between that and some elevated payoffs in the fourth quarter, I think this is gonna be a flat quarter which I know is disappointing, but I think that's really where we're gonna kinda come out of this.
Going into next year, we feel a little bit better about it, in that we've got a bunch of construction deals that we have approved over the course of this year that have not funded up yet, we're still waiting for all the equity to go into those deals. So just off of a steady state book, I would say low single digits for next year. And as you know, expect to have both of the acquisitions that we have announced closed and on the books in the next year, probably by the end of the first quarter of next year. Which will help out obviously for just the total volumes.
Only thing I would caution out of 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, David or Tim may wanna add to that.
David Zalman: 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 have to be careful and prudent. And there are still loans to look at out there. We have active loan committees. But we don't wanna 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.
Kevin J. Hanigan: Yeah. The last thing I probably should have mentioned is it's not lost on you or us. But that 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 bought banks here to be aggressive. Into this market. Offsetting that aggressiveness, and maybe this isn't as prevalent as it's been, you know, fifteen, twenty, thirty years ago. There's a fair amount of Texas-based businesses that wanna bank with the Texas Bank.
So just the fact that you've got an out-of-state competitor taking over a local institution, there'll be more than a handful of clients who say, you know, we're Texans and we wanna bank with a Texas bank, somebody we can look in the eye in terms of the top decision-makers. So I think they'll net-net that probably plays out on a positive basis for us. Yeah. That's a very real aspect.
Catherine Mealor: And so how should we think about if because I think you're right. I think the competitive landscape I mean, if you see stress and structure and pricing that you don't think are acceptable today, my gut is just given all the M&A that you've seen in Texas, that's only gonna get worse next year. But I appreciate the comment on Texas, one of the banks with 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 given where your stock is trading and the slow growth? I mean, is it appropriate for us to incorporate this entire 5% buyback into our estimates over the next year?
David Zalman: I'm going let David take that one. I'm going say that's going to 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 S4s out there on acquisitions. So I do expect very soon we'll be active again.
David Zalman: Kathryn, I would say that I've read a lot of the analysts' things that came out this morning. I think once the herd gets into a certain motion, they all run in that same motion. They 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 Loan Bank. If you look a year ago, we were probably borrowing about $4 billion and today we, you know, you might we might have closed at $2 billion, but we probably average about a billion in borrowings a day.
So we maybe a billion and a half to billion 8. So we really lowered our balance sheet. The things that every that I don't 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 ecstatic. Well, that's what's happened. Our earnings from nine months last year to nine months this year has grown over 15%. Our net interest margin went from 2.95 to 3.24. I mean, that's just magnificent.
And the beautiful part about that is based on y'all's projections, you have that to look forward to 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. 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 for 15 times earnings.
Anybody take your earnings next year, $6 or something, multiply that times that's our real price. That's the real value of our bank, you know, $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.
Catherine Mealor: Great. Love to hear that. Thank you.
Operator: The next question comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose: 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, the fixed asset repricing, but it's kind of price times volume, right?
And I think we'd like all like to see some greater earning asset growth really reap the benefit of that margin expansion.
David Zalman: 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 has gone by, where that should not be the case. We typically look at those people and try to determine, you know, should they still be with us or not. 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.
Michael Rose: Okay. Helpful. Kevin, maybe I could 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 a rate cut here in a couple of hours. Just wanted to see what you guys are seeing. Thanks.
Kevin J. Hanigan: Yeah. Thanks for the question, Michael. First of all, I have to say after six or seven year run of really hitting the nail on the head on our thought process about a forward look in this space. I missed it this quarter. I said $1.25 billion. We averaged $1.21 billion. So the record is broken. You know, Michael, quarter to date, through last night, we're averaging $1.222 billion. So basically flat to the average of last quarter. Typically, the warehouse is decent, in October, and November and December are relatively weak months. In fact, it wouldn't surprise me if we saw a week or two at below a billion or below $900 million before the year is out.
Now, all that's rate dependent, but I would say the quarter, we probably averaged $1.1 billion. Yeah. The only helpful thing you could say, I saw some numbers today, I don't know if they're accurate or not, where we refinancings are up 111% over last year. Simply because right believe it or not, you know, there's another mini refi boom going on.
Michael Rose: That's good to hear. I'll step back. Thanks for taking my questions.
Operator: The next question comes from Dave with Cantor. Please go ahead.
Dave: Hey, good morning, guys. Maybe if I could just start on 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 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'd be great.
David Zalman: Can probably start on the margin also, if that's I mean, we as we said last year, we really felt the margin, I think, we gave numbers like we'd end up at 3.25 or 3.30, I think, at year-end. This year, we feel comfortable. I think we've hit the I think we've got really close to what we said right now. We still see margin increasing over the next twelve, twenty-four, and thirty-six 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 our rates are lower example, like on a money market, if you have a million dollars with us, may be 3%.
At our bank, if you're at one of the other banks, we're 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, what 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 that they will go up. It's just maybe not as fast we would like them to go up with their interest rates going up or down. So we still see margin improvement for twelve, twenty-four, and thirty-six months.
I mean, it looks really good for us. I mean, there's no question. You've got a $10 billion portfolio of bonds that little over 2%. That's with a three-point something year duration. So as those are maturing, I mean, it's I mean, it's just it'll be a home run for us.
Asylbek Osmonov: I agree. And that what we're discussing now, the security and the fixed loans will be tailwind for us that continue to reprice for 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 is fixed-rate loans.
Dave: In terms of just what's rolling over the next year or two, any sense for dollar amounts there?
Asylbek Osmonov: I think just if you look at it, it's rolling off probably from a repricing standpoint, of course, that you know, floating and variable will be faster than fixed one. But I think it's we'll have a good value volume of repricing it. If you look at them big picture, we have about $5 billion of loans gets repaid or paid down every year that for opportunity to out of that $5 billion about $3 billion has opportunity to reprice because a $2 billion is already at the floating rate.
David Zalman: So that's get another two billion of our security.
Asylbek Osmonov: Exactly. So that's we have about $5 billion in repricing opportunity between loans and securities.
Dave: And 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 and a half to four and a half to 5%. So we'll see what rates are at the time that repricing occurs. But I expect a pickup in the rate on those loans.
David Zalman: So we'll see. I agree. Yeah. It should be pretty decent.
Dave: Where are your new loans pricing now?
Kevin J. Hanigan: Oh, I'd say between $6.50 and 7 in a quarter.
David Zalman: That's correct. Once again, we see some competitive pricing at 5% or even below. We've tried Those we aren't doing. We've tried to stay away from those.
Kevin J. Hanigan: That's correct. Yeah. Yeah. I think the worst one we chased is probably six and a quarter. Maybe.
David Zalman: If we went that low, it was only because the customer had as much in deposits as we had in loans. But for the most part, we're I mean, we're seeing some people pricing thirty days off for plus two. And, I mean, we just haven't gone to those kind of levels. You know?
Dave: Yeah. Okay. Appreciate the color. Maybe just switching to expenses real quick. Appreciated the 4Q guide there. How are you thinking about the step up in that run rate as we get into next year? I know sometimes you've had a little bit of a step up in the first quarter and then you've got merit and other stuff kicking in for 2Q. And then, anything lumpy that you're expecting over the next year or so just in terms of platform enhancements or anything like that we should be aware of? Thanks.
Asylbek Osmonov: Yeah. I think the guidance that 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. It's going to be normal if inflationary increase we see throughout. I know we're working on the plus change for next year, and we kinda looked at it in numbers. It provides about additional one and then to one and a half percent additional expense for the run rate I provided. So that's gonna be baked in starting next year. But, overall, I think we have pretty good expense management, and we'll continue to do that next year.
Dave: 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 got stellar credit quality, you know, 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?
Kevin J. Hanigan: You got a future in politics, the way you phrased that.
David Zalman: I really think that's what the market's missing. I mean, again, our bank's not up for sale, but at the same time, what is the real value of our bank when you look at the banks that have sold like First Bank Colorado and they're I mean, they're 15 times earnings. I mean, just take that multiple where we're at and what's out there in the market. You can see how underpriced that we are today. 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 fund on the stock or another hedge fund on the stock, but we're always gonna 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's really missing the optionalities that we do have.
Kevin J. Hanigan: Our scarcity value is increasing. Yeah. Yeah. I mean, we're the second largest bank based in Texas right now. So I mean, it one of the best growing states in The United States. So I just think people are really missing the boat here.
Dave: Yep. Totally agree. Thanks, guys. Appreciate it.
Operator: The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia: Hi, good morning all. So just a follow-up to your comments that things are looking a little bit frothy on the loan side and competition is only increasing from here and you have to be careful. Is there anything that you can do to drive loan growth within your return parameters? Maybe increasing branches or investing in your product set or hiring more? Is there anything else that can be done here?
David Zalman: No. That's out of hiring people and lowering rates. Structurally, we're not gonna bend. But again, it's again, analysts are on one always on one side. They're always focused just on loan growth. I mean, bottom line is, guys, we have an 80% loan to deposit ratio. Don't wanna be a 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 45% for. It's 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 you know, we may we may the same kind of return when we were 60% or 65% loan deposit rates as we are now is 80%. But, again, we're focused on it, and we're gonna continue to make loans. But, again, to make loans in a market where it's not profitable, there's too much risk, it's good for the short term because everybody's 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 ten years out.
Asylbek Osmonov: And just give us some statistics. I know Tim mentioned what the average month production was for third quarter was $356 million and our production for the second quarter average was $353 million. But if you just compare what we had a year ago and same periods, the average was in the second quarter of last year was $255 million and the third quarter was $260 million. So if you look at just period to over period, our production up almost $100 million. So the production is there. Like I think Kevin mentioned that some of those real estate, they need to put their money first before they start taking out.
So from that statistic, you can see that we are.
David Zalman: If you look at the increase, if you look at the amount of loans that we decreased this time, the majority of the loans were in the category of one to four family residential home loans. And, again, people the home prices were higher. Interest rates were higher. Again, we were trying to get out of those more and sell more of those to the market. Where we could keep more of those, and we could you know, we can easily bill our loan to deposit ratio 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.
Manan Gosalia: Got it. That no. 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?
David Zalman: I 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.
Asylbek Osmonov: So
David Zalman: I don't think there's an obvious gap products anywhere. I don't know. I mean, we're really we're we offer just about any type of loan that you could want. I mean, we're one of the biggest ag lenders in the 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 there's probably enough. We're in middle market lending. We're in oil and gas. I mean, I can go on and off. There's not many areas that we don't touch. So we touch almost all the areas that are out there, actually.
Manan Gosalia: Got it. Very clear. And then, maybe a follow-up on the buyback comment. You noted that you would have liked to be more active in the quarter and that you won't 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 domain 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?
David Zalman: I think that we'll always look at M&A, but based right now where our stock price is, we're really focused on getting our stock price up and we weren't able to buy. I will admit, I'll say that we just heard during this meeting that we have gotten all of our approvals on the American Bank in 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, you know again, if it's a cash deal, it really doesn't matter. It's only stock that if we give our stock and it's too low away, that's what matters. So we'll still continue to look at all opportunities, but our main focus right now is to get our stock price up.
Manan Gosalia: Great. Thank you.
Operator: Next comes from Peter Winter with D. A. Davidson. Please go ahead.
Peter Winter: 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?
Kevin J. Hanigan: Not nearly as much as we experienced this year with the Lone Star acquisition. First Capital. First Capital. I mean, Lone Star has been fine, 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 credit dive on both of these American Bank is gee, it's one of the cleaner banks we've seen, ever. So I think know, it's gonna be muted compared to what we've experienced here more recently. There's always gonna be some. But I think it'll be muted compared to what we have seen in the past. I think Tim and David could probably Yeah.
Well, Peter, both of those banks, did due diligence on both of them. You know, they're I don't wanna say clean as a whistle because there's always issues that come up. But, again, nothing like, you know, on our first capital deal that we did, in West Texas, we probably outsourced over $460 million in loans. We don't expect anything like that with these two deals right here. Nothing like that. So
Kevin J. Hanigan: Let's just 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.
David Zalman: And our experience, along that Gulf Coast right there, our experience with Victoria, we paid a lot for that bank. Which we paid a lot for the American Bank at the same time. But 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 with the core deposits that American Bank has and that market share that we'll own from along that Gulf Of America side down that coast. It'll just be I think it's gonna be a really a good deal.
Peter Winter: Got it. That's helpful. Thank you. And then just, if I could go back to the margin, I mean, clearly, it's been a good story. It's been progressing the way you guys had thought it would. But just I was just curious with the third curve suggesting more rate cuts. Are you still comfortable with kind of a 3.35 NIM in the fourth quarter and 3.40 by the middle of next year?
Asylbek Osmonov: Yes. I think those little bit maybe ticked down because the numbers what we provided was that static balance sheet and the no rate cuts. So if you're looking twelve months, twenty-four months, our margin showing that with 100 down being still higher than what we projected for average for this year. So I will continue to grow the margin. It's going to be ticked down a little bit lower.
David Zalman: But, again, even at a 100 basis points down, it may be slower as accomplished, but the twelve months from now, I hate to give these numbers out because then if we're not accurate, but, you know, we're still showing close to what you said, I think, at 3.38. So Mhmm.
Peter Winter: And so I'm sorry. Just to follow-up. So when you say Asylbek tick lower, tick lower from the 3.40,
Asylbek Osmonov: Yeah. So what we just said on the our model showing 100 basis point down twelve months, we're showing 3.38.
David Zalman: We're 3.48 with no in a static market.
Peter Winter: Got it. Okay. Thank you.
Peter Winter: The next question Pietra as you go out twenty-four months and farther, we do still pick up pretty significantly even with interest rates going down. 100 basis points.
Asylbek Osmonov: And that was just to clarify, that was standalone not including American or partners. Right. Correct.
Peter Winter: My lost contact.
Asylbek Osmonov: Hello? Hello? Are we ready for the next question?
Peter Winter: Yes. Yes. Okay.
Operator: Great. Wonderful. Our next question comes from Jared Shaw with Barclays Capital. Please go ahead.
Jared Shaw: Hi, good afternoon. Maybe just on the margin for the deposit costs, should we or what are you expecting in terms of beta with that broader rate backdrop.
Asylbek Osmonov: Yeah. For our model on the deposit betas, that's non-maturity deposit, we use 13 basis points beta.
Jared Shaw: Pretty low. Okay. And then looking at the you know, I hear what you're saying about the buyback and appreciate all that. But when you look at the M&A environment here, for smaller deals, 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?
David Zalman: Candidly, we have more deals than we have money. Quite frankly. It's just a matter of what we really wanna do.
Jared Shaw: Okay. Thank you.
Operator: The next question comes from David Chiaveroni with Jefferies. Please go ahead.
David Chiaveroni: Hi, thanks. So wanted to follow-up on the deposit question. Can you talk about deposit competition? You mentioned about the 80% loan 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?
David Zalman: Yes. I mean, we're at 80%. We probably would go to 85%. Our loan to deposit ratio at that limit, probably stop. We were still focused on core deposits. We don't have any broker deposits. And really when we go out, we really try to go you know, we're really trying to get a total deposit relationship, not just the certificate of deposits to build to build up deposits. And so I mean, that's what we're focused on. We do see the people coming in, especially you know, I may take a different stand because a number of these banks that have bought other banks out in the state they weren't able to get into the state.
And because of that, they've raised their interest rates so much on money they pay here compared to where they pay somebody else because they haven't been successful at building market share especially in deposits. I'm almost thinking since now they're making headway into the state and they really have some market share, they may not be under so much pressure to show their other people in the other states that they're having to grow those deals. 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.
Asylbek Osmonov: Yeah. And if you look at it, we always had a competition, so it's nothing new for us related to the deposits and I know we well, we have grown this quarter in the core deposits. I mean, that's all relationship, you know, and that's what brings it not just the rate, but the relationship we have with our customers.
David Zalman: We really focus on relationships. I mean, Kevin kind of alluded to it a while ago. I mean, people wanna bank with the Texas Bank. And they and I think where we're at in this state and with the other guys coming in, that the amount of opportunities we have are just it's unbelievable and the kind of customers that we have are unbelievable customers that know, have been around their daddy and their daddy's generation have had businesses and they're coming to us and again, we're getting to handpick those again. We're not we're not here showing you 810% loan growth, but what we are putting on is really quality stuff and really building a really quality organization.
David Chiaveroni: Thanks for that. 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?
Tim Timanus: I think I can give you some color on that. Out of the a little over $119 million in nonperforming assets, about $57 million of it is single-family homes. And those NPAs with respect to the homes are a result of pressure that we got from a regulatory standpoint to make loans in minority areas, etcetera. And we did not get the down payments that we would normally want. Etcetera. And this is the result of it. It's not surprising. The good news is there's a market for the homes. It takes a while to go through the foreclosure process and get them back. 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 didn't have those homes, you could take $57 million away from the nonperforming. But, again, we were required under fair lending. We had to get a certain amount that we can. We would be we would be eliminated from doing M&A. So we were kinda 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. So it was a regulatory issue. It was a regulatory issue.
Tim Timanus: And please don't misunderstand what I'm saying. I'm not implying that we don't have good relationship with the regulators. No, sir. 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 underserved. 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. Well, the challenge is all banks, it's not just us, all banks are required to do this.
So there's just a certain number of these customers that everybody's trying to get and everybody's fighting for these customers, and that's just one of the things that happened, really. Right.
Tim Timanus: Now we have 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 gonna 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 non will be effectively gone.
Kevin J. Hanigan: Yeah. And in terms of any pockets we're looking at, we look at the you know, our credit history is pretty good. We look we're looking at the entire portfolio. And as we look across the entire portfolio, I'd say there's maybe one deal we think has got the potential for some stress.
David Zalman: Shared national credit. It's shared national credit. We don't have a lot of shared national credits but it's a shared national credit we've got our eye on. It's still performing. Right. It's making its payments, but it's one we got our eye on. And it's $35 million. Right. Outside of that, the portfolio looks pretty good. Right. And I did 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 you know, of that number, $153 million of that is stuff we agent.
Kevin J. Hanigan: So, know, a lot of that is structured and sold by us.
David Chiaveroni: Very helpful, thank you.
Operator: The next question comes from Ben Gjerlinger with Citi. Please go ahead.
Ben Gjerlinger: Hey, good afternoon or good morning. I guess, in Texas.
Kevin J. Hanigan: Kansas City, New York?
Ben Gjerlinger: Yeah. I'm in Georgia. So south. When you guys think about the two pending deals, I think you said David. Just got regulatory approval while we're on the phone here. Can you find the potential close dates these two?
Charlotte M. Rasche: Yeah. I think we're probably looking around fourth quarter this quarter to close probably the end of the year, the American deal. And 2026 for Southwest.
Ben Gjerlinger: Gotcha. Okay. That's helpful. Yeah. But financial impact, gonna be more on the next year, not this year. We'll probably roll the American back into the first month of Right. Next year. Yep. Right. Gotcha. Okay. That is helpful. And then also, like, you've done a really good job of taking a chainsaw to the expense base of the banks that you guys pick up. Is it fair to assume it's going to be kind of business as usual? Is it tracking the savings? Or is there anything kind of long-tailed associated with them? I'm you think about it might bleed into two or three q next year?
Asylbek Osmonov: Yeah. I mean, definitely, when you do mergers with other banks, you know, 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 gonna get some benefit early on, you know, because there'll be some departure, but, an 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, get in '27 and beyond.
Ben Gjerlinger: Gotcha. Alright. I appreciate the help. And then just wanted fine-tune the buyback comment to 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 doing that?
David Zalman: You know, I we really we had this, and I think we had an S4 filed and I know there's probably been some other little people shortages with doing some complete thinking that we won't be able to buy back. But I think we should be able to start buying back next week. Next week. Yeah. So we should we should be out there buying.
Ben Gjerlinger: Gotcha. I appreciate the help. Thank you, everyone.
Operator: The next question comes from Matt Olney with Stephens. Please go ahead.
Matt Olney: David, can you clarify your commentary about the current balance of the borrowings? I think it was around $2.4 billion at 09:30, and I thought you I thought I heard you say it was below that.
David Zalman: Well, I think on the last day or so, couple days, we put pull if you look a year ago, we were at with $3.9 or $4 billion.
Asylbek Osmonov: Yeah. $3.9 billion, and we ended at $2.4 billion in the 09:30 but we were able to reduce some from that for in October month. So we're running. If you average for the month, you probably near the 2.4. No. No. We're much lower. What do you think the average was probably? For the For that month? But I haven't hear you're looking at a quarter, but, again, we started reducing it. So we started reducing it. As our bonds started maturing, we started we're just reducing our cash instead of buying back, you know, And, again, we'll get we're gonna 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 our guys to buy, and they didn't. But we're not going to we're not gonna we're we're we're still gonna keep about $2 billion of leverage on the deal, and we're 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 let it get too small in my opinion. And the comment what we made right.
Asylbek Osmonov: Currently, have $1.8 billion borrowing, but like I said, we're going to buy some securities. So we want to carry about $2 billion leverage little bit historically done.
Matt Olney: Got it. Okay. Well, thanks for clarifying that. 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, ex expectations for the fourth quarter?
David Zalman: Yes. Again, I think you can read us. We're very transparent what we say. It happens in our we're pretty consistent. Our fourth quarter has always been pretty consistent, and I think you're probably looking at least another $200-$300 million gain in deposits probably. Yep. I agree.
Asylbek Osmonov: Our seasonality of public funds, and we should get it's just a normal big customer deposit. And big customer deposits. From the commercial side. Getting ready for commercial side. Yeah. Yep.
Matt Olney: Okay. That's helpful. Thank you, guys.
Operator: The next question comes from Janet Lee with TD Cowen. Please go ahead.
Janet Lee: Hello. Dialing into deposits a little, so I believe there was about $150 million of run offs from Lone Star acquisition on the deposit side as well through June. Do you expect any sort of deposit run offs from the two acquisitions as well heading into 2026?
David Zalman: The American Bank, acquisition is very solid. I mean, their deposit is made up of they're probably as close to us as you could get. So I don't we don't expect anything there. The Texas Partners Bank, their deposit makeup is different. And, probably the difference, because you saw in the prices, they have a big treasury department with a lot of a lot of commercial accounts. That it's just a bigger part of their it's a bigger 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 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 in this treasury area, so there is more risk in that. For sure.
Janet Lee: Got it. And fee income came in a little stronger than you guide it to before I believe that range was, like, 38 to 40. How do you feel about the fee income? Is that there an updated view on where the fee income could be over the next coming quarters?
Asylbek Osmonov: Janet, I think I'm gonna stick to the, you know, 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, you know, if we come in higher than that, that's good. But I would say 38 to 40 the guidance I would still continue for fourth quarter.
Janet Lee: Thank you.
Operator: The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Jon Arfstrom: Hey. Thanks. Good morning. Good morning, Jon. Hope I hope I'm last. Just, David, I put back up the truck in my Excel model on the share count on get in. So 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 your capital has gone up. So I'm just curious how far down you'd like to take your capital ratios?
David Zalman: We were saving a lot of our capital because we had aspirations of the you know, we were bidding on a bigger bank. We didn't get the bigger bank, and we thought we would have needed the cash. As part of the deal. We didn't get it. With our stock being this low, I think we have a lot of room. I mean, if you can do them for what, 11% plus leverage ratio right now. So Mhmm. I mean, you can do the math yourself and what the earnings we make. Even if we spent $500 million it still wouldn't change the needle very much where we're at. So, I mean, we have a lot of bullets, I think.
Jon Arfstrom: Yep. Okay. One of the things If he if he fell down even 8%, you still have three or 4% of capital. I mean, you we got a lot of money. I mean, we really do unless something goes wrong, but we got a lot of bullets.
Jon Arfstrom: Yep. Okay. Okay. Well, we'll look forward to that. The and then 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?
David Zalman: No. You're good. You know me too long. You've been around me too long. I think when again, when Kevin was talking about the loans, that's fine. You know, normally, we see just tons of business out there and you know, coming in. You know, we're just taking care of it. We're not we're not out there trying to underprice something. It's just coming in. We sorta 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 I don't wanna 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's any other place in The United States that you would rather be, but there's definitely a tone of a moderation, I think, right now. But, again, again, the economy is still overall very good. You still see gosh, you got 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 operation centers in the other side. I think it was Irving.
Everybody's moving to this deal. So I say moderation, there is I think there's a slight moderation. I think it'll change. I think what Kevin said earlier, you'll see you'll see a pickup, I think, in probably the first quarter of next year. And so Texas, I think, is still gonna always be good. But, again, compared to where it was, I do feel a little bit of moderation.
Jon Arfstrom: Okay. Okay. That's very helpful. Yeah. Yeah. That's helpful. I appreciate that. Thank you.
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 M. 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.