Prosperity Bancshares (PB) Q3 2026 Earnings Call Transcript

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DATE

Wednesday, Oct. 28, 2026

CALL PARTICIPANTS

• Executive Vice President and General Counsel - Charlotte Rasche
• Senior Chairman and Chief Executive Officer - David E. Zalman
• Chairman - H. E. Tim Timanus Jr
• Chief Financial Officer - Asylbek Osmonov
• Senior Vice Chairman - Eddie Safady
• President and Chief Operating Officer - Kevin J. Hanigan
• Vice Chairman - Robert R. Franklin
• Chief Lending Officer - Randy Hester
• Director of Corporate Strategy - Mays Davenport
• Executive Vice President - Bob Dowdell
• Houston Area Chairman - Ramon Vitulli

TAKEAWAYS

• Adjusted Net Income -- $200.8 million, excluding $69.7 million in merger-related expenses and a $5 million out-of-state tax settlement.
• Tax-Equivalent Net Interest Margin -- 3.73%, representing an increase of 49 basis points from 3.24% in the same quarter of the previous year.
• Total Assets -- $54.1 billion, an increase of 41.1% compared with $38.3 billion in the prior year primarily due to recent merger activity.
• Total Loans -- $32.1 billion, growing $10.0 billion from $22.0 billion as a result of the American, Southwest, and Stellar acquisitions.
• Total Deposits -- $41.2 billion, up 48.4% from $27.8 billion in the prior year reflecting the completion of three bank mergers.
• Noninterest-Bearing Deposits -- $13.8 billion, representing 33.6% of the total deposit base as of Sept. 30, 2026.
• Average Monthly Loan Production -- $635 million, increasing from $454 million in the second quarter of 2026.
• Adjusted Efficiency Ratio -- 48.0%, excluding $69.7 million in onetime merger costs.
• Future Expense Guidance -- $220 million to $225 million per quarter, projected to be the clean run rate once integrations are finalized by the second quarter of 2027.
• Anticipated Cost Savings -- $65 million to $70 million in additional pretax savings, expected following the completion of remaining system conversions.
• Nonperforming Assets -- $193.9 million, or 0.41% of average interest-earning assets, compared with $119.6 million in the previous year.
• Dividend Increase -- $0.64 per share for the fourth quarter, representing a 6.7% increase from the $0.60 per share paid in the prior four quarters.
• Stock Repurchase Activity -- 457,000 shares, repurchased at an average weighted price of $69.62 per share during the third quarter.
• 2027 Loan Growth Outlook -- Flat to slightly increasing, as management anticipates historical runoff patterns at acquired institutions to offset new production.
• Core Deposit Growth Guidance -- 2% to 4%, aligned with the company's historical annual growth rates.
• 2027 Net Interest Margin Outlook -- 3.80% to 3.85%, based on expected asset repricing and investment portfolio cash flows.
• Allowance for Credit Losses -- $629.6 million, covering loans and off-balance sheet credit exposure as of Sept. 30, 2026.
• Bond Portfolio Duration -- 3.9 years, with projected annual cash flows of approximately $2.2 billion for reinvestment.
• Warehouse Purchase Program Loans -- $1.1 billion, reflecting a decrease from $1.3 billion at the end of the previous quarter.
• Tax Settlement Impact -- $5 million, related to an out-of-state settlement that increased the effective tax rate to 24.4% for the quarter.

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RISKS

• Hanigan noted that it is more typical that loans at acquired institutions "tend to shrink for 6 months to a year" following an acquisition.
• Zalman stated that the Texas and Oklahoma economies expand despite "labor supply constraints and headwinds from inflation energy prices."
• Zalman indicated that as a $54.1 billion bank, management does not expect nonperforming assets to fall below $100 million in the future, with a projected run rate between $125 million to $150 million.

SUMMARY

Prosperity Bancshares, Inc. (NYSE:PB) reported third-quarter results characterized by the full integration of the American Bank merger and the continued absorption of the Southwest and Stellar acquisitions. Management reported that total assets reached $54.1 billion, a multiyear high driven by inorganic expansion. The company reported significant net interest margin expansion and a record level of average monthly loan production. Management indicated that its strategy for 2027 focuses on realizing approximately $70 million in additional pretax cost savings and maintaining a conservative loan growth outlook as it finalizes system conversions for Texas Partners and Stellar Bank.

• CEO Zalman noted that the company's increased scale "strengthens our competitiveness, improves efficiency, and enables technology investments that would be difficult for a smaller bank."
• Management reported spending three years on a new IT infrastructure that allows for processing capacity up to $500 billion in size.
• The company expressed a preference for stock buybacks over new acquisitions in the near term, with CEO Zalman stating that at current valuations, the company likely makes more money buying its own stock.
• CFO Osmonov projected that the clean expense run rate will settle at $220 million to $225 million per quarter by the middle of 2027.
• Management attributed its core deposit growth of 2% to 4% to the lack of dependence on wholesale or brokered deposits, focusing instead on traditional checking and money market relationships.
• President Hanigan indicated that while mortgage warehouse volumes are trending lower due to interest rates, the legacy Prosperity loan portfolio is seeing increased production.

INDUSTRY GLOSSARY

• PCD (Purchased Credit Deteriorated): Loans acquired in a merger that have experienced a more-than-insignificant deterioration in credit quality since origination.
• PSLs (Purchased Seasoned Loans): Loans acquired through mergers that are not classified as credit-deteriorated but require specific accounting marks under GAAP.
• Warehouse Purchase Program: Short-term financing provided by a bank to mortgage companies to fund the closing of residential mortgage loans.
• Efficiency Ratio: A measure of a bank's overhead as a percentage of its revenue; a lower ratio indicates higher operational efficiency.
• Net Interest Margin (NIM): The difference between the interest income earned by a bank and the amount of interest paid to its lenders and depositors, relative to its interest-earning assets.

Full Conference Call Transcript

Operator: Good day, and welcome to the Prosperity Bank Third Quarter 26 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Charlotte Rasche: Thank you. Good morning, ladies and gentlemen. And welcome to Prosperity Bancshares Third Quarter 26 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I am Charlotte Rasche, executive vice president and general counsel of Prosperity Bancshares. And here with me today is David E. Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Timanus Jr, Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Senior Vice Chairman; Kevin J. Hanigan, President and Chief Operating Officer; Robert R. Franklin, Vice Chairman; Randy Hester, Chief Lending Officer; Mays Davenport, Director of Corporate Strategy; Bob Dowdell, Executive Vice President; and Ramon Vitulli, Houston Area Chairman. David E.

Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward looking statements for 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 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 E. Zalman.

David E. Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our third quarter 26 conference call. I am pleased to announce that the Board of Directors approved increasing the fourth quarter 2 thousand and 26 dividend to $0.64 per share from $0.60 per share that was paid in the prior 4 quarters. An increase of 6.7%. 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 2026 was 10.4%. 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.

We are proud of this year's growth and would like to highlight the following results. Prosperity's total assets reached $54.1 billion at 09/30/2026. Up $15.8 billion or 41% compared with $38 billion at 09/30/2025. Our loans totaled $32 billion at 09/30/2026, an increase of $10 billion or 45% compared with $22 billion, excuse me, at 09/30/2025. And our deposits were $41 billion at 09/30/2026 up $13 billion or 48% compared with the $27.8 billion at 09/30/2025. These increases primarily reflect our 3 recent mergers. We are highlighting their magnitude because they demonstrate the expertise of our associates who have extensive experience executing acquisitions and integrating the acquired institutions.

Our greater scale strengthens our competitiveness, improves efficiency, and enables technology investments that would be difficult for a smaller bank. We completed the operational integration of American Bank in September. All American Bank locations are now branded Prosperity Bank, and we welcome the American Bank customers and associates to our family. We remain focused on completing the operational integrations of Texas Partners Bank in November and Stellar Bank in March 2027 and delivering the outcomes we believe are possible. The Texas Partners and Stellar Bank teams are already and integral part of our organization and operations. We are excited about our future as a larger bank including the potential growth in earnings.

Excluding the onetime expenses, listed in the press release, net income was $200 million. And earnings per diluted common share was $1.67 for the 3 months ending 09/30/2026. Annualized returns on average assets and average tangible common equity were 1.515.81% on average tangible common equity for the same period. Excluding the merger related expenses, the efficiency ratio was 48%. We are proud of these earnings and expect them to improve after all merger related cost savings are realized. The net interest margin on a tax-equivalent basis was 3.73% for the 3 months ending 09/30/2026, up from 3.47% for the 3 months ending in 06/30/2026 and 3.24% for the 3 months ending 09/30/2025.

This 49 basis points year over year increase reflects the strong net interest margin improvement we expected. Loans totaled $32 billion at 09/30/2026. Compared with 22 billion at 09/30/2025. We have seen an increase in our average monthly loan production numbers over the past 2 quarters. This should help bolster our pipelines into year-end. In the third quarter of 2 thousand 26, average monthly new loan production increased approximately $180 million compared to the second quarter of 2 thousand 26. And approximately $320 million compared to the first quarter of 2 thousand and 26. The overall deposits totaled $41 billion at September 30 compared with $27.8 billion at 09/30/2025.

Our linked quarter core deposits, excluding Stellar Bank, increased 2% annualized during the third quarter of 2 thousand 26. Our noninterest bearing deposits of $13.8 billion at 09/30/2026 represented 33.6% of total deposits. The level of non interest bearing deposits as a percentage of total deposits continues to remain strong light of our recent acquisition activity. Looking forward, we believe core deposits will continue to grow in line with our historical run rate of 2% to 4% growth and we remain conservative with our loan growth projections for 2027, projecting flat to slightly increasing loan balances due to the recent acquisitions.

We believe that the combination of our growth outlook with our loan pipelines asset repricing, net interest margin expansion, and the realization of our cost savings will drive meaningful earnings per share growth in 2027. Our non performing assets totaled $193 million or 0.41 basis points of quarterly average interest earning assets at 09/30/2026. Compared with $119 million or 0.36 basis points of quarterly average interest earning assets at 09/30/2025 and $130 million or 0.34 basis points of quarterly average interest earning assets at 06/30/2026. The amount at 09/30/2026 and 06/30/2026 was impacted by nonperforming assets acquired in the mergers. The allowance for credit losses on loans and off balance sheet credit exposure was $629 million at 09/30/2026.

The allowance for credit losses on loans was 3x the amount of non performing assets. We are excited about the synergy we have with our new partners Stellar Bank, Texas Partners Bank, and American Bank. Our top priority is the operational integrations of the remaining 2 banks and our combined teams are working very hard to ensure they are successful. We also continue to have conversations with other bankers considering strategic opportunities and are open to transactions that will be beneficial to our company's long term future and will increase shareholder value. The Texas and Oklahoma economies continue to expand in late 2026 despite labor supply constraints and headwinds from inflation energy prices.

Texas has a growing population of 31.7 million and continues to attract people and businesses with its business-friendly state government and lack of a state income tax. Major construction projects across Texas include new data centers, factories producing various products from chips to new drugs, and SpaceX and Tesla projects Both states remain attractive places to live and do business. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov our chief financial officer, to discuss the specific financial results we achieved.

Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. The third quarter represents the first full quarter that includes Stellar Bank. And our results reflect both the increased scale of the combined company and ongoing integration activities for all 3 merged banks. Net interest income before provision for credit losses for 3 months ended 09/30/2026 was $443 million, an increase of $169.5 million compared to $273.4 million for the same period in 2025. And increase of $112.4 million compared to $330.6 million for the quarter ended June 30, 2026.

The net interest margin on a tax-equivalent basis was 3.73% for the 3 months ended September 30, 2026, an increase of 49 basis points compared to 3.24% for the same period in 2025, an increase of 26 basis points compared to 3.47% for the quarter ended June 30, 2026. The linked quarter increase was primarily due to the addition of Stellar Bank and higher investment yields. Excluding purchase accounting adjustments, the net interest margin for the 3 months ended 09/30/2026 was 3.59% compared to 3.19% for the same period in 2025 and 3.41% for the quarter ended June 30, 2026.

Fair value loan income for the third quarter of 2 thousand 26 was $11.6 million compared to $4 million for the second quarter of 2 thousand 26. Fair value loan income for the fourth quarter of 2 thousand 26 is expected to be in the range of $7 million to $10 million. Noninterest income was $52.7 million for the 3 months ended 09/30/2026, compared to $60.7 million for the quarter ended 06/30/2026 and $41.2 million for the same period in 2025. The second quarter of 2 thousand 26 included a net gain of $8.2 million resulting from the conversion of Visa stock partially offset by the loss on the sale of investment securities.

The noninterest income for the third quarter of 2 thousand 26 was reduced by a $2.6 million net loss due to write down of assets. Noninterest expense was $308.6 million for the 3 months ended 09/30/2026 compared to $176.2 million for the quarter ended 06/30/2026 and $138.6 million for the same period in 2025. The third quarter of 26 included $69.7 million of merger related expenses. Excluding these merger related expenses, noninterest expense was $238.9 million. This amount includes the operating expenses of Stellar Bank. During the third quarter, we continue to realize cost savings from the acquired banks with additional savings expected as we complete the remaining 2 system conversions.

For the fourth quarter of 2 thousand 26, we expect noninterest expense to be in the range of $235 million to $238 million, excluding remaining onetime merger related expenses. The efficiency ratio was 62.1% for the 3 months ended 09/30/2026 compared to 46% for the quarter ended 06/30/2026 and 44.1% for the same period in 2025. Excluding merger related expenses, the efficiency ratio is 48% for the third quarter of 2 thousand 26. The provision for income taxes for the third quarter of 26 included approximately $5 million related to an out-of-state tax settlement. This 1-time tax expense reduced diluted earnings per share by approximately $0.04 and resulted in higher than normal effective tax rate of 24.4%.

The bond portfolio metrics at 09/30/2026 have a modified duration of 3.9 and projected annual cash flows of approximately $2.2 billion And with that, let me turn the presentation over to Tim Timanus for some additional comments on loans and asset quality.

Tim Timanus Jr.: Thank you, Asylbek. Our nonperforming assets at quarter end 09/30/2026 totaled $194 million, Or 60 basis points of loans and other real estate. compared to $131 million or 52 basis points at 06/30/2026. Since 09/30/2026, $4.29 million of non-performing assets have been removed or put under contract for sale. On 09/30/2026, the non-performing asset total was comprised of $171 million in loans, $57 thousand in repossessed assets, and $22.8 million in other real estate. Net charge offs for the 3 months ended 09/30/2026 were $4.44 million compared to net charge offs of $2.18 million for the quarter ended June 30, 2026. There was no provision to the allowance for credit losses during the quarter ended 09/30/2026.

No dollars were taken into income from the allowance during the quarter ended 09/30/2026. The average monthly new loan production for the quarter ended 09/30/2026 was $635 million. Compared to $454 million for the quarter ended June 30, 2026. Loans outstanding at 09/30/2026 were approximately $32.1 billion compared to $25 billion at 06/30/2026. The 09/30/2026 loan total is made up of 38% fixed rate loans, 30% floating rate loans, and 32% 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 Our call operator will assist us with questions.

Operator: We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are 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, please press * then 2. At this time, you will pause momentarily to assemble our roster. The first question comes from David Rochester with Cantor. Please go ahead.

Dave Rochester: Hey, good morning, guys. Wanted to start on the margin outlook for the quarter. Appreciate the accretion on the loans, $7 million to $10 million Maybe just to wrap up on the accretion side, I think you had some on the securities book as well. I imagine some of that continue. And then the CDs might be more short lived, but was just curious if there are any expectations for that as well, so that accretion number might be a little bit bigger in Q4?

Asylbek Osmonov: Yeah. Yeah. For the fourth quarter, I mean, we are excited to see the continued repricing of our loan portfolio. As I mentioned, we still have 2.2 billion on annualized cash flow from bond portfolio. We have a 5.92% rate average rate on the bond, and we have been recently buying, like, 55 to 75, so repricing. So that is gonna continue to reprice on the bond portfolio side. On the secure. On the loan side, you know, we have 38% on the fixed loans. They are gonna continue to reprice. If you look at our average rate on loans, without fair value, it is 5.93%. So we are putting higher loans on our production.

So that is gonna benefit from that. But 1 thing I want to note that you know, we did increase our deposit rates at the end of the third quarter due to the, you know, Fed rate increase. So it has not fully baked in our third quarter, but we will see that baked in the fourth quarter. So I think if you are looking on margin, I think it is gonna be flat to slightly up because it takes little time for assets to reprice. But in long term, our model shows we are going to continue to expand on the margin significantly. As the bond portfolio and the loan kind of reprice.

And, if you look for 2012 and 2024, it is looking really good. And, you know, the assumption we provided that exit rate on the fourth quarter margin being 3.73% to 3.75% as is. So comfortable with that, and the guidance we provided for next year is also stands as a. For average for the quarter, like, 3.80% to 3.85% right now. So we are seeing expansion of the margin. Yeah.

David E. Zalman: I think he is looking for some help on accretion. So the accretion on the loans, as I said, is $7 to $10 million. On the CD accretion, we had what, $2.25 million. I think it is going to reduce a little bit to $1.3 million. And. For the fourth quarter and kind of burns off first and second quarter of next year. Okay.

Dave Rochester: So accretion comes down in 4 q, but the underlying margin is expanding, and so that is what kind of keeps it flat to maybe up a little bit just on a reported basis?

Asylbek Osmonov: that is correct. that is right.

Dave Rochester: Okay. that is great. it is good to hear that you guys just are still thinking positively about the margin. You have a lot of opportunities here to expand that, it sounds like. Maybe just switching to expenses real quick. That result was solid. The guide certainly shows you have got more cost savings coming. Where do you think that expense range, that $235 million to $238 million goes as you head into next year? I know you will get a lot more of the cost savings from Stellar. On the integration, so maybe those flow through more fully into Q2, and that is normally when you have got your merit coming through on a full quarter basis.

So I was just curious how you think that trend to the extent that you have got projections through the year?

Asylbek Osmonov: Yeah. that is a good question. We did see some cost savings already baking in, not just from American,, but some cost savings from Stellar and Texas Partners. We are going to continue to see that. I think based on our estimates, we have additional $65 million to $70 million pretax of cost savings coming in if you compare to, you know, our third quarter expenses. If you look at, you know, our expectation when we all settled in more, like, you know, starting second quarter and third quarter, when we have, like, quarterly clean expense run rate, I would say, We are looking at about $220 million to $225 million per quarter. that is a pretax number.

So that is gonna be our run rate once everything is settled.

Dave Rochester: All right. Great. Maybe with just 1 last 1 on credit. You know, through the deal accounting and whatnot, that allowance ratio went up pretty decently this quarter. Seems like you are pretty well positioned to have a zero provision for 2027. Now you do not have a crystal ball, but is that kind of what it feels like at this point?

David E. Zalman: I think so. I mean, really, at $193 million in total non performing assets and having over $600 million in provision or allowance, I think we are covered pretty good. Yeah.

Kevin J. Hanigan: When you said 2027, I was not sure if you meant next year 2027 or 27 years worth. I did not mean by 27 years worth.

Dave Rochester: Let's stick to next year for now. Alright. Thanks, guys. Appreciate it. it is a good call. Thanks.

Operator: The next question comes from Brett Rabatin with Stonex Group. Please go ahead.

Brett Rabatin: Hey. Good morning, everybody. Thanks for the questions. Wanted to just go back, I know last quarter you would mentioned you are going to probably have to increase deposit rates a little bit and then you just alluded to it. I was just curious. Your money market rate average was up 9 basis points linked quarter, but it is your core funding is really low cost, great core deposit funding base. You know, how much, Asylbek, have you increased the rate? And then, you know, how much should we be thinking about the cost of funds from here? And how you guys are thinking about the margin with potential rate hikes?

Asylbek Osmonov: Yeah. I think we have I mean, it was not 1 rate for everything. We kind of looked at it, different buckets of the deposit and the different rate increases. But I will tell you this for. If you are looking for fourth quarter specifically, we calculate what would be average cost of deposit would be. it is going to go up by like 6 or 7 basis points from Q3. So the average cost will be $1.46, $1.45, $1.46, on the cost of deposit.

But if you look at cost of fund total, I think that it goes up from 1.50% to 1.57% or 1.58%, so 8 basis points, which our deposit increase that we did end of the quarter on the third quarter.

David E. Zalman: It is our primary focus, Brett, again, we really it is not that we do not focus on them. it is just that they are not as rate driven and you are checking accounts and all that. Our main focus really on the increase was really on the money market accounts and really focused on balances that were a million dollars or more. We actually raised our money market rates about a quarter of a point from 2.75 to 3%. And, again, we are still offering the special rates. We have a couple of special CD rates that are what are they right now? So it is, 7 months CD. at, like, 3.75%.

So And so we are offering a couple of special promotional deals like that. But that is really what we are focused on, and that is where the rates have increased. And I would say going forward, if interest rates increase again, that is probably the focus where we will be in at those 2 products primarily. The majority of the rest of the bank is just core funding and you know, I think the rate driven stuff is probably more in that. And even that, is not rate driven like a lot of other banks, really.

Brett Rabatin: Mhmm. Okay. that is helpful. And then the other question I wanted to ask was just around loans. And with the monthly production up to $635 million it sounds like the outlook is still for maybe modest growth from here. Does the production give you guys any confidence that growth might improve? From here? And then just any color on you know, the payoffs from legacy Prosperity or the deals that you have had How much that might have impacted Q3?

Kevin J. Hanigan: Yeah. Brett, David's nodding at me. This is Kevin. So I. I will take that 1. And bear with me as I walk you through a couple of things and what may seemingly be get off topic and end up back on topic, if you will. So the monthly production, we have looked back as if all the acquisitions were done last year. We looked at, you know, the production by bank, American Partners Stellar, ourselves, going back to January, and those numbers have picked up from Q1 to Q2 to Q3. It went up about $180 million. In total between Q1 and Q2 and a little over $200 million.

So not only going up, but it is increasing its path upward. it is worth noting that the major driver of that upward trajectory is in Prosperity the legacy Prosperity portfolio. Stellar, dipped down a little bit in Q2 and Q3. We believe that to be largely related to the acquisition and getting to know each other and lenders getting to know each other and what we have seen there is a rebound in their pipeline. So I think as that pipeline improves, we pick back up to where Stellar was. And see further improvement. that is all the that is all the tailwinds for loan growth. The headwind is our history and what happens when we make acquisitions.

I think you all know it. But I will say it. It is not unusual. In fact, it is more typical that loan by. Loans at those institutions tend to shrink for 6 months to a year. After an acquisition. So that to me, that ties in where David said he thinks loans for next year are probably flat and maybe up a little bit. it is it is the headwind of integrating Stellar and it is the tailwind of this production improving. So I would say for the good side of next year, and before I get into what I think 2028 is going to be.

And I know it is way too early to be talking about 2028, but I will briefly. I think the good side for 2027 from our perspective, is now the street has seen a new run rate with Stellar onboard. And that run rate's pretty strong. Depending upon what you add back, it was $1.67 to $1.69. So I think from an earnings perspective, we have got this nice new run rate nice new margin. We have the continued margin expansion from repricing. And we got another $70 million worth of pretax cost saves. So I think that delivers in spite of what is likely to be a flat kind of loan growth year. that is gonna deliver double digit.

In fact, low to mid teen double digit EPS growth for 2027 even with flat. If I take that and say we go through the stellar transition, through 2027 and we rebound off of this new production that we are currently seeing, look into 2028 and let's face it. A lot of things can happen between now and then. So this gets squishier, but that leads us to believe in 2028, we can get to low mid. I am gonna say 3% to 5% loan growth kind of numbers in 2028. Post dealing with all the potential runoff from the acquisition. So what that means is another year of double digit EPS growth.

So I think we are really set up for 2 consecutive years of really nice EPS growth Maybe a little disappointing to you that we cannot eke out more growth next year, but we are being realistic. And just trying to offset this nice production increase with our history and knowing what happened. So long winded, but I think we are really in a great position from an EPS growth standpoint for the next 2 years.

Brett Rabatin: that is great, Kevin. I appreciate the narrative there. That helps. Explain. Quite a bit. Thanks for all the color, guys.

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

Janet Lee: Good morning. Good morning. Going back to your net interest margin, 3.80 to 3.85% for 2027. that is great. Strong core NIM expansion. Just given the belly of the curve moving up, significantly more since we lost spoke. Why could not it be higher? I feel like this rate environment is actually pretty good for you.

Analyst: For your NIM.

Asylbek Osmonov: Yeah. We are, if you look at our balance sheet, we are neutral to asset-sensitive. So if you look at our model, an increased rate environment does benefit us. But when we run the model, you know, we kept it flat rate. You know, there is an expectation the Fed gonna increase the rates. But for our model, we kept it flat. So, I mean, there might be a you know, possibility to do better, but, you know, us being conservative, we just gonna stick to our guidance that we provided.

David E. Zalman: Yes. I think, Janet, our models, again, maybe trying to underpromise and overperform, but our models look really good. For 2028 and 2029, quite frankly. So, I mean, we are we really. As Kevin mentioned earlier, we really are looking at some double digit earnings increases over the next couple of years.

Janet Lee: Right. Makes sense. And just to make sure, I am interpreting correctly, your core deposits growing 2% to 4% and loans being flat to slightly increasing in 2027, Is that excluding the runoffs, or is that inclusive?

David E. Zalman: No. that is that is. When I refer to core deposits, that is that is all deposits excluding public funds and government agencies and stuff like that. We have a lot of-- what do we have in public funds right now? around $3 billion. $2 billion or $3 billion. And those are real seasonal in nature. Like, right now, they are probably lower than they are all year right now. Next quarter, you could see our public funds increase $500 million to $800 million probably. I mean, it is very possible. And then out of state, in the bank through and it starts running out at the end of the first quarter and second quarter again.

So when I refer to the core deposits, it is our checking accounts, money market accounts, and stuff like that, just our core And, again, we do not have any wholesale deposits. We do not have any broker deposits or anything like that.

Janet Lee: Right. And on the loan side, on the flat to slightly that is inclusive of the potential any We do because I think that.

David E. Zalman: I think because, again, gosh, I hope I am not overly optimistic. I think Stellar Bank and our bank are very, very similar in nature. And I do not see in I am in loan committee, and I do not see a whole lot of difference in what they would have done and what we will do. So I you know, I just. I really think that Stellar Bank and us are very much alike. And I do not see a lot of change. Again, as Kevin mentioned, no matter what we do and how hard we try sometimes, we do go backwards. Acquisition. But I think with Stellar, I am I am.

And American Bank too and Texas Partners, all of us are very similar in the way we lend money and so I do not see a whole lot of changes in what we do. So I am I am hoping for the best. Yeah.

Janet Lee: Alright. Thank you. If I can squeeze in 1 more. Did Maybe I missed it. Could you talk about your appetite around buybacks from here?

David E. Zalman: Well, at 60 something dollars, it is it is got a huge appetite. And we have the money to do it with. I mean, we are we are projecting earnings of how much next year Asylbek, when we have projected earnings or what the analysts have as total earnings. I mean, let's say $850 to $880 million, something like that. So Yeah. And in 2029, it is even you know, really high. So we. You know, you take the 64. The 64¢ a quarter dividend, and that is what, about $300 million? $310 million. So we have we have a lot of gunpowder to do something with. So, okay.

Janet Lee: Thank you.

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

Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Just following up on loan growth, I asked this a lot. But Kevin, if you can give some updates on kind of mortgage lending in the warehouse just given the hire for longer. Backdrop. Obviously, saw, you were fairly close, I think, to your know, average guide for the quarter. But just given where mortgage rates are now, if you can just discuss kind of the near term outlook ending next year? Thanks.

Kevin J. Hanigan: Yes. Thanks, Michael. Yes, for the quarter, we averaged $1.229 billion, I think, in our estimate going into the quarter on the high side was $1.22 billion. So we are we are spot on that 1. Since quarter end, it is been a downward trend. At the end of the quarter, we were at 1.32 Last night, ended up at 1.110 And we are basically at a billion 1 average for quarter to date. And I expect that to go down further. A, because of rates and b, because of the typical seasonal decline in warehouse in Q4.

So, Michael, I am thinking you know, on the low side, $850 million to maybe on the high side, $900 million average for the quarter.

Michael Rose: Alright. that is helpful. I appreciate it, Kevin. And then maybe, David, just. You know, you talked about kind of ongoing conversations with bankers for M&A opportunities, but clearly, integrating a bunch of deals right now. Any do you expect that we could see a little bit of a pause here? Or if you just find the right opportunity, you guys are just open for business and you are gonna you are gonna make the decision based on you know, what. what is out there at this point. Thanks.

David E. Zalman: You know, I think we are always in the market, but let's let's face it. I mean, our focus is truly the combination of Stellar Bank and Texas Partners. that is our primary focus. Us to really jump into something, it has to make a whole lot of sense and maybe increase our Texas franchise or something like that would be significant. But that. that is really our main focus right now is to really put these banks together really for the most part.

Kevin J. Hanigan: Yeah. I would say in the near term, buybacks way more likely than acquisitions.

David E. Zalman: Yeah. The stock price that it. it is at when we are trading less than 10x earnings, we probably make more money buying our stock back than really buying somebody else, really. Makes sense.

Michael Rose: I appreciate all the color. Thanks, guys.

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

David Chiaverini: Hey, guys. This is Brooks Dutton on for David Chiaverini. Quick question here. On fee growth. Now you guys are a $54 billion bank, where does fee growth come from going forward? And is treasury management for Stellar's commercial clients the main lever here? I know last quarter, you guys had been mentioned treasury management build out that included additional hires from Texas Partners. Could you just speak on that going forward?

Asylbek Osmonov: So, yeah, I think the. there is a lot of opportunity, you know, with especially with merger with Stellar. You know, I think we really like our trust business and brokerage business, so we would love to continue And if you look at past few years, we have grown very well on that 2 areas. And now with the addition of Stellar and having you know, partners at Stellar with the lenders referring the business, so that is a focus for ours. And I think that is gonna be main focus for next few years on the brokerage and the trust Yeah.

David E. Zalman: I think our trust looks good. We are growing there, but I think treasury management I think that is. That plays a bigger and bigger piece because it offers so many different products to our customers. And Mhmm. Again, I think that is what we are focused on right there. I think sometimes, you know, you try to sell. I saw where we try to sell treasury management sometimes to smaller businesses that really do not necessarily need the complete treasury management. So we need to rethink who we are really pushing it to and who we do not on the automatic consolidations.

But for the most part, I think we have a lot of good products and you know, we are really looking forward to all of the customers and the growth that we can we can do.

David Chiaverini: Great. Thank you. Appreciate the color.

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

Analyst: Yes. Hey, great. Thanks for the questions, guys. Hey, Catherine. Hey. Just another 1 on the buyback. Just follow-up here, David.

David E. Zalman: It sounds like you are you are very constructive here at this price level. If I if I go back and look, you know, kinda pre some of these merger announcements looking back to latter half of 2025. I mean, in the fourth quarter last year, you purchased 2% of the company You know, is that kinda order of magnitude on the table here, you know, at these price levels in this valuation? I think it is it is really based on how opportunistic it is. I mean, when, again, when we are trading below, you know, 10x earning, it is pretty opportunistic. It just. Know, it seems like it. Our stock price is pretty seasonal also.

It looks like your September, October prices really go down and then about time that our stock vests at the first of the year, our stock price goes to sky high. I guess that is because we have to pay the taxes on that accelerated price. So I. You know, again, it is real seasonal, but, again, we will we will be opportunistic. And, again, I. Trading less than 10x earnings will be definitely opportunistic. Yeah. Okay. that is that is fair enough. Another quick follow-up just on the core deposit growth, 2% to 4%. Should we think about the balance sheet growing at that same level, that same capacity in 2027, that 2% to 4%?

Or within that, we might have, you know, more flattish year for loans, is there a chance to optimize some of your funding and balance sheet growth is also a little flat? Just how do you kind of think about those dynamics? No. I think historically, again, once when we look at our when we look at our bank and we look at the acquisitions, our core deposits have always grown 2% to 4%, you know, excluding some of the people that join us. I have I do not see that anything different. I mean, we do see ups and downs, but, again, I again, I just last.

Just in the last 3 days, I saw our core deposits go up $300 million just in the last few days. And again, our public funds are down a little bit, which is seasonal. that is that is in nature. But I think 2% to 4% is very realistic for us We have always done that since the beginning and having that of growth, and I still think that you will see that Yeah.

Asylbek Osmonov: And balance sheet growth. Yeah. Yeah. And but if you look at, you know, on total assets, you just have to look at period to period as we mentioned that our public funds goes down in second quarter and third quarter. So if you look at, you know, Q4 to Q2, you might not be clear picture because we have a seasonality on public funds. But as we stated, you know, if we see the 2% to 4% on core deposit growth, over time, our balance should continue to grow.

David E. Zalman: I think that is why I feel so confident in our earnings numbers and our earnings model because when you have core deposit growth, and I know analysts push loan growth. But the bottom line is when you have deposit growth, and you have core deposit growth, not growth that you are going out and paying 4% for money, but core deposit growth. You can take those same funds. And you can get 5.7% in a security with about a 4 year duration we make really good money, and that is what it all boils down to. I mean, we have.

You know, sometimes they say you do not have the growth, but we really have a 77% loan to deposit ratio. I think our policy allows us to go to 85 so we have room for growth. But the real the real the real value in any bank is really the core deposit relationships, and that is really what we focus on.

Analyst: Yeah. Understood. I certainly appreciate that. The confidence around the ultimate earnings power here. Maybe lastly for me, maybe a cleanup question. It looks like the stellar credit mark was maybe a decent bit higher than where you guys had thought it might be, when this deal was announced. I guess is that true? Is that fair? And b, what kind of were the drivers behind that?

Asylbek Osmonov: Yeah. It was a little bit higher, you know, what we projected. But what we do, you know, when we a projection or, you know, we kinda look at high level. But when we go inside and dig in and being our, you know, conservative nature, what we have with up a little bit more of the marks than we anticipated.

Analyst: Okay. Well, Hardy, thanks for the questions, guys. I appreciate it.

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

Analyst: Hi, thanks for taking my question. So we talked about capital use for buybacks. And I am wondering any appetite to use capital on repositioning the securities portfolio given the movement we have seen in the belly of the curve, and you have been historically, you know, pretty active on mortgage backed securities. MBS rates are, you know, above 6% right now. Any appetite to do more there?

David E. Zalman: I do not see any. I mean, over the years, I have been in banking. The banks that you know, that use financial engineering to make their numbers look better. Peter turns out well. You sell and reposition and put a new market value in the next week. The market value changes again. We will never be able to control rates really determine what interest rates are gonna be up or down. We never extend the portfolio to something that we cannot live with. I think if you looked at the previous 2 to 3 years before this year, you saw our earnings really down, and that is because we never try to call the markets.

Try to have something that is we are gonna be able to survive and up with interest rates going very up or very down. And, you know, I just that is just not something we do, and I do not I do not see that every several banks that we bought were banks that really discontinued. Buying and selling and the and reengineering the balance sheet and that. For us, that just does not work. I the answer to the question is simply no. I do not see that, really. Alright. Very clear and then Yeah.

Shifting to competition, we have you know, heard from you guys a lot in the past about loan competition in your market, not necessarily meeting your standards. Just give us an update on what you are seeing today. Any change versus last quarter on the competitive side? You know, like, I. Probably in the last month or so, I do not I do not see them being as crazy as they were. But, again, when we talk about the out of state competition, we are really talking about a couple of banks really And it is. And those are the banks that you know, I think they are smaller, trying to grow. I think they will always be competition.

But the bottom line, look, we are a we are 1 of the largest Texas banks right now. With 350 locations in people in Texas. I do not care who you are. They are gonna wanna do business with Texas people. And that is just they can say whatever they want. They can pay whoever they want. They can try to take all the people they want, and you can underprice all you want. I mean, do all that stuff you want. But when it is all said and done, they are still gonna wanna deal with the Texas fine.

Operator: Thank you. The next question comes from Steven Stouten with Piper Sandler. Please go ahead.

Stephen Kendall Scouten: Yes. Good morning, everyone. Thanks. Just kind of on all this conversation about the potential for organic growth, the competition, versus y'all's successful track record on M and A? From a strategic standpoint, do you like the idea of continuing to grow loans via M and A using, you know, the legacy bank for good core deposit growth versus trying to push the envelope on the organic side? Is that a fair way to think about it strategically? Say that again. I wanna try to really what you are saying. I know if I am asking you that. Do you like growing loans via M&A?

Given your successful track record there versus kind of pushing the envelope to grow loans organically right now?

David E. Zalman: I think we have been successful with the, with the m and a growth deal. I mean, it is it makes it easier because you get to really analyze get to analyze the portfolio that you have, which like and do not like and kinda really know what your potential losses are. The thing that we do not like, I think, is to say, you know, we are. You are gonna have double digit loan growth every year. We are just not do that. I mean, I do not I do not see that, and we are not gonna really go out and try to buy wholesale deposits just to make that happen.

I think that you will see reasonable growth with our 2% to 4% our deposit growth, and we do have about you know, like I mentioned earlier, we have a 77% loan to deposit ratio. We can go up to about 85 in our policy, so we have room to grow there. Think they will continue to grow. But I think the answer to your question exactly is I have I like what we have been doing.

Kevin J. Hanigan: You know?

David E. Zalman: I have been doing this a little while, about 30 or 40 years, and I have probably gone through a lot of analysts, and I have been through a lot of these meetings. And you know, a lot of the same stuff that people come up with and say, well, you cannot do this and you cannot do that. Well, I remember being $300 million and them saying that you cannot do that and cannot do this. And today, we are $54 billion making a lot of money.

So I think the strategy that we have and the model that we have and the asset quality that we have and the growth that we have in organically and through M&A, it is just been a winning formula. And I think that is that is what we will stick with probably.

Kevin J. Hanigan: It. it is really a balanced approach. Yeah. Yeah. Was gonna say we really want both. Yeah. But on the loan growth side, we are we are not gonna be somebody that is gonna grow at double the rate of GDP. So if we can do acquisitions and grow loans, at GDP rate, we are just fine with that. If the market is all growing at 10 because we think they are doing crazier things, Well, in those cases, let them grow at 10 and we will grow slower.

And if we need to grow more than that, growing through acquisitions, way we do it, and I think you have all seen the way we do it, there. there is enough marks put on these loan books that we buy. The credit's never an issue. And we do it with the ability to increase our reserves. So we sit we sit here today in a really strong credit position no matter what the market does. So the simple answer is we want both, but we are not gonna go overboard chasing growth above GDP rates.

David E. Zalman: I think, basically, it is a model if you are a long term investor If you are a long term investor, you are gonna love our model. If you are a short term investor, you probably would not. Yeah.

Stephen Kendall Scouten: that is probably a very fair point. that is helpful. And then now at $54 billion in assets, does the idea of indexing these regulatory thresholds, does that change your outlook for the ultimate size or scale of the bank? Or anything strategically that would open up for you all if those policies come through?

David E. Zalman: I do not know that I saw the indexing threshold that you are referring to. I am I am I guess, you are referring to the $100 billion in size ratio would be our next ratio. But right now, we do not. Again, the way when you are a $50 billion bank, you could be a $150 billion bank. All the stuff that they are required from enterprise risk management to BSA, all the regulatory burden they put on you right now, you could be that bigger size. And, again, we probably did not talk about it enough in addition to the mergers that we done with Texas Partners and Stellar and American.

We also we also spent 3 years in house on our own IT infrastructure. And we put in a new data processing that really allows us. Again, I am not saying we are gonna build up to this size, but it allows us to go up to about $500 billion in size. Just to give you an idea, we were running out of capacity on a holiday weekend. We were running batch with our checks, and, basically, we would start on Friday, and it may be caught up by Monday morning. It may not our servers. But today, can run through all of that, and it catches up within an hour's time.

We can run the whole process within our time. So we spend a lot of time on our infrastructure, IT app. IT infrastructure, a lot of money on technology. And so you know, I. And we have a great team with internal audit and progress management. Now AI, get everything at. So I feel good where we are at. I think we are we are in a good position.

Stephen Kendall Scouten: Got it. Really appreciate all the color. Thank you.

Operator: Mhmm. The next question comes from John R. Strom with RBC Capital Markets. Please go ahead.

Jon Arfstrom: Hey, thanks. Good morning, everyone. Good morning. Just a few cleanup questions here at the end, I guess. On credit, obviously, not a big deal, but the 60 basis points in NPAs David, that probably drives you nuts. It does. What is the-- what is the plan to work that down? Is there anything bigger in there? Or, you know, how do you expect that trend over the next few quarters?

David E. Zalman: You know, our directors. I talked to our directors about this at the last meeting. it is a good question. You know, At the size that we are at, I do not ever see us really getting below $100 million in nonperforming. We are at about $200 million right now, and we will probably realistically settle when it is all said and done. A year from now or 2 years from now. Again, with that, every. With everything else being stable, we will probably settle at about $125 million to $150 million is where we will probably end up in nonperforming. On a run rate. Okay.

Jon Arfstrom: Energy lending, any comments there? Do you have an increased appetite? Is there more activity in your West Texas markets? Anything to note there?

David E. Zalman: You know, in our West Texas markets, I wish they would borrow more. Those guys you know, when they borrow, they sign personally. And they usually have about $100 million in their checking account. They are borrowing $100 million. But they just they just have not borrowed a whole lot. So, you know, we do have some really great customers. We will continue to thank the customers that we banked for the last 20 and 30 years. I think probably the middle market we are not as big in anymore.

Kevin J. Hanigan: Kevin may be able to talk to that. Yeah. We are not our underwriting is a little different when it comes to you know, revolvers and borrowing base reviews. And it is good in a conservative way. Not that long ago, we. And we all remember the potential smarting of 2000. What, 2014 through 2017 or whenever that period was. So I do not look for that category to grow into a 5% of total loan kind of category. We are we are comfortable with where we are The bank's got a tremendous list of great oil and gas and oil field services customers. Who have really great balance sheets that rarely need to borrow.

Every now and then, we get 1 of them pop up. it is doing an acquisition, and they allow us to loan them some money. As David said, I can think of 1 client who routinely has a $100-plus million and he is making a $50 million or $60 million acquisition, he allows us you know, to make him alone.

David E. Zalman: He usually does not keep it out very long, but rather than just paying cash, that. that is great for us. Guys like that and we have. Everybody in this room knows who I am talking about. But we got a couple of people like that.

Kevin J. Hanigan: John, I think it is gonna do not look for that to be a category that takes off. Yeah.

David E. Zalman: I think over my years of experience, especially in the certain lending to oil service industries, when it. When prices got really high, every jump into the market. Your bankers and lawyers, they want to be oil and gas guys, and that is when you lose all the money. So I think we have learned our lessons. We are not we are not. You know, any new company that is jumping in the business, we are really not looking at that. What we are really looking at are existing companies, and we have a lot of them. And they are they are So we are still we are still taking care of them.

Mean I mean, we will look at something new. It would have to be extraordinarily appetizing to do it, really.

Analyst: Yeah.

Jon Arfstrom: Okay. Okay. Just last 1 here. In Houston, and maybe Ray can even comment I do not know. But you have a larger market share and you have a larger branch count. With almost $12 billion in deposits. How's it gone so far? And is there anything you wanna do differently or need to do differently with the larger density you have in Houston?

Ramon Vitulli: Yeah. Yeah. This is Ray. it is going very well. I think as far as the question that we will do differently, I would actually say more of, like, how we are gonna leverage the synergies that we are getting as part of the merger. For example, I think Asylbek mentioned on the wealth side, starting to see referrals on the wealth side and just using the bigger, better offering with the merger to our advantage, and we are already seeing that. So it is super excited about the footprint that we have that we have expanded in Houston and East Texas. And we just. We think that there is great runway there.

Robert J. Dowdell: Bob, do you have any comments on this? I mean, I guess the comment I would make, David, is you know, you added with the 3 acquisitions, you added about 20% to the balance sheet, all in great opportunity areas. So in support of loan growth, whether we whether we get there or not, our opportunities have increased. So Dallas and Houston represent almost 60% of our loans. Today. Right and great business opportunities. So to me, I think it is a matter of us getting out there and getting that done. So I we have got. We have built on opportunity. We have we have increased the size in those markets.

And I think it bodes well for the next several years.

David E. Zalman: I think we do have the opportunity, Bob, and I think that the only reason sometimes I hold back right now when you put these things together, it does take a lot of time, as you know, integrating and making sure the operational integrations are going right. But know, once you get past that, our opportunity is just almost endless with the amount of people we have on the ground. And the different amount of banks that we have in the Texas market in Oklahoma. I think the opportunity is just great, really.

Jon Arfstrom: Okay. Thank you. Yeah. Mhmm.

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

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