Prosperity Bancshares, Inc.(R) Stock

Good day, and welcome to the Prosperity Bancshares Second Quarter Conference Call. [Operator Instructions] Please note, this event is being recorded.

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

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Second Quarter 2026 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks.

I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Senior Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Robert Franklin, Vice Chairman and former CEO of Stellar Bancorp; Randy Hester, Chief Lending Officer; Mays Davenport, Director of Corporate Strategy; Bob Dowdell, Executive Vice President; and Ray Vitulli, Houston area Chairman and former President of Stellar Bancorp.

David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions.

Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for 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 Prosperity Bancshares' filings with the Securities and Exchange Commission including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2026 conference call. I'm excited to announce that on July 1, 2026, Prosperity Bancshares completed the merger of Stellar Bancorp and its wholly owned subsidiary, Stellar Bank, headquartered in Houston, Texas. Stellar Bank operated 52 banking offices, including its main office in Houston and banking offices in the Houston, Beaumont and East Texas areas and in Dallas, Texas.

I'm also pleased to announce that Robert Franklin, former CEO of Stellar Bancorp; and Joe Swinbank, a former Stellar Director have joined the Prosperity Bancshares' Board of Directors and that Ray Vitulli, former CEO of Stellar Bank; and Pat Parsons, a former Stellar Bank Director have joined the Prosperity Bank Board of Directors. Pat was instrumental in building Sellers Beaumont franchise over the years.

With regard to earnings, excluding the gain on the Visa Class B2 stock exchange and net of investment security sales that we had and merger-related expenses, net income was $162 million, and earnings per diluted common share was $1.62 for the 3 months ended June 30, 2026 compared with $135 million or $1.42 per diluted common share for the same period in 2025. This represents a 20.4% increase in net income and a 14.1% increase in diluted earnings per share.

These earnings for the second quarter of 2026 do not reflect any contribution from Stellar. Excluding onetime merger-related expenses and charges related to security sales, Stellar had $42.1 million in pretax pre-provision core income. Assuming a 21% tax rate, Seller's second quarter net income would have been approximately $33 million.

Annualizing this amount for Stellar and Prosperity second quarter core net income after excluding the nonrecurring items, shows an annual run rate of about approximately $780 million. This does not reflect any cost savings that we expect to achieve after the operational integrations of American Bank in September, Texas Partners Bank in November and Stellar Bank in March of 2027. As mentioned on prior calls, these are the results we expected, and we believe these tailwinds should continue to be positive for the near future.

With regard to loans, loans were $25 billion at June 30, 2026, an increase of $2.8 billion or 12.8% compared with the $22.2 billion at June 30, 2025, and this was primarily due to the American Bank and Texas Partners Bank mergers. Loans, excluding warehouse purchase program loans, were $23.7 billion at June 30, 2026 compared with $23.8 billion at March 31, 2026, a decrease of $117 million. We experienced paydowns this quarter with our 1-to-4 family residential portfolio, decreasing $100 million plus as well as other large pay downs. We also are focusing on the integration of our new -- with our new partners.

Our deposits were $32.6 billion at June 30, 2026, an increase of $5.1 billion or 18.7% compared with $27.4 billion at June 30, 2025, primarily again due to the American Bank and Texas Partners merger. Our linked quarter deposits decreased $33 million from $32.6 billion at March 31, 2026. However, our noninterest-bearing deposits increased $159 million during the second quarter of 2026. Our noninterest-bearing deposits of $10.7 billion at June 30, 2026, represent 32.9% of our total deposits.

The net interest margin on a tax equivalent basis was 3.47% for the 3 months ending June 30, 2026 compared with 3.18% for the same period in 2025 and 3.51% for the 3 months ended March 31, 2026. The net interest margin in the first quarter of 2026 was impacted by a onetime loan interest income of $4 million from a nonaccrual loan. The net interest margin continues to be positively impacted by the repricing of assets as we predicted and mentioned during previous calls, and Asylbek will give you a lot more color, but we're really excited where our net interest margin is headed.

Asset quality. Our nonperforming assets totaled $130 million or 34 basis points of quarterly average interest-earning assets at June 30, 2026 compared with $122 million or 33 basis points of quarterly average interest-earning assets at March 31, 2026 and $110 million, again at 33 basis points of quarterly average interest-earning assets at June 30, 2025. So you saw somewhat of an increase there, but based with the new banks that have come in with this and the amount of assets we're still basically at the same ratio. The allowance for credit losses on loans and off-balance sheet credit exposure was $420 million at June 30, 2026. The allowance for credit losses on loans was 2.9x the amount of nonperforming assets.

With regard to acquisitions, 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 integration of all 3 banks and our combined teams are working very hard to ensure they are successful. While we continue to have conversations with other bankers regarding potential acquisition opportunities, we remain focused on the integration of our 3 transactions.

Texas has one of the strongest and most diverse state economies in the U.S. ranking as the second largest by GDP after California and approximately the eighth largest economy in the world. Oklahoma has a smaller but stable economy, heavily influenced by oil and gas with more modest growth. Texas continues to shine as more people and companies move to the state because of the business-friendly political structure and no state income tax.

Prosperity continues to focus on building core relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels. We intend to continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone involved in our company for helping to make it the success it has become. Thanks again for your support of our company.

Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended June 30, 2026, was $330.6 million, an increase of $62.8 million compared to $267.7 million for the same period in 2025, an increase of $9.4 million compared to $321.2 million for the quarter ended March 31, 2026.

The net interest margin on a tax equivalent basis was 3.47% for the 3 months ended June 30, 2026, an increase of 29 basis points compared to 3.18% for the same period in 2025 and a decrease of 4 basis points compared to 3.51% for quarter ended March 31, 2026. The linked quarter margin decrease was primarily due to the previously mentioned onetime loan interest income of $4 million recorded during the first quarter of 2026. Excluding this onetime loan income, net interest margin increased by 1 basis point on a linked quarter basis.

Excluding purchase accounting adjustments, the net interest margin for the 3 months ended June 30, 2026 was 3.41% compared to 3.14% for the same period in 2025 and 3.44% for the quarter ended March 31, 2026. The fair value loan income for the second quarter 2026 was $4 million compared to $3.7 million for the first quarter of 2026. Fair value loan income for the third quarter 2026 is expected to be in the range of $6 million to $8 million. Noninterest income was $60.7 million for the 3 months ended June 30, 2026 compared to $46.5 million for quarter ended March 31, 2026, and $43 million for the same period in 2025.

The higher noninterest income during the second quarter of 2026 includes a net gain of $8.2 million, resulting from the conversion of Visa stock, partially offset by loss on the sale of investment securities. The noninterest expense was $176.2 million for the 3 months ended June 30, 2026, compared to $217.3 million for the quarter ended March 31, 2026 and $138.6 million for the same period in 2025. The first quarter included merger-related expenses of $42.5 million.

For the third quarter of 2026, we expect noninterest expense to be in the range of $244 million to $250 million. This includes the additional Stellar bank operations. However, this projection does not include any onetime merger-related expenses associated with the Stellar merger. Efficiency ratio was 46% for the 3 months ended June 30, 2026, compared to 59.2% for quarter ended March 31, 2026 and 44.8% for the same period in 2025. The bond portfolio metrics at 6/30 2026 have a modified duration of 3.7 and projected annual cash flows of approximately $2.2 billion.

I will now provide a high-level overview of Stellar financial performance for the second quarter of 2026. Stellar also delivered strong financial results during the quarter. Stellar's net interest income before provision for credit losses for the 3 months ended June 30, 2026, was $106.4 million, an increase compared to $105.9 million for the quarter ended March 31, 2026. The second quarter results included onetime merger-related expenses and losses related to the sale of certain investment securities. Excluding these onetime charges, Stellar's adjusted pretax pre-provision net income was $42.1 million, an increase of $2.9 million compared to the first quarter of 2026.

Now let me turn over the presentation to Tim Timanus for some additional detail on loan and asset quality. Timanus?

Thank you, Asylbek. Our nonperforming assets at quarter end June 30, 2026, totaled $130,576,000 or 52 basis points of loans and other real estate compared to $122,107,000 or 48 basis points at March 31, 2026. Since June 30, 2026, $5 million of nonperforming assets have been removed or put under contract for sale. The June 30, 2026, nonperforming asset total was comprised of $119,271,000 in loans, $9,000 in repossessed assets and $11,296,000 in other real estate.

Net charge-offs for the 3 months ended June 30, 2026, were $2,183,000 compared to net charge-offs of $41,309,000 for the quarter ended March 31, 2026. There was no provision to the allowance for credit losses during the quarter ended June 30, 2026. No dollars were taken into income from the allowance during the quarter ended June 30, 2026. The average monthly new loan production for the quarter ended June 30, 2026, was $454 million. compared to $312 million for the quarter ended March 31, 2026. Loans outstanding at June 30, 2026, were approximately $25.028 billion compared to $25.288 billion at March 31, 2026. The June 30, 2026 loan total is made up of 34% fixed rate loans, 33% floating rate loans and 33% variable rate loans.

I will now turn it over to Charlotte Rasche.

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

[Operator Instructions] Our first question comes from Janet Lee with TD Cowen.

From the last call, you've talked about net interest margin reaching the 3.70 level as you exit '26 and then getting in the 3.80 range in 2027. Are you -- do you still have a good light of sight into reaching that level? Or is there any changes to the outlook versus before?

Janet, No, we -- our models are still showing is hitting, I think, again, Asylbek may want to jump in on this, but we're still saying that we'll end up with 3.75 at the end of the year, but our models are still showing 3.70 to 3.80 .

Yes. So yes, it is. We provided guidance of 3.70 million. I think we're going to increase to 3.70 to 3.75 because with additions still very accretive to us. So the guidance stays the same. And for 2027, we said 3.80, I think still for whole year, 3.80, 3.85, that will be updated guidance.

The only caution I would put is we start getting past to 3.7% of net interest margin, we still are very competitive. We offer some of the competitive CD rates, but we've been a little bit lower on our money market accounts, and we may want to raise our money market accounts rate just a little bit. So that may temper the net interest margin a little bit anyway. We may be -- again, maybe trying to grow more organically at that point in time once we hit 3.7%.

Okay. Makes sense, but the 3.80-plus range still contemplates that you're raising rates on your deposits?

Some rate, yes, we have increased some of them. So yes. But...

Okay. Got it. I understand that the priorities is on the integration part. But on the Stellar side, perhaps or even on the legacy prosperity side. What are you seeing in terms of loan growth and demand there? It looks like outside of the mortgage warehouse, it was fairly stable quarter-over-quarter. Just wanted to see what you're seeing on that front.

Yes. This is Kevin. I'd say for the remainder of the year, company-wide, still relatively flat for the remainder of the year. That does include Stellar has got a pretty robust pipeline [ billion to us ], right? And so they feel as though they'll grow their loans, they're grow them about $200 million in the first half of the year, they'll probably grow them another $200 million in the back half of the year. But overall for the company, I would call it flattish for the remainder of the year.

Maybe on the better news front, as Tim said, production has been picking up and we have several hundred million, probably closer to $400 million construction deals, which we've approved so far this year that are booked. They're in our pipeline. They will not provide any funding this year as all the equity has to go into those deals first. But beginning in the first quarter and more materially in the second quarter of next year, the pull-through of those deals is going to start generating some positive overall company growth.

And this is Tim. Everything that Kevin said is accurate in my opinion. We do forecast stability going forward. We have a decent pipeline of loans. We see decent loan activity out there in the marketplace. Really, the only thing we see that's a hindrance is some of the very, very aggressive structure and pricing that the competition is putting forward. So we have to be cognizant of that and careful with it. But basically, everything looks decent right now.

Yes. As Tim said, it's no news to all of you on the call, but credit spreads are at 25- or 30-year lows across the risk spectrum. I mean some things out there just getting to the point of being ridiculous we have looked at 2 meaningfully large transactions in the last 2 weeks, priced at SOFR 125. The math on that yields you an opening day coupon like 4.83 which is ridiculously low. And it's not like either one of those things came with masses or amounts of demand deposits and relationships. So just risk reward across the spectrum right now is, I think, slightly mispriced.

And I'll give you a little bit more color because I think that no district aspect, but the analysts continue to want to show just the growth in the loans and growth all the time. But I think you need to take profitability in the consideration. And just to give you a little color last week, we had a loan committee. It was a rate aid company. There's no question about it, but the -- it was a $20 million credit and it was priced at with especially some of the regional banks coming from outside the state trying to make a mark inside the state. They priced it at a 7-year fixed rate of 5.5% with a 25-year amortization. And of course, there's not many of any deposits with that.

And so you have to consider, okay, do I want to make a loan at 5.5%? Or can I go with a pretty high duration? Or do I want to just go buy a money buy a mortgage-backed security with a 4.8-year duration and get 5%. So can we really operate on 50 basis points. And I would tell you the difference is, no, you can't pay the lender, the officer reserve for loan loss and make it off of 50 basis points.

So we're really -- I guess my point is we're really paying attention to profitability at the same time. It's not an excuse, but I think that you guys just need to know that, too. We're just not going to just -- we're not going to just put loans on it. Most of the loans that come, the bigger loans they come, they're really more of a dry relationship. I mean if you're really bringing over a customer and you're bringing over the customer deposits and total relationship, that's a completely different story. And even that rate may make some sense. But the bigger dry relationship is just to grow loans to grow loans at that kind of pricing, in my opinion, doesn't make a lot of sense.

And the next question comes from Brett Rabatin with Stonex Group.

I wanted to start on the other income. I know there was some noise in 2Q with the gains in the securities. Was the increase in other, was that related to anything in particular? And does that continue from here?

Yes. On the other one, we had just about $2.5 million just, I would say, annual income that we get that, but it's not going to be expected maybe next quarter, but there was an annual income would generate about $2.5 million. Other than that, everything is a core except of course, gain on diesel stock. So if you're thinking going forward, I would say our range around [ $50 million ] prosperity before Stellar and Stellar has $5 million to $6 million. So I would say between $54 million to $56 million, that would be a good run rate on the noninterest income.

Okay. That's great color. Appreciate that, Asylbek. And then David, you were just talking about your kind of thesis on loans versus securities and with where the bond market has moved. I was just curious if there was any maybe increased appetite to actually grow the securities portfolio from here? And just thoughts on how you view the securities portfolio size kind of post Stellar integration?

Well, again, our first focus will always be loans. But on the other hand, when the price is getting to where it is right now, you really can't we're not going to put a bunch of stuff on the books and just to grow loans and not be profitable and take the risk. So I would say, I think you'll continue to see -- we'll focus on building loans first. But whatever we don't, we'll continue to put into the bond market. And we still grow organically. It's so hard for you guys to see. But when we strip out the banks that have joined us, I think, Colin, you did showing yesterday that our deposits actually have grown organically about 3.2%.

So once things always stabilize, we'll state 2% to 4% organic deposit growth all the time. It's just when you put all these things together and some customers come, some customers leave, it will take the year or so. But we'll always have organic growth, and that in itself always outproduce what we are able to put loans sometimes. So I think you'll have a combination of both growth in loans and deposit loans and securities really going forward.

Okay. And then if I could just ask 1 quick last one, just around -- it sounds like you guys are still seeing some irrational stuff on the lending side, what the monthly loan production was obviously stronger linked quarter. Would you guys attribute that to just increased activity in the markets customer gains, anything in particular you would point to just kind of describe the linked quarter improvement in loan production?

Yes. Once again, we see things as being very stable and maybe growing a bit. Our people are constantly out there trying to bring customers in and that obviously includes loan customers as well as deposit customers. The problem with the pricing and the structure that we're seeing in the market, those things historically come and go. And right now, they're here. We're having to deal with it. But how long it lasts, I guess, is anybody's guess.

So I think there's reason to think that we can improve our loan growth and therefore, improve our loans outstanding. You have to understand that quite often, the loans that we put on the books don't fund right away. They're construction loans, they're different types of loans where equity has to come in and get funded first. So it can be a few months before we start funding those loans. So that's a normal time delay. That's a good thing, not a bad thing. So I see a lot of positive things out there and not that many negative things other than the current structure that we're having to deal with on a competitive basis.

But the bottom line, Tim, as Brent -- again, Texas is still growing. You're still seeing businesses move into Texas. You're seeing population growth and business growth. So I think we're still going to have opportunities to grow and build the portfolio. I mean we saw a lot more -- we saw more production this time. A lot of it was pay downs, too. I mean just the 1 to 4 families, if you look at it, it was over $100 million decrease.

And again, we're getting pay downs in that. In the housing market, people haven't been willing with the higher interest rates to lock in and to buy the 1 to 4 family. So a lot of our paydowns were in that category right there. But Texas is still it's probably the best market out there. There's just no question about it.

That's absolutely correct. And Oklahoma is doing well also. So from a geographical standpoint, everywhere we operate right now looks good.

And again, again, we're probably more cautious. We're probably more focused on profitability than some of the other banks because we don't want to just put loans on the books just to say that we've grown loans to at the same time. So we're trying to balance that out.

And the next question comes from Manan Gosalia with Morgan Stanley.

You spoke about credit spreads being at multi-decade lows in the $20 million credit line. I guess the question is how widespread is that competition on structure and pricing? Is that happening for a specific loan segment like construction or a specific type of client where there might be a higher likelihood maybe of getting other business down the line. Or is it widespread across construction, CRE, middle market C&I.

Yes. The SOFR 125s are outliers. That's 2 deals, both of them pretty recent, but I'd say that's 2 deals that I think we go back all the way back into December, January time frame. It's 2 deals from then to now. So there's 2 recent deals, very large prominent clientele. Asylbek can probably give you a little bit of color on originations, both in pricing on originations at both at Stellar and at Prosperity for the last quarter that might help you understand what we are doing.

But I would also say, though, that the one that I described with the 7-year fixed rate with a 25-year amortization at 5.5% is not unusual, and that's -- those are loans that everybody is bidding on. I mean they're not deposit -- they're not bringing deposits to the bottom line. That's loans like on 1 to 4 family -- not 1 of 4 family multifamily units, retail centers office buildings and stuff like that. And it's just -- it's just going to the lowest bidder for the most part.

Yes. And Asylbek, let me mention before you start, that it is not across the board. It is primarily the larger loans. And what we're seeing more often than not is the large banks or relatively large banks that have recently entered the Texas market are trying to enter the Texas market. And they're focused on those larger loans. They make a bigger splash that way, and it's understandable.

I think that's a good point, Tim. I mean it's not everybody is doing this...

It's not everybody.

And if you ask me, I can put them on 1 hand, and I don't even need all 5 fingers.

Yes. It's mostly the bigger loans.

It's a couple of the banks that have come in more the regionals, the bigger regions that are trying to buy their way into the market. And I'm not saying that they're wrong. We -- when we go into a market before we did a lot of mergers and acquisitions if we started to open up a banking center or something we would give special deals to. And I guess that's what they're trying to do at the same time. But it's still not across the board, but these are all very large loans, and it's just rate driven and I think that's the way they can say that they're making us flash. That's just my opinion.

Right. So Asylbek.

Yes, I'm just going to give the facts. The average loan production month for Q2 that Tim mentioned the $454 million. The average rate on that blended was around 6.5%. And I think when we talked to -- we looked at Stellar's #2, I think the new loans they're putting up also around 6.5%. So we're comfortable at that point. So we know that our fixed loans and some loans are going to be repriced at the higher rate at this rate.

That's all very helpful color. I really appreciate it. I guess when we talk to some of the other banks that have been talking about looking at the all-in returns of their client relationships, not just the loans and deposits, but also, I guess, cash management, investment banking, et cetera. I guess the question for you is, as you do more acquisitions, as you grow the size of the balance sheet, is there anything that you need to invest in on the product side or on the fee side to capture more of the economics of the client?

Well, I think that's the good news is that over the last 3 years, we spent a lot of time, money and energy on our new technology. If we wouldn't have we wouldn't -- we had our own computer conversion that we had from -- we were on [ Fester ] from one platform to the DNA product. If we wouldn't have done that and spent all that money in time, there's no way that we could have done these 3 deals that we're doing right now.

So I think that we're well positioned because we did spend the time, the money and the energy to let us know that we did want to be a bigger bank and to do that, we had to have the technology, and I think that you're seeing that growing. And I think that we're even bringing in some really good people, especially at Texas partners that has a lot of experience and a lot of big bank experience with treasury management, and I see our treasury management really growing and our products, I think, are very, very good.

The next question comes from Peter Winter with D.A. Davidson.

I was wondering, Kevin, can you give an update on the mortgage warehouse business? And just also with this increase in mortgage rates, does that kind of virtually shut down refi activity?

Yes. Refi activity is not all the way shut down. There's always been some but it has been muted. And as I just look at the first 28 days of the quarter, so through last night. I think we're averaging right at $1.250 billion in outstandings, which is off from the $1.316 billion or whatever it was [ $316 ] in Q2. So that's a little unusual for the third quarter.

Usually, third quarter is pretty good, particularly in July and August, with September being a little off. So it wouldn't surprise me if we average $1.2 billion, maybe as good as $1.225 billion in Q3, which is -- it's roughly $100 million off the average of Q2.

Got it. And then David, just how are you thinking about deposit growth in the second half of the year? And you mentioned you might get a little bit more competitive on money market rates, but just how you're thinking about deposit rates going forward, assuming the Fed is on hold?

I was wondering if you're going to ask me a question, Peter. Thank you. No, it's hard to tell you that you're going to see a lot of growth because when you do these deals, there are some relationships that come and go. The only thing I can tell you is, and we really believe this, our numbers show this. that on an organic basis on legacy deposits, we always have continued to grow 2% to 4% and where we do lose is when new banks join us and they may have been paying a higher interest rate than we've been willing to pay or there may have been some circumstances or the customer just so they'd like us to be part of that deal.

But I think over time, if you ask me to make -- I guess, first of all, the Fed, a lot of people were talking about them raising rates because of inflation. I think the Trump [indiscernible] this new guy in [indiscernible] and he's not going to raise rates in my opinion. Having said that, I think our modeling guy has put in, what, 25-point in...

End of the year.

End of the year. And so I don't think they will. Our models really show really great net interest margin, just where they are right now. I mean it shows greater if interest rates go up and it shows less if interest rates go down a little bit. But again, our customers have been very [indiscernible] if you look at the last, you followed us, Peter forever and you just take a look at the graph for the last 10 or 20 years, we've had increased earnings, increased earnings per share, increased assets, increased deposits every year until we get 2022, we started -- we've seen interest rates go up.

You saw our net interest margin going down. And then we really got bond in '23 and '24 with net interest margin is going down to 2.75. And of course, now we've built it back up to 3.50 and we're going to 3.80. And our customers have stayed with us, and they really didn't have to, they could have gotten stuff better at some other places. So when I commented earlier that once we get up to the 3.7, I would like to see us bump our customers up a little bit. We still want to make good money, but I want to reward them for staying with us at the same time to and possibly start growing more organically in that phase.

Thing on the deposits, it's kind of hard to see when you see our balance sheet, our deposits have decreased. But if you kind of peel off, there's a public fund that have seasonality each time. So it goes down second and third quarter. But if you strip out the public fund, our core deposits have increased in the second quarter.

Yes. I mean I was extremely excited this time because last year at this time, this is usually one of our worst quarters with public funds being down. And...

And core to [indiscernible] down...

[indiscernible] tax payments. So I thought this was pretty good for usually a seasonally pretty tough deposit.

And the next question comes from Michael Rose with Raymond James.

Just wanted to start on the Stellar side, I think maybe Ray is there. Looks like the margin was up pretty meaningfully in the quarter. And it looks like maybe there might have been some restructuring securities balances were down. And just trying to better understand how much of that benefit is driving the NIM guide that also [indiscernible] layed out.

Yes, Michael, this is Ray. The -- so we picked up 9 basis points on the NIM. There was about a $30 million paydown of sub debt in there, but it's really driven by -- as Asylbek said, we booked $525 million plus we renewed another $600 or $700 million, so it's about $1.1 billion, $1.2 billion in the quarter at an average rate of $6.50 on the loan side. Deposit costs held in there, and that was really the driver -- most of the driver of that NIM expansion.

And just to add on the sale of security, it happened at the end of the quarter, so there was no impact on the margin. So the margin that they have 9 basis point increase. That was a quarter increase on the margin.

Okay. Very, very helpful. And then maybe just 1 follow-up. Just as it relates to the integration efforts and cost savings realizations of the 2 other deals, not stellar, but where do you stand with those? And I understand you gave the expense outlook, just trying to better understand the puts and takes.

Yes. On American and Partners Bank, we realized some of them, but most of the cost saving is going to come in after the system conversion, which we scheduled for September or November. But let's -- assuming that all the integration is done. We still expect from the Stellar -- I'm sorry, from American and Texas partner additional $20 million to $25 million cost savings coming in. So we should see the full impact of it in 2027...

Before tax or after tax?

Yes, before tax, 2025 before tax. And on the stellar, we're still in line with what we announced on the premerger, how much of savings we're going to get. So we expect to get that savings. It might be a little bit pushed back on the timing of it because the system conversion doesn't happen until March of next year because of the timing of everything going on with 3 acquisitions. So the timing might , but the cost savings that we projected is still in line on Stellar as well.

The next question comes from David Chiaverini with Jefferies.

So you mentioned a couple of times about your focus on profitability. Can you remind us how you're thinking about ROTCE targets once the conversions are done and the cost savings are fully baked in looking out to 2027.

What kind of targets I didn't catch that?

Your return on tangible common equity.

Well, I mean we're right now, we're running -- even right now, we're running about 15% return on tangible capital.

15.5%.

I'm really hoping, again, you might have these numbers in your model, but I'm thinking if we hit the numbers we say we're going to hit, we should be hitting 17%, 18%.

.

Yes. I think initially, we're going to take a hit because of the conversion, but we build it up very quickly. So our process...

[indiscernible] about tangible capital, not return on tangible. Are you talking about return on tangible capital or were tangible capital is going to be...

I think return on tangible capital.

The return on tangible...

Yes, you answered it. Yes.

Yes. Basically, they want to kind of know what -- do you have that in your model, but I mean, if we're hitting the numbers that we're saying, you can do the math, just add the extra money that he just told you on those cost savings of the $780 million and divide that by the share, you're going to get -- I think you're going to start hitting 17% to 18% return on tangible cap.

That's right. That's correct.

Perfect. And a follow-up to that on capital. With your buyback, you reduced it in the second quarter. How should we think about the buyback going forward?

Whenever people are on [indiscernible], we have an opportunity to buy, we're going to buy. I mean we -- again, you can see the amount of money that we're making or proposed to make. Again, it's something -- there's no [ black ] long. So we have a run rate of $780 million right now. We have a lot of cost savings that's going to add to the bottom line. So I think our projections are $850 million to $880 million. We're paying how much in dividends $200 million.

So the difference between that and what we're going to make is or what we are making is there's a lot of money. So we have a lot of gun powder to do something with, and we will. I mean if we see that there's real opportunities in the stock price falls and there's something out there in the market, we would definitely be buying our stock back. I mean, we're trading right now at 10x the next year to earnings or so. So we're pretty cheap.

Yes, it was muted in Q2 largely for blackout purposes. We just couldn't buy. We would have loved to buy a lot more, particularly certain periods in Q2, but we just -- we were blacked out.

And the next question comes from Stephen Scouten with Piper Sandler.

Going back to the Stellar legacy results a little bit, it seems like with the $33 million in net income you mentioned, maybe that's a fair bit ahead of where consensus numbers have them at 1 point in time. I'm wondering if their results are kind of ahead of what you guys assumed -- when you first announced the deal, if it's going kind of tracking ahead of expectations and just if there are any material changes to the marks kind of at closing versus what you were expecting.

Yes. On the -- definitely running ahead what we projected. I think when we put together expectation was about $126 million for 2027 on Stellar net income, if you take the $33 million, we're talking about $130 million. So it is ahead of it. But on the market side of it, I think it's maybe a little bit higher than what we projected. But we're still working on it right now, and we don't have -- we have not finalized the markets yet. But I think the preliminary number coming in a little bit higher than what we projected on the loan marks.

Okay. And you said $6 million to $8 million in expected accretion in the third quarter estimate.

Yes, that is including all.

And then 1 question -- sorry.

I just want to say, it's always -- it depends if there's some loan pays off with a discount or premium it could impact. But if you look at the model, it's $6 million to $8 million.

Kind of scheduled versus accelerated? Yes, that makes sense. And then in terms of the pro forma loan loss reserve, do you know where that will go to pro forma with the close for stellar. And then you guys have had a kind of a 0 provision for several years now. Do you think we'll start to see provision be more in line with loan growth moving forward? Or is there still some excess that can be worked out over time?

On the seller one, we're still working on it, so we don't have any number, but I know it's going to be in addition to and maybe a pretty good healthy addition to that, but...

There's [ 420 ] right now.

Including that unfunded Prosperity Bank.

Prosperity. And so your Stellar -- going with Stellar [indiscernible] is up to [ 600 ].

Yes. We're still working on it. So we'll -- could this we'll give that more in the third quarter. But on the provision, it's kind of hard to say if we're going to provision or not, we just have to run the models and whatever model tells us if we need to provision we'll do provision if it tells that we don't, we're not going to take provisions.

It's hard provision when you get 3x the amount in allowance compared to your nonperforming. So I don't see that. If you're asking me personally, unless there's something that I will know in the loan portfolio is going to blow up. But we have 3x the amount of money that we have an allowance for loan losses compared to what we have in nonperforming right now. So I don't see in the next 12 months any provisioning, that's just me.

The next question comes from Jon Arfstrom with RBC Capital Markets.

Asylbek can you just walk through the expense cadence again in terms of what you're expecting in the time line? I'm just trying to -- I know it's way out in the future, but just trying to get an understanding of what you think the run rate looks like when everything is fully converted.

I'll give you the run rate. I gave $244 million to $250 million, that's including Stellar and have some savings that we pull forward from American Bank and Texas Partners Bank, but not all of it. So we expect as I mentioned earlier, from partners and American additional $20 million to $25 million cost savings going to be coming in. And for the Stellar, I think we expect -- that's all pretax numbers. So what I'm talking.

And for the Stellar, we expect additional probable cost savings around $80 million to $85 million, and that is cost saves that we announced plus additional of new CDI. So in combination, is around $85 million additional cost saves on Stellar side which was all baked in and everything, of course, the timing, as I mentioned

That's pretax.

That's all pretax numbers.

We have got [ $85 million to $25 million ]. And you got the tax rate on that.

Yes. So between additional $100 million to $110 million.

But again, we ought to be conservative on that. I mean these are numbers, and we like to give you a little bit less than the case we do screw up or we don't make it. But I think we leave a little room in there.

And it's also -- I mean, we're kind of looking long term, right? We don't know what the inflation is the additional costs there might be in, but this is what we have right now, what we expect and that's what we're projecting. And we feel very comfortable about the savings.

We've looked at this up and down 2 and 3x because I didn't want to -- we didn't want to just put something out there that we didn't know if it was going to do it or not. But I mean, we feel pretty good with these numbers. I mean you guys have looked at.

Yes. Okay. Yes, you guys have definitely delivered on that in the past. David, you kind of alluded to this, but with your asset size, not that $50 billion is a big deal, but you're a much larger bank. Anything else you need to do at your asset size that maybe you weren't thinking about or doing a year ago? You kind of referenced some hiring in products, but anything else to do that could cause some expense pressures? Or do you feel like you have what you need?

No. In fact, we needed to get to this size just to utilize the cost that we had, quite frankly. I mean, the way the regulators treated us, they were treating us like we were $50 billion and $100 billion. So we were geared up to be a bigger bank. And so this really just utilizes all the additional costs that we took on to do that really.

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

Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

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

Good day, and welcome to the Prosperity Bancshares First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche, Executive Vice President and General Counsel. Please go ahead, ma'am.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares First Quarter 2026 Earnings Conference Call.

This call is being broadcast live on our website and will be available for replay for the next few weeks.

I'm Charlotte Rasche, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Senior Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President.

Also joining us this morning are Bob Franklin, Chief Executive Officer of Stellar Bancorp; Ray Vitulli, President of Stellar Bancorp; and Paul Egge, Chief Financial Officer of Stellar.

David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions.

Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC.

All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter 2026 conference call. The first quarter of 2026 was impactful for the company, and I'm excited to announce that during the quarter, we completed the merger of American Bank Holding Corporation on January 1, 2026, and completed the merger of Southwest Bancshares, Inc. on February 1, 2026, and announced the merger of Stellar Bancorp on January 28, 2026, for which we have now received all necessary regulatory approvals and expect to complete on July 1, 2026.

Additionally, we completed a core system conversion in February. We and others believe that Prosperity is doing the right thing. Prosperity has been ranked as one of Forbes America's Best Banks for 2026. And since the list's inception in 2010, was ranked in the top 10 for 14 consecutive years. Prosperity has also been recognized by Newsweek as one of America's Best Regional Banks and was ranked 15th in the S&P Global Market Intelligence top 50 U.S. public bank rankings for 2025.

In an effort to continue to enhance shareholder value, Prosperity Bancshares repurchased approximately 837,000 shares of its common stock at an average weighted price of $68.15 a share for a total of $57 million during the 3 months ending March 31, 2026.

Our net income was $116 million for 3 months ending March 31, 2026, compared with $130 million for the same period in 2025. The net income per diluted common share was $1.16 for 3 months ending March 31, 2026, compared to $1.37 for the same period in 2025. During the first quarter of 2026, Prosperity incurred merger-related expenses from the mergers with American and Southwest of $42.5 million or $0.34 per diluted common share. Excluding these charges, the net income was $149.9 million and net income per diluted common share was $1.50 for the first quarter of 2026. This represents a 9.5% increase over the $1.37 reported for the same period in 2025.

Our loans were $25.2 billion at March 31, 2026, an increase of $3.3 billion or 15.1% compared with $21.9 billion at March 31, 2025. The linked quarter loans increased to $3.4 billion or 16% from $21.8 billion at December 31, 2025. Loans increased primarily due to the mergers with American and Southwest. Excluding the loan increases due to the mergers and excluding the impact of the net charge-off, total loans decreased 1.2% or about 4.8% annually, that did include about $100 million plus in warehouse lending increase. So excluding that, the decrease would have been somewhat more.

The deposits were $32.6 billion at March 31, 2026, an increase of $4.6 billion or 16.4% compared with $28 billion at March 31, 2025. Our linked quarter deposits increased $4.1 billion or 14.6% from $28.4 billion at December 31, 2025. Deposits increased primarily due to the mergers. Excluding the deposits acquired from American and Southwest, our core deposits increased about 1.2% and public fund deposits experienced its normal seasonal decrease.

Prosperity has strong noninterest-bearing deposits of 32.4% of the total deposits as of March 31, 2026, with a cost of funds of 1.45% and a cost of deposits of 1.32% compared with 1.38% for the same period last year. Our net interest margin on a tax equivalent basis was 3.51% for 3 months ending March 31, 2026, compared with 3.3% for the 3 months ending December 31, 2025. Obviously, the net interest margin was affected by the mergers but it was also impacted by the repricing of assets as we predicted and mentioned during previous calls.

Our asset quality, our nonperforming assets totaled $122 million or 33 basis points of quarterly average interest-earning assets as of March 31, 2026, compared with $150 million or 46 basis points of quarterly average interest-earning assets at December 31, 2025. The allowance for credit losses on loans and off-balance sheet credit exposure was $421 million at March 31, 2026, compared with $386 million at March 31, 2025. The allowance for credit losses on loans increased during the first quarter of 2026 due to the mergers of which $47 million was attributable to the American merger and $43 million was attributable to the Southwest merger.

Excluding Warehouse Purchase Program loans, the allowance for credit losses on loans to total loans was 1.61% at March 31, 2026, and that's compared with 1.67% at March 31, 2025. Our quarterly net charge-offs were $41 million, the largest amount in our bank's history. This has mitigated somewhat by the total being comprised primarily of two credits both of which were unique in nature and we believe do not represent a trend in the potential future losses. This is evidenced by the lack of any material additions to nonperforming loans in quarter 1, 2026, and only two nonperforming relationships of more than $10 million.

Both charged-off credits were generated out of our Dallas office. Both loans were shared national credits. However, both were initially originated and syndicated by us before the loans were moved to much larger banks that were willing to provide modified loan structures that we were not. The larger charge-off of approximately $30 million was to a start-up insurance company. Once that loan was moved and syndicated, Prosperity purchased a percentage of that loan back, although it was a smaller exposure than we previously had.

While the borrower had allegedly a strong sponsor that is well known in the industry with the history of backing its investments, it failed to do so this time. The smaller charge-off with a customer who legacy banked for over 15 years and is reflective that in lending money, sometimes things just don't work out.

With regard to acquisitions, as previously mentioned, the merger of American Bank Holding Company was completed on January 1, 2026, and the operational integration is scheduled for September 2026, and the merger of Southwest Bancshares was completed on February 1, 2026, and the operational integration is scheduled for November of 2026. We are fortunate to have American and Southwest associates on the Prosperity team.

We are excited about our pending merger with Stellar Bancorp and expect to complete the transaction on July 1, 2026. While we continue to have conversations with other bankers regarding potential acquisition opportunities, we remain focused on the completion of the Stellar merger and the integration of all three transactions.

Texas and Oklahoma continue to benefit from strong economies and are home to 57 Fortune 500 headquartered companies. Texas also benefits from diversification in various industries, including energy, oil, gas, renewables, technology, manufacturing, trade logistics, major ports health care and finance. Further, it's business-friendly environment, no state income tax, population growth that supports spending and workforce expansion and key role in trade and cross-border commerce positions Texas well for 2026 and the future.

While Texas continues to outperform the U.S. on output growth, the labor market has cooled noticeably after years of rapid expansion. The growth in 2026 is expected to be steady, although the state's size, diversity and policy advantages position it well for a rebound.

Overall, I would like to thank all of our associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity and will continue to work hard to keep our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended March 31, 2026, was $321.2 million, an increase of $55.8 million compared to $265.4 million for the same period in 2025, and increase of $46.2 million compared to $275 million for the quarter ended December 31, 2025. The net interest margin on a tax equivalent basis was 3.51% for the 3 months ended March 31, 2026, an increase of 37 basis points compared to 3.14% for the same period in 2025, and increase of 21 basis points compared to 3.3% for the quarter ended December 31, 2025.

Excluding for accounting adjustments, the net interest margin for the 3 months ended March 31, 2026, was 3.44% compared to 3.1% for the same period in 2025 and 3.26% for the quarter ended December 31, 2025. The increase in net interest income and net interest margin during the first quarter 2026 is primarily due to repricing of earning assets and addition of American Bank and Texas Partners banks during this period.

The fair value loan income for the first quarter 2026 was $3.7 million compared to $3.1 million for the fourth quarter of 2025. The fair value loan income for the second quarter of 2026 is expected to be in the range of $3 million to $4 million. Noninterest income was $46.5 million for the 3 months ended March 31, 2026, compared to $42.8 million for the quarter ended December 31, 2025, and $41.3 million for the same period in 2025.

Noninterest expense was $217.3 million for the 3 months ended March 31, 2026, compared to $138.7 million for the quarter ended December 31, 2025, and $140.3 million for the same period in 2025. The linked quarter increase was primarily due to merger-related expenses of $42.5 million and the addition of American Bank and Texas Partners Bank during this period.

For the second quarter of 2026, we expect noninterest expense to be in the range of $176 million to $180 million. This projection does not include additional onetime merger expenses for the quarter.

The efficiency ratio was 59.2% for the 3 months ended March 31, 2026, compared to 43.7% for quarter ended December 31, 2025, and 45.7% for the same period in 2025. Excluding merger-related expenses, the efficiency ratio was 47.6% for the 3 months ended March 31, 2026.

The bond portfolio metrics at 3/31/2026 have a modified duration of 3.8 and projected annual cash flows of approximately $2.1 billion.

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

Thank you, Asylbek. Nonperforming assets at quarter end March 31, 2026, totaled $122.107 million or 48 basis points of loans and other real estate compared to $150.842 million or 69 basis points at December 31, 2025. Since March 31, 2026, $7.936 million of nonperforming assets have been removed or put under contract for sale.

For March 31, 2026, nonperforming asset total was made up of $108.714 million in loans, $136,000 in repossessed assets and $13.257 million in other real estate. Net charge-offs for the 3 months ended March 31, 2026, were $41.309 million compared to net charge-offs of $5.884 million for the quarter ended December 31, 2025. There was no provision to the allowance for credit losses during the quarter ended March 31, 2026. But $91.4 million total was added via the mergers with American Bank and Texas Partners bank. No dollars were taken into income from the allowance during the quarter ended March 31, 2026.

The average monthly new loan production for the quarter ended March 31, 2026, was $312 million compared to $314 million for the quarter ended December 31, 2025. Loans outstanding at March 31, 2026, were approximately $25.288 billion, compared to $21.805 billion at December 31, 2025. The March 31, 2026, loan total is made up of 38% fixed-rate loans, 28% floating rate loans and 34% variable rate loans.

I will now turn it over to Charlotte Rasche.

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

[Operator Instructions] The first question will come from Catherine Mealor with KBW.

I wanted to first to start out on the NIM guidance. It was great to see the NIM move higher. I know part of this was just the addition of these 2 acquisitions. But interested if you could just help us think about how you're thinking about the margin moving forward next quarter and then once you add in Stellar. And then maybe is there anything within the margin this quarter that felt onetime in nature, either some kind of onetime loan payments or anything like that, that we should be aware of that we should be rolling forward to next quarter?

I'll answer, Catherine. So we are pleased with our margin expansion this quarter. it was, like I mentioned, contributed from our asset repricing during the first quarter and addition of 2 banks to help us with the increase in the margin. But if you look at our rate track model, and it's like based on the static balance sheet, looking for the second quarter, we see that our projected margin for second quarter will be flat and a little slightly higher than the first quarter.

And the reason is that there was like -- there was several factors that impact in Q1. We saw continued repricing of earning assets, but we also had -- we recognized about $4 million of loan income from nonaccrual loans, which we don't expect in the second quarter. And also, I think the -- having fewer days than the calendar quarter helped as well -- historically helped our margin. So if those 2 things had an impact on it, but overall, we are very pleased with the expansion.

Do you want to go ahead and give them some kind of guide?

So we continue on the guidance. If you kind of long term, and I'm going to include the Stellar Bank in our model for 2026, I think what the model shows that we'll be exiting combined NIM around 3.70% and -- but for having full year of Prosperity and half year of Stellar, average model shows around 3.60% for 2026.

Okay. Great. And then on the bond, there was a big increase in assume you restructured the portfolios that you acquired. Is this a good run rate for the rent yield on the securities book or anything to be aware of there and how you're thinking about that going forward?

No, I think it's a good run rate. What we've done in the first quarter, we did in addition to bringing the bond book from the acquired banks, we also did buy some securities. That's why you saw almost $1.4 billion including bond portfolio. I think we also continue to buy. So from now on, we -- I see that the yield on bonds should increase a little bit than what we had in the first quarter.

Okay. And where did that $1.4 billion in securities -- what was the rate -- the new rate on that?

So I think it's between -- we were able to get between 4.50% and we were able to get around 4.85%. So it was kind of in between when rate is with the Iran war, the rate fluctuated, so we were able to secure some at 4.85%.

The next question will come from Manan Gosalia with Morgan Stanley.

Can you hear me?

Yes, we can.

All right. Sorry about that. So David, you mentioned the benefits of diversification in Texas. At the same time, you mentioned the labor market is kind of cooling right now. And then maybe if I add on to that, there's clearly a lot more competition, especially from some out-of-state banks. Can you put that together for us in terms of how you're thinking about competition overall, loan spreads, deposit rates, loan growth and just your bigger picture thoughts on the dynamics in the state?

Well, that's a big question. But even though it may be slower growth, there's probably still better growth than anywhere else in the United States. So I still think that Texas is probably the best place to be as far as growth goes. I mean there has -- it's really kind of a -- it's kind of split. Everybody complains about prices going up and when they go to the grocery store or they go buy gas or car that used to cost $60,000 now costs $100,000. And everybody complains about it, but when I talk to people, again, I think probably middle class and upper middle class, it still had to slow people down.

People still have a lot of money and they're still spending money. Probably it's affecting lower earning group than maybe the other group. But I think for the long run, Texas has still had tremendous growth. You're still seeing I mean every time California does a thing like they're going to tax people 5% on net worth, make it only makes states like Texas and Florida better. So for the foreseeable future, we still see it very good.

Talking about the competition, that is a big deal because you have a lot of banks that want to be in Texas, it's hard for them to get market share, and we're competing against them on loans on a day-to-day basis. And some of the bigger deals that we competed on where we were in the 6% price range, they were down in the 5.9% range. I understand that when we ever go into a new market, that's exactly what we do. We try to underprice something and try to get some market share. So that's what we're looking at from the out-of-state banks coming in.

On the deposit side, you still see them throwing sometimes if you're a noncustomer right now like Truist, you are advertising like a 4% rate on a money market rate -- on a money market account, we're closer to the 3%. So they're trying to buy the business. We understand that. At the same time, we have in acquiesce. We lost several big deals where we haven't come down on the price, we haven't come down on the price and we're still trying to maintain our margin, I think that we will continue.

And I think that overall, in the long run, we've been through this before. It's not our first rodeo. We'll continue to do good. Our partners, you could saw -- Stellar, they did much better than we did this time. And I think it just shows that things happen over a period of time. They were up over $200 million. where they might have been lagging before. And I think that's the same thing for us. We'll win. We have a number of big deals that we're looking at right now that we -- I think we've agreed to the price. We're just making sure that we want to do the deal. So I do see that.

Having said that, we have 3 mergers with banks. And if you look at it historically, I'd like to tell you that you're going to see this mid- to single digit loan growth or double-digit loan growth, and that just doesn't happen. I think that if we can stay flat, that's pretty good this year. I mean, because I think that as you do these deals, you just see some you see some change in that. And just historically, I'd like to say that you're going to be there, we're going to make it. But historically, that's not happening. Kevin, you may have some comments on the deal or...

No, I agree with you, David. I think not to get too granular, Prosperity ex acquisitions has not had growth in the last couple of quarters. I think as I think about the wise to that, the market has gotten more competitive, particularly on very large construction deals, which we've always played a part in. The market has gotten cheaper in terms of the rates that they're willing to do those deals at and they come off levels of recourse, much lower levels of recourse. And we have not. We have not played in that game. And it's cost us. We've missed out on some deals.

I think to augment that or to fight that off a little bit. We're likely to set aside a bucket of, say, $750 million to $1 billion worth of commitments where we'll play in those markets with certain clients, very well-known folks that have been clients for a very long period of time. So I think we'll fight some of that off ourselves ex what happens in the acquisitions. As David said, and this is no surprise to any of you. When we do acquisitions, it is more likely than not that there's some asset runoff from those acquisitions in the ensuing 18 months. It's been the case time and time and time again. And we've got 3 of them.

So we'll be fighting those headwinds for the next year to 15 months, 18 months, and I think if we are flat during that period of time, overall, we'll have done pretty well.

And I'd even say some of the out-of-state banks are offering 5.8%, 5.9% and we can get 4.85% on a security with about a 4-year average life. Pretty hard to pay the lender, reserve some money for loan loss and really go that low. But again, at the same time, if a customer is able to bring in, it's just not a dry relationship and that customer is really able to bring over a positive relationship that's a whole different story, and we'll give you credit for that, and we'll probably get as low as that if it's not a dry relationship.

But all in all, we still stick with the story that the core deposits are really what makes the bank and that's where we're focused on and we're really focused on increasing net interest income and net income for the shareholder over the next 1 to 2 years. And I have to tell you right now I'm probably more excited than I've ever been in the last 3 years about our future. When I look at the numbers, I mean, we were going -- as you all know, our net interest margin was what it got as low as 2.75% or something like that, 2.90%.

Our numbers that we're looking at right now, we're really looking at some really great net interest margin going forward. I think we're looking at probably for the next 2 years, net interest income increasing and so I'm terribly excited for where we're at right now today.

I appreciate all the color. I know that was a fairly broad question, but I appreciate the fusions. So maybe just a follow up there, given the excitement about the forward NIM expansion and forward growth as well. Maybe how are you thinking about additional M&A from here? Does it make sense to integrate the current deals first? Or do you think that there's room to pursue another one if you get something that makes sense for you?

I think the answer that we all need to be doing is these 3 deals are very important. I mean we're going from a $38 billion bank to a $53 billion, $54 billion bank. And so that's -- so our main focus right now is the operational integration of these three deals. And so that's why when we talk about the things we talk about, our whole focus. I mean I don't think you'd ever want to say never on anything. At the same time, our primary focus is bringing these 3 deals together and hitting those consensus numbers that you analysts all have out there, and we feel really good about that.

The next question will come from Dave Rochester with Cantor.

Just as a part of your view on NIM going forward, how are you thinking about the cost of deposits here in a scenario of no rate cuts? Do you think you guys can hold deposit costs here? Can you shift them lower? And then I was just curious where you're seeing new loan yields come in as the remaining fixed rate loans are still rolling off here?

I don't think that -- if interest rates stay where they're at, our net interest margin targets are really good. I mean I think also back talk to you just a minute ago in about a 3.6% average for this year, 3.7% exit. 2027, I think you guys have about 3.8% net interest margin 3.8%. I think if interest rates stay where they're at, we'll hit that or even higher. If interest rates go down 100 basis points, we're probably -- we'll come off of that to some degree. But again, I don't think that we're a lower deposit rates any.

And I think our numbers show really higher net interest margins and maybe you do deals. But at the same time, I don't know that I really believe them because as interest rates come down, we never went up as high on a lot of our customers as we -- as they could have gone somewhere else so I don't know that we'll come down as fast or at the same time. So I don't if that gives you any color or not.

I'll just add a little bit on the deposit side of it. So we haven't decreased or changed our rates for the past few months now. And based on what we see on the deposit growth we mentioned on our core deposit growth, I think we're holding our own with the current rate. I know it's -- a lot going to depend on the competition. But at the current rate, we believe that we don't need to increase the rates. So they might come down rate overall because we have some higher CDs getting repriced. So we'll see some overall deposit rate or cost of deposits come down a little bit, but not significant, but it will do it because of repricing.

But overall, I think as long rate doesn't change, we should be at this level or lower by ourselves. But if you add Stellar, Stellar has a little bit higher. But in the combined one it is still going to be a cost of deposits around 1.40. That's what our model shows. I think on the loan pricing, they want to know on loan pricing, I think if you...

The loan repricing, I mean I think we're kind of good where we're at. I mean I don't see us -- I'm not saying we won't jump to maybe 1 or 2 deals to compete on the 5 or under 6. But for the most part, we're really not going to play that game. And we'd rather buy securities, I think, than just try to play a game just to have a dry relationship to beat somebody out and take a lot of risk.

So new loan yields or where the book is right now? Are they still a little bit higher?

A little bit higher.

Little higher.

Okay. Maybe just one more switching to the loan trends, your thoughts there going forward? I know you mentioned maybe flattish loans this year with all the deals closing, maybe that carries into next year a little bit in terms of like a little bit of a runoff that you normally get. But just looking at Stellar this quarter, which had a solid loan growth quarter. It seemed pretty decently broad-based. I was just thinking about you guys next year and the growth trajectory. I was wondering if you think that with Stellar in the fold, after you have that little bit of runoff, are you thinking that maybe your organic growth profile can improve from where it has been over time?

Yes. Post any, what I would call normal for us, post-acquisition runoff, I do think, particularly with Stellar hitting its stride that we'll return to kind of low to mid-single-digit kind of stuff, but it's going to take a while.

I think even American Bank and Texas Partners are talking, they're excited with where their position is too and has done pretty good.

We just want to be cognizant of the fact that it is typical for us to have some loan declines post acquisitions, and we've done 3 acquisitions, and we want to be realistic about it.

The next question will come from David Chiaverini with Jefferies.

So following up on the deposit side was sort of deposit growth should we expect? Should it kind of trend in line with loans and kind of flattish and the loan-to-deposit ratio stays in the low 70s? How should we think about the deposit side?

I think our deposit side is really not going to be effective. We should have our normal organic growth on the deposit side with the exception of seasonal fluctuations with public funds. And I think we've always done at least 2% to 3% more. Now having said that, one of the banks that joined us has some really larger accounts that really operate under their Treasury -- that are treasury -- their treasury system that they have. They feel comfortable that we -- that they won't lose any of those accounts.

On the other hand, it's always possible that there's -- there's a handful of those accounts that are $30 million, $40 million, and that could always affect us to some degree. But for the most part, I mean, all the banks that are joining us were in Texas. We should have growth on the deal. I think that -- I think that we're fine. You'll still continue to be -- still can see core deposit growth with seasonal drops with public funds.

As far as the loan-to-deposit ratio is, I think I didn't answer that. We have a policy that we -- it doesn't say we can't go above 85%. But once we start hitting -- we hit 85%, we have to go in front of the Board and discuss that with them. So unlike a lot of the other banks or a number of the other banks that are at 90% and 100%, I don't think you'll see us doing that. I think we feel more comfortable at the 75% and 80% for the most part.

Got it. And then shifting over to the capital side. Can you talk about the Basel III Endgame potential benefit to your capital ratios and then your buyback appetite from here the last couple you've been a little bit more active than you had been historically. How should we think about that going forward?

I think that we're going to make a lot of money or at least it looks like we're going to be making a lot of money at least combined. And so I think that as long as -- whenever we see this, you'll see the price. You saw the buyback when the price of the stock was, I forgot what the average time was $68 or something like that. So I think you'll still see us when the price is an opportunity like it is right now, you'll see us continue to buy back. And again, we have a lot of capital even with the combination of Stellar Bank, and I know we're paying 25% or 30% cash on that, but we still have a lot of capital. And I think going forward, you'll see us continue to buy back if prices stay where they're at, for sure.

Yes. And on the Basel III benefit, we did high-level analysis of impact of the mortgage loans, and it will benefit, but I think it's when we calculate maybe 50 basis points on the capital, that what we saw benefit on the -- once the rule passes on the mortgage loans.

But from a capital standpoint, I mean we're in...

Kind of benefit.

When we look at a pro forma based on our combined earnings of both of these banks even after you take out dividends, you're talking about $500 million or $600 million a year in excess after dividends to do something with. So we have a strong capital going in, and I think we'll have a stronger capital going forward, really and the ability to purchase our own stock back.

The next question will come from Matt Olney with Stephens.

I want to go back to the Stellar Bank discussion. And I think you mentioned the improving loan growth at the bank, but also it looks like the adjusted net income at Stellar Bank was almost $30 million in the first quarter, ex a few nonrecurring items. If I go back to the original assumptions when the deal was announced back in January, it looks like the earnings projections from Stellar for the full year was $113 million. So it seems like you're tracking well above that number, if I just annualize that first quarter. Was there anything else unusual or anything else to consider with that first quarter net income number of almost $30 million? Or is that a clean number that we can carry forward from here?

Matt, thanks for the question. It is a clean number. We actually feel great about the earnings prospects entering into the second quarter, taking the cumulative nature of the growth that we had in the first quarter. So we feel good about the path that we're on and what that implies.

Okay. I appreciate that.

We're paying we paid down on April 1, the last remaining piece of sub debt. So we actually see benefit to margin that will come back -- come out as a byproduct to it.

Okay.

For those of you who don't know, that was Paul, CFO at Stellar.

Great. And then I think you completed the core system conversion at the bank in February. I think there was a mention earlier on the prepared remarks, but I missed it. Just remind us of the time line expectations to complete the remaining conversions for each of the acquired banks?

Yes. First of all, the DNA conversion was a huge deal. I don't want to just keep talking about it, but our bank was more on a back system. And over the weekend, if you had a long weekend by the time we ran everything back through and brought everybody's account back up to date, we may be up by Monday morning, and we may not. And under this new system, we can update everything in about 1.5 hours. So that just tells you how much capacity we have.

It was a real big deal to the years to complete. And so I think when you look at our bank and we had 3 major deals. We had a DNA conversion. We've had our plate full. So the team has done just a miraculous job. And so going forward, we're looking at September operational integration for the American Bank. We're looking at a November operational integration for the Texas Partners Bank and for Seller, we're looking at March 8, I think.

The next question will come from Brett Rabatin with Stonex Group.

I wanted to go back to the credits, the 2 credits you guys talked about and you guys obviously have a historical very low net charge-offs, really strong asset quality. So the 2 this quarter were obviously an outlier. But I was hoping maybe for any other color, you mentioned one was an insurance company. Was there a fraud involved? Were these loans from past acquisitions? Was there anything unusual that created the loss exposure relative to what you modified as collateral?

Yes. The big one -- this is Kevin, Brett. The big one was an insurance company. They were in the business of selling Medicare products, so Medicare Plus Medicare Advantage kind of products. And if you want to get to the core of it, their business was doing pretty well for the first 18 to 24 months and not to get too deep into the accounting, but if you call them and you did a Medicare Advantage program through them and your annual premium for the year was, let's just say $240 to make it easy, $20 a month, they would accrue $20 for that first month paid by the government largely. And then the rest of it would be booked as a receivable. So $220 in account receivable.

In that business, what you do is you model and project what your account turnover is going to be. So you may wake up 3 months from now and cancel that policy because you think you can get a better deal or you want a different deal. You're unhappy with the deal you've got. So there is some modeling of the turnover of your receivables of people canceling. And what happened here was the cancellation rates were way higher than the model reflected. And that causes obviously two things: a write-down of your receivables by the remaining balance that has not been accrued in the income, and it can cause you to have to restate prior period earnings. And that was the big factor in that overall deal.

The deal was backed by a very large, very well-known private equity firm that our bankers have had some experience with in the past, and they have typically backed their deals. In this case, at least to this time, they have not backed the deal. I think we began talking about this deal probably in the third quarter of last year. We talked about it again in the fourth quarter, and we chose to write things down this quarter all the way. So that I would call that a one-off in our case.

If we look across the remaining nonaccruals in our book, I think the largest nonaccrual loan we have is $10 million. So there's nothing else out there that looks anything like this. This is truly a one-off. David mentioned the other one has been a long-time client. It was a legacy client in the Buy Here Pay Here car space. High-performing company for 15, 18 years with us that we banked them. And they got a little more aggressive in their business model coming out of COVID, poor timing. And I would differ the first one, which was a one offer and probably should never happen again, a loan we probably should not have made, easy to say today.

The second one is the loan we would have made today, and it's just basic business. The guys changed their strategy a bit. The strategy was not successful, and it costs them dearly and it cost us a bit. So I'd say one is a way out there. Nothing else looks like that in the portfolio kind of thing that we're worried about. And the other one, look, it was a bad day.

Well, you'd have to say the original insurance deal, we did have the backing of this big sponsor. We didn't want to release it. They wanted to release and so a huge major, major bank took it and they release the guarantee on it. Our stupidity is enough -- us being stupid, we bought a percentage back. However, a lesser percentage than what we had originally.

Okay. That's very detailed color. I appreciate that. And then, David, I wanted to ask, when I look at your map, I mean you're pretty dense in Texas. Is strategy from here, you're obviously very focused on integrating these 3 acquisitions. But would the strategy from here be more density? Or would you look to new markets? Are there markets -- are there other smaller markets in Texas that might have great deposits, other community banks? Just any thoughts on how you see the environment from that perspective.

As we mentioned before, first of all, I'd say we don't want to grow just to grow. But having said that, scale has just become very, very important. I look at our income statement, and I see just buying equipment, technologies, like $2 million a month, sometimes, that doesn't count what the technology we spend, $75 million, $80 million, $90 million a year on that. So scale is important, but we don't want to say we grow to grow. We still, as we mentioned earlier, I think that we really think that a real bank -- the real value in it is the core deposits, where if you don't want to grow loans that you can still buy bonds and still have a good 1.5% plus return.

I think that we've all talked about it. We like where we're at right now. But we also -- we still -- again, our primary objective is still to put these 3 deals together. But our real -- our deal is to really be in -- we grew up in the times when you had Texas Commerce and our First City and an Allied and all that. And it's still our plan and goal to continue to make one of the Texas biggest banks, not just because it's big, but they can offer services from a technology standpoint to the biggest customers to the smallest customers. And we'll continue to do that, but we're going to do it at a pace -- we're not going to do it at a pace until we really can put these deals together and really show you that everything that we can make the $6 or something since this year, when we make the $7 or something since next year.

We want to show everybody that we can do that. And that like in the past, when we promised that we'd bring in that margins up. We want to do what we say that we're going to do. But but the future is still building that larger bank that we want to be for everybody.

The next question will come from Janet Lee with TD Cowen.

I appreciate the near-term guidance you provided on expenses for the second quarter, just given a lot of moving pieces with some cost saves at Stellar in the third quarter. Is there some sort of fuller expense guide you could give for the year or where the efficiency ratio could trend? Is it -- is this mid-40s level a good place to be? Or how should we think about the trajectory?

Janet, I don't know if I can give a specific guidance long term because we're still trying to integrate two banks and then Stellar coming in the second half of the year. But what we said earlier on at least two banks that we merged, cost savings that we announced, that we are working toward it and we're going to achieve those cost savings. I mean, we're already getting some of the cost saves now, but most of them come when the integration of the system, what we mentioned in September, November, then when we're going to see that.

Also, with the Stellar addition, we're going to probably see most of the cost savings next year. And with Stellar 35% cost save, we feel very comfortable about the cost saves on that side of it. So if you combine all together, I think the goal for us to get back to the -- with all the cost savings and get back to the mid 40s that will we ran historically, 44%, 45%, 46%. So that's the goal, and I think it is achievable.

Got it. That's fair. And you said the loan accretion income expected to stay around this $3 million to $4 million range on the loan side in the second quarter. Could you remind us where this could go with the Stellar the third quarter? Or could you maybe provide a projection around the full PAA as opposed to just loan accretion?

Yes. On the -- for second quarter, yes, it's a saying $3 million to $4 million. With the addition of Stellar, I mean, it can a lot of change, right, it depends on the market rate environment when we do merge with Stellar July. So it's kind of hard to say. But I'll tell you when we did our projection when we put together in January, we said that we're probably going to expect about at least on 2027, about $10 million to $12 million of interest -- fair value income from Stellar, that's a pretax number. That's what we estimated. But again, a lot of can change depending on the rate environment in July.

That was for loan and securities.

For loans, yes, and security is going to reprice. I think Stellar was about, what, 3.5% margin. So they're going to reprice a little bit and maybe 100 basis points or so.

Got it. And the 3.70% NIM that was the target for the...

Yes, that was -- yes, that's going to be our exit, meaning the end of the year combined Prosperity Bank and Stellar together.

With 3.6% average for the year.

For the year because we can just going to have Stellar for half a year.

The next question will come from Jared Shaw of Barclays.

I guess just on the $30 million charge-off that you had highlighted, was there a specific reserve associated with that prior to the charge-off?

Yes. For that specific, we had a reserve half of it last year because I think when we kind of start seeing that and we reserved rest of it and charge off this one. That's why we didn't see any of the P&L impacts this quarter because we provisioned half last quarter and we charged off the remaining half this quarter.

Okay. Okay. And then on the Stellar deal last quarter, a couple of times, you mentioned that just given their underwriting and pricing, you didn't expect to see any runoff from that portfolio. But today, it sounds like maybe there could be some run off. What should we assume is potentially at risk from the stellar portfolio of running off? And I guess what changed to change your view on that?

Kevin can jump in a minute, but again, I think we're just trying to prepare everybody that you have Stellar, you have Texas Partners Bank and American that just historically that we have lost loans through these deals. And again, we don't want to give somebody a deal that says, okay, we thought it was great that they increased $200-and-something million. But again, we don't want to come here and tell you we're going to have a 5% or 6% loan growth when historically, we've seen things that I guess we're just being cautious really.

Yes. I'd say it's cautious. I do think they underwrite much like we do. It does take -- and again, I went through this on the other side in 2019 with a large lending staff. It takes 6 to 9 months to get integrated into the system and how the underwriting is done at prosperity at the forms in the process. it takes a while, and then lenders get used to it and things stabilize.

I think it's even more than that, Kevin. I think even I look at what we did in our production this first quarter. And it was definitely impacted by doing a DNA conversion, people trying to get their loans to the loan committee doing working with 3 different banks to put it all together. So I think there's -- when you're doing this, I mean, we increased our assets, you can do the math between $38 million and $54 billion. That's a lot of increases, so to try to massage and put all this together, things are not going to be just exactly the way they were.

And if you -- and I would say this that if you think they're going to be exact complex, you're going to have this exponential growth I think it would be a mistake. I think right now, we really need to focus on putting all this together, making sure everybody fits in good and take our time in doing it right.

Just to clarify 1 thing in my mind, I call provision, but that's 1 I meant like specific results, we put specific reserve on that loan provision expense.

The next question will come from Jon Arfstrom with RBC Capital Markets.

I might have missed this, but Kevin, can you touch on the warehouse lending business and your outlook there?

Yes, warehouse as you know, Jon, averaged $1.207 billion, I think, for the quarter, but we closed out at $1.430 billion something, maybe $1.432 billion or $1.433 billion. So it ended up the quarter really strong. It's backed off a bit from there. I think yesterday, it closed at about $1.240 billion, $1.238 billion, something like that. I think it will be higher on average in the second quarter than it was in the first. So I'll call it $1.3 billion to $1.25 billion.

Because even our own mortgage company, we're finally seeing where they're making money, and most of our mortgage companies are doing pretty better. Yes, so it probably ought to be a little better.

Okay. Good. And then maybe also, Kevin, you talked about construction and being a little more cautious there due to competition, but there was still decent growth for the quarter. Was that acquisition-driven? Or is there activity that you guys are putting on the balance sheet now?

No. Construction has been weak. What I was saying is we're losing out on a lot of construction deals because of the competition in the market is willing to do it with less recourse and way cheaper spreads to SOFR and that we are looking at establishing a bucket for a handful of clients that would be our A+ rated clients where we might be willing to do things at a little cheaper rate and a little less recourse.

Yes. I mean, the bottom line is we lost some really larger deals, $100 million-plus deals because, again, we just weren't willing to go down to the pricing and the terms and conditions that those guys are willing to do and we could buy on, not have the risk to still make the money.

Okay. David, one for you. That's maybe an odd question with your Stellar team in the room, but you got beat up last quarter on the pricing and during the quarter on the price paid. Just curious how you're thinking about it a quarter later. It sounds like you still believe the accretion is there and the 2027 EPS numbers are there. But and maybe Stellar is doing better than planned. But how are you feeling about this quarter later? Just it's a big deal, obviously.

I couldn't be happier. I think it's a great deal. I mean I think there's a huge difference between 1 bank and another bank. And I think I'm not just saying is because these guys are in here. If we were ever to sell our bank, I wouldn't sell for anything less on a multiple that these guys that we pay for. So I think it's top-notch. I think you are going to -- I thank all the analysts -- in the end of 2027 when we make the money, we're going to make, I think everybody going to say, I know it the whole time. But right now, I got to prove it. But you guys are all going to say, well, we knew it the whole time, and that's when the stock is going to go to $95 or $100. But which I'm telling you it's going to happen, and I feel better than I have in 3 years about all these different deals.

Yes, Jon, this is Kevin. Look, we did get a little dinged up, right? We -- the market thought we paid a little too much, and they thought -- they thought we were using estimates that were greater than the market had for 2026. But I think we did it based upon a deep dive of due diligence and knowing these people really, really well in the course of putting the acquisition together and feeling comfortable with their internal numbers.

And it's really rare for us to put out numbers that are above the consensus when we're doing a public deal. It's rare for anybody to do. We did it. And I think they've proven up with a clean quarter that's really good this quarter. And my guess is when we look back at all of this, the estimates that we used for Stellar for 2026 are going to be better than the one -- they're going to -- we're going to end up doing better than even the ones we.

Well, I would even go a step further that and Bob can jump in if he wants, but I know this goes from American and probably for Bob, both, if they wouldn't have got the price they wouldn't have done the deal. I mean they know what they're worth. Bob, you may jump in and say that, but I wouldn't. I mean, I wouldn't do a deal if we knew we were worth more.

Absolutely, David. I'm kind of thinking now we didn't pay it enough.

I knew that was...

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

Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

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

Good morning, and welcome to the Prosperity Bancshares Fourth Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Charlotte Rasche, Executive Vice President and General Counsel. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Fourth Quarter 2025 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks.

I'm Charlotte Rasche, General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. Randy Hester, our Chief Lending Officer, is unable to be here today.

Also joining us this morning are Bob Franklin, Chief Executive Officer of Stellar Bancorp; Ray Vitulli, President of Stellar Bancorp; and Paul Egge, Chief Financial Officer of Stellar Bancorp. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality.

Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws and as such, may involve known and unknown risks, uncertainties and other factors, which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC.

All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

Thank you, Charlotte. We had a stellar quarter. I would like to welcome and thank everyone for listening to our fourth quarter 2025 conference call. For the year ended December 31, 2025, we had net income of $543 million compared with $480 million for the same period in 2024, an increase of $63 million or 13.2%.

Our net income per diluted common share was $5.72 for the year ending December 31, 2025, compared with $5.05 for the same period in 2024, an increase of 13.3%. The net income was $139.9 million for 3 months ending December 31, 2025, compared with $130 million for the same period in 2024, an increase of $9.8 million or 7.6%. Our annualized return on average assets and average tangible common equity for the 3 months ending December 31, 2025, were 1.49% on assets and 13.61% on tangible equity.

Prosperity's efficiency ratio, excluding the net gains and losses on the sale, write-down or write-up of assets and securities was 43.6% for the 3 months ending December 31, 2025. As mentioned, since 2024, we expected our net interest margin to increase, and it has. The net interest margin on a tax equivalent basis was 3.3% for the 3 months ending December 31, 2025, compared with 3.05% for the same period in 2024 and compared with 3.24% for the 3 months ending September 30, 2025.

During the year ending December 31, 2025, under its 2025 stock repurchase program, Prosperity Bancshares repurchased approximately $157 million or 2.34 million shares of its common stock at an average weighted price of $67.04. Our loans, excluding warehouse purchase program loans, were $20.5 billion at December 31, 2025, compared with $20.7 billion at September 30, 2025, a decrease of $249 million. We continue to see good demand for loans. However, we are not willing to compete with the terms and conditions being offered sometimes by out-of-state competitors on some of the larger deals.

Our overall loans have been impacted by efforts to outsource some less desired loans acquired in previous transactions also. Deposits, as mentioned in our last quarter, we expected deposits to increase due to seasonality, but the increase exceeded our expectations. Deposits were $28.4 billion at December 31, 2025, an increase of $700 million from $27.7 billion at September 30, 2025.

Our nonperforming assets totaled $150 million or 46 basis points of quarterly average interest-earning assets at December 31, 2025, compared with $119 million or 36 basis points of quarterly average interest-earning assets at September 30, 2025. The increase in nonperforming assets during the year was primarily comprised of 2 loans made in our middle market lending group and well-collateralized real estate loan acquired in one of our recent acquisitions, all of which Kevin will be able to answer and address in the Q&A.

The allowance for credit losses on loans was $333 million and the allowance for credit losses on loans and off-balance sheet exposure was $371 million as of December 31, 2025. Our allowance for credit losses on loans still stands strong at 2.21x of our nonperforming assets. I'm excited to announce that on January 1, 2026, Prosperity completed the merger with our new partner, American and its wholly owned subsidiary, American Bank headquartered in Corpus Christi, Texas.

In connection with that transaction, we are pleased that Pat Wallace, the daughter of one of the founding families of the bank; and Steve Raffaele, the CEO of American Bank, have joined our bank Board of Directors. We have also received all the regulatory and shareholder approvals for the merger with Southwest Bancshares, the parent company of Texas Partners Bank and expect the transaction will be effective on February 1, 2026.

In connection with the Southwest deal, we are pleased that Gene Dawson, Interim Chairman of Southwest Bancshares and Chairman of the nationally recognized Pape-Dawson engineering firm will be joining our bank Board of Directors. To further add to our San Antonio presence, Charlie Amato has joined our bank Board of Directors. In addition to his successful business, Charlie previously served as a Board member of the Federal Reserve Board of Dallas, San Antonio Branch and Region of the Texas State University system and as an investor in the San Antonio Spurs.

There's much more, but there'd be too much more to go over with all he's into. When Prosperity went public in 1998, we were a small community bank in rural Texas with less than $500 million in assets. For 27 years, we have remained disciplined and focused on the same strategy, delivering shareholder value by prioritizing -- I'll skip that low-cost core deposits, operational efficiency, sound credit quality and growth via opportunistic M&A.

This morning's announcement that Prosperity is acquiring Stellar Bancorp is consistent with that strategy, and this transaction marks an important milestone for the company. Our combined Houston Bank deposit rank goes from #9 to #5, making us the largest Texas-based bank in the market and second largest bank by deposits in the state.

Importantly, Stellar is a well-run bank with similar credit discipline and an envious noninterest-bearing deposit mix. As a result, we view the transaction as a low-risk combination that significantly enhances our Texas footprint. I would like to thank all our customers, associates, directors and shareholders for helping build such a successful bank. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmano, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended December 31, 2025, was $275 million, an increase of $7.2 million compared to $267.8 million for the same period in 2024, an increase of $1.5 million compared to $273.4 million for the quarter ended September 30, 2025.

The net interest margin on a tax equivalent basis was 3.30% for the 3 months ended December 31, 2025, an increase of 25 basis points compared to 3.05% for the same period in 2024, an increase of 6 basis points compared to 3.24% for the quarter ended September 30, 2025. Excluding purchase accounting adjustments, the net interest margin for the 3 months ended December 31, 2025, was 3.26% compared to 3% for the same period in 2024 and 3.21% for the quarter ended September 30, 2025.

Fair value loan income for the fourth quarter 2025 was $3.1 million compared to $2.9 million for the third quarter of 2025. The fair value loan income for the first quarter of 2026 is expected to be in the range of $3 million to $4 million. Noninterest income was $42.8 million for the 3 months ended December 31, 2025, compared to $41.2 million for the quarter ended September 30, 2025, and $39.8 million for the same period in 2024.

Noninterest expense was $138.7 million for the 3 months ended December 31, 2025, compared to $138.6 million for the 3 months ended September 30, 2025, and $141.5 million for the same period in 2024. For the first quarter of 2026, we expect noninterest expense to be in the range of $172 million to $176 million. This projection includes 3 months of American Bank expenses and 2 months of Texas Partners Bank expenses.

In addition to this first quarter guidance, we will also have about $30 million to $33 million in onetime merger-related charges for those 2 acquisitions. We expect to realize most of the previously announced cost savings related to American Bank and Texas -- Texas Partners Bank after the system conversions, which are scheduled later this year.

The efficiency ratio was 43.7% for the 3 months ended December 31, 2025, compared to 44.1% for the quarter ended September 30, 2025, and 46.1% for the same period in 2024. The bond portfolio metrics at 12/31/2025 have a modified duration of 3.7 and projected annual cash flows of approximately $1.9 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality.

Thank you, Asylbek. Our nonperforming assets at quarter end December 31, 2025, totaled $150.842 million or 69 basis points of loans and other real estate. compared to $119.563 million or 54 basis points at September 30, 2025. This is an increase of $31.279 million.

Since December 31, 2025, $6.631 million of nonperforming assets have been removed or put under contract for sale. The December 31, 2025 nonperforming asset total was made up of $137.534 million in loans, $12,000 in repossessed assets and $13.296 million in other real estate.

Net charge-offs for the 3 months ended December 31, 2025 were $5.884 million compared to net charge-offs of $6.458 million for the quarter ended June 30, 2025. This is a decrease of $574,000 on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended December 31, 2025.

In addition, no dollars were taken into income from the allowance during the quarter ended December 31, 2025. The average monthly new loan production for the quarter ended December 31, 2025 was $314 million compared to $356 million for the quarter ended September 30, 2025. Loans outstanding at December 31, 2025, were approximately $21.805 billion compared to $22.028 billion for September 30, 2025. The December 31, 2025 loan total is made up of 35% fixed rate loans, 35% floating rate loans and 30% variable rate loans.

I will now turn it over to Charlotte Rasche.

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

[Operator Instructions] The first question is from Catherine Mealor with KBW.

I wanted to start just on the Stellar acquisition. Congratulations on that. I noticed in the slide deck, you're using a different estimate for Stellar versus consensus. It looks like it's about a $2.20 number versus $2 for consensus roughly. Just curious what's driving that difference and your confidence in that level of earnings coming over from Stellar. Thanks.

Catherine, you probably saw their fourth quarter earnings come out that's really going to influence that. But Paul is here with us today from Stellar, and I'll let him go over with you.

Absolutely. We've been thrilled with our growing momentum in the back half of 2025 and what that portends for 2026. We've been able to grow our earning assets in the back half of the year pretty meaningfully, all while maintaining and growing our core NIM, and that paints a great picture for 2026. We actually feel great about the momentum we're taking from a growth perspective into 2026 as well.

So if you were to take 2024 just -- or pardon me, the fourth quarter, just to be simplistic, and put a kind of more normalized provision onto it and annualize it, you'd be talking about a $0.55 per share EPS run rate, which would annualize to $2.20. Now we enter 2026 with about $100 million more in interest-earning assets than our average for the fourth quarter of 2025. That's going to be -- help assist us and then we'll have the first kind of full quarter benefits of the rate changes, the Fed rate cuts that occurred in the fourth quarter.

So all that paints a really good picture for us to maintain and actually upside to the go-forward earnings run rate. And then I think the last point I'd note is we assume a more normalized consensus level of net charge-offs. And both us and Prosperity have a great track record of delivering meaningfully lower net charge-offs, which would mean -- which would drive lower levels of credit costs and potential beats to the numbers we put forth.

Okay. Very helpful. And then as we think through growth moving forward, so it looks like part of that is assuming better growth at Stellar, which is great. Typically, from Prosperity, what we've seen with past deals is you do an acquisition, then you shrink a little bit, and that's been part of the headwinds that we've seen at growth on the Prosperity recently. So why is this acquisition different? And what kind of forecast for growth in '26 should we expect for Prosperity?

I think this is different. We -- Bob and I have known each other for probably we romance for 10 years plus. And again, we're across the street because we can throw rocks at each other. So to me, it takes a lot of risk out of a transaction like this. I think we've talked about doing this for a lot of years. It makes a lot of sense. There's -- I think there will be efficiencies through this.

And I would say, as far as growth going forward in 2026, I would say that our plate is pretty full with the transactions that we have. I think that we're going to primarily focus on the integration of the 3 banks that we have. So -- and having said that also, I think Stellar Bank is very much like our bank. So with some of the banks that we buy, we know that either their deposits are extremely high or their loans or something else wrong, we have to get rid of them. I don't see that in the Stellar acquisition. I think that they're very similar to us.

So I feel good about that. But again, I think our focus is really going to be taking care of our customers, taking care of our associates and actually putting all these 3 deals together this year. That will be our main focus.

Our next question is from Manan Gosalia with Morgan Stanley.

David, maybe can you help us think about the price of the acquisition? 18x 1 year forward does feel a little high. But I know you mentioned the higher level of NIB and the synergies. Maybe if you can help us appreciate all the synergies and growth prospects that the combined banks have. And also how you think through the earnback period, 4.5 years earnback is a little bit higher than what you've done recently?

Yes. I can start off and saying I think -- I don't know, if this is a good analogy or not, but I think Banks are a lot like cars. I can drive a Ford Pinto or I can drive a Range Rover. The Pinto will probably get me wherever I need to go, and I can probably throw it away and not lose a bunch of money when it's gone. I can really enjoy and have a Range Rover that's going to really be something and have a good resale value.

This -- there's a big difference in the price of things, and I wish -- I think some people have a harder time doing that. A bank that's good deserves a premium price. These guys -- it's just -- it's a premium bank. And so the thing that we really look at is we say the price, but I look at it and I say, okay, in 2027, our combination will be earning $7.34 a share once we get all of this put together. And so at $7.34, if we trade just at 13x earnings, our stock value would be $95.42.

If we traded at 15x earnings, and that somebody may say, well, that's high. Well, I would just tell you the first bank in Colorado went for that much. You saw these other banks. And I can tell you, I could call up any one of the midsized banks underneath Bank of America or JPMorgan the guys underneath them, and they would offer us 15x earnings probably in a New York minute, which would indicate a price -- a value of our bank at least at $110 a share. So we paid a lot for it, but I would tell you, too, that it should be easy for anybody to see that the franchise value, not only is it accretive, but the franchise value is really enhanced by us being one of the largest banks in the Houston market.

So I think the combination of the earnings, the enhancement of the franchise value, and that's what sometimes -- I don't know what kind of -- how do you put a price on the enhanced franchise. I can tell you, it's significant. I think that anybody would want to probably acquire us as being one of the bigger banks in the state of Texas and the franchise that we have.

And so that's kind of the rationale behind it. It also -- it takes us from being a -- these -- all 3 of these deals, it takes us from having a 13% return on tangible capital. I mean we're looking at a 17% on return on average tangible capital in the year 2027. So not only did I like it, not only is it pretty, the metrics make sense for all of these deals. So that's kind of the rationale.

Got it. That's helpful. And maybe as you think about the capital deployment strategy from here, I mean, I guess you're now integrating 3 deals together. Is that it for now? Like would you focus on the integration for the coming months? And just given where the stock price is, is there more of a focus on buybacks? I know you guys upped the authorization yesterday. So maybe just help us think through capital deployment plans from here.

Well, let's say we're going to do any more deals. They've got me handcuffed in this room, so I can't get out. But if you can look at the projections going forward in the year 2027, I think we're projected to make around $880 million. And so we have about 120 million shares outstanding, and you can do the math, we're paying $2.40 a share in dividends. So that's $288 million or so. I think that's right.

So you subtract that $288 million from $680 million. We have about $600 million. So we have a tremendous -- not only do we have a strong capital to begin with, we have just like -- I mean, like a printing press. If something doesn't go wrong with $600 million, we can do a lot with that. We can buy a lot of stock back. We can increase dividends, and we can buy more banks. It's a high-class problem.

But any -- I guess, any immediate priorities there? Like would you tilt more towards buybacks in the near future?

I think that we would -- when it's opportunistic, we certainly would look at buybacks for sure. We just -- as this last year, our stock went down in the 60s to low 60s. And I think you saw where we spent $157 million on buybacks this last year. And I think we have another 5% approved for this year. So you're talking was that $300-and-something million that we can buy back this year as well, and that's been approved ready by the Fed.

The next question is from Stephen Scouten with Piper Sandler. [Operator Instructions] Moving on. The next question is from David Chiaverini with Jefferies.

So you mentioned about you've got multiple bank integrations occurring simultaneously. Can you talk about ways you'll be able to juggle these at the same time and not get distracted from the core operations?

Well, again, they're all planned, and somebody may want to talk about which ones we have in order. But I mean, we've done 40 of these transactions. So I don't think this is going to be -- there may be 3 of these. But again, we're doing our own operational integration here probably in the next few weeks or so. And then right after that, we're going to American Bank, David, what also...

So I think specific to address the question, we have designated teams who does that. So it's not like our people who is out on the field is doing the organic growth, they will be focused on this. We'll have a specific team focusing on integration. So we have a plan to convert these banks as those 2 Bank American Bank and Partners Bank this year in the sense of integration. And in the process, so far, it's going well, and we started in advance. So it's not like we're starting now.

Overall, we are scheduled to do convert later this year, and it's working as we planned.

We feel confident where we're at. It's not to say that you won't ever have any glitches on anything that you do. There always may be something like that. But for the most part, we have a well-seasoned team that's done many of these things, and they feel very comfortable where we're at.

Great. And can you talk a little bit about the cultural fit? How did the deal come together? And why now with the deal?

Well, the time seems to be right. I mean, if you look, in the previous administration, I think we did a -- we were trying to do some bank deals and even much smaller deals. I think the last bank we took, I maybe wrong, but it took us almost a year to get completed. I think that from a regulatory standpoint, that the regulatory -- the regulatory things are in place to make this happen. The timing is right, and it was right. I think it was right for us and I think it's right for them. It just seems to be the right time.

And can you talk about the cultural fit and how the deal came together?

Yes. I mentioned earlier, Bob and I have known each other for 20 years or more. I mean, I would say -- I said this in our meeting the other day, I said, if I got killed and ran over tomorrow and Bob took my place, I don't think that our banks would change our combined bank would change at all. I think that, if anything, I think they may be even more conservative than we are on the loan side and it's hard to believe. So I -- we feel -- we did our due diligence, and we feel really good. We feel the same way about things.

And again, this -- we've dated and romance for probably 10 or 20 years, and it's not like we just saw this pretty girl across the street, fell in love and got married in a month. This is something that we really thought about and have thought about and talked about with each other for years and years, and the timing just seemed to be right now, and we did it.

Next question is from Dave Rochester with Cantor.

I just wanted to go back to the capital discussion real quick. I noticed the shares are trading below the average price of the buybacks this past quarter. So I was just curious if you see that buyback opportunity is occurring now. And then I know there are blackout periods related to the outstanding deals. If you could just talk about when you'd be actually able to buy back stock if you saw that opportunity in the near term? And if you had a 10b5-1 plan.

Yes. I don't know what the 75%, what plans are you talking about?

Yes, we don't have a 10b5-1 plan.

Yes. And David, I would say on the others. Basically, I'd probably stick to our statement that you've seen us buy in the past, but it's been opportunistic, and we'll do that again.

Okay. Any sense for blackouts when those pop up when those ends, that kind of thing?

Well, we're in a blackout today for earnings. So we have a normal earnings blackout and things, and there's some blackouts around the merger transaction, of course, around shareholder votes and things like that, when you should start soliciting the Stellar shareholders.

Before you do that. Sorry, go ahead.

I say at this price and then when it's available for us to buy back, we'll do buybacks.

Sounds good. I wanted to get your thoughts on the trajectory for NII and the margin through '26, just given the 3 deals you got coming in. Just assuming you closed Stellar, June 30. Can you just help us understand what you see as that path through the year?

Yes. If you look at Prosperity, I'm just going to talk about prosperity and with 2 smaller acquisition on projection. We definitely see the improvement in the margins for 2026 and beyond. And it's because the margin on the smaller banks were higher than ours, a stand-alone. So that have accretion there. But if you look at our balance sheet, with repricing our bond portfolio, as we mentioned -- as I mentioned that we have a $1.9 billion cash flowing from that.

So we'll be repricing that our yield on the bonds of $215 to pricing, I think we can get around $450 right now. So 200 basis points there. If you look at our fixed loans, that's getting repriced as well. So putting all together, our kind of projection for 2026 stand-alone showing about around 350 margin for 2026. But if you add Stellar Bank together, I think the margin on Stellar is still about more 4.2%, so that will be very accretive to. So combined together, you can do the math, we'll be looking very good for 2026 and...

a minimum of 3.5% -- minimum 3.5%.

Yes. So that's looking really good.

And that comes along the way, it goes back towards 2 years ago, somebody said, well, the bank and your peer group, you did in performance because as your peer group over the last couple of years. Well, the truth of the matter is we did and I mean, our bank has never tried to call rates one way or another, and we bought in every market.

In fact, we should be buying more. But I think we're still scared from what happened last time. But -- so -- so for the most part, we said we try to buy and have a 3.7, 3.8-year duration, and we said 2 years ago, we got caught in that.

And as this thing turns, we would turn it around. We went from 2.75% net interest margin to 3.5% today. So we did everything we said and candidly, we have very, very strong tailwinds in back of us. And I think that not only looking at '26, '27 without anything, we have some very, very strong tailwinds going at the same time.

Yes. And I want to add to that. I think we mentioned a year or 2 ago that we want to reduce our borrowing levels. We were almost $3.9 billion borrowing 2 years ago, and we have a conscious program that we're going to reduce it to a level that we are right now. So now we believe that the borrowing level is what we expected is between $1.5 billion to $2 billion. And now we're going to be -- with the growth in deposits and additional of the 2 banks, we're going to start growing our average earning assets, while the past 2 years, we were shrinking because we want [indiscernible].

I think it was just a matter of the time that somebody could make an argument in this e-mail -- the sharp e-mail that I got this morning made that argument, I can make an argument that you could go back. Anybody can pick a year in time that they want to. But if you go back for the last just 2,000 until today and you compare us to the S&P 500 in comparison to the NASDAQ Bank Index. Our bank has returned 1,447% compared to the [ National ] Bank Index of about, I'm thinking 181%. And it's compared to the S&P 500, 665%.

So I think if you're a long-term player, you need to jump in and buy the stock because I did the math for you all ago what this thing should trade for -- and so it's just -- I think it's 1 of the greatest opportunities and you will benefit if you're a long-term investor right now.

All right. Great. I appreciate all that color. Maybe just one last one on the cost save estimate. I know historically, you guys have been pretty conservative or have outperformed your cost save expectations. I was just wondering how you feel about this level here that you've talked about and if there are any branch closures that you have to take care of as a result of the higher concentration of branches in Houston?

So regarding the cost saves, we feel very comfortable with the 35% cost saves that we printed and it's a combination of the combining 2 banks that have the same footprint. So of course, there will be some consolidation of branches. Also, there is -- as you know, the system conversion is going to help. So we took deep dive, and we feel very comfortable with the cost saves.

The next question is from Janet Lee with TD Cowen.

Good afternoon. Back to M&A. If I were to ask it in a different way. So if I look at your pro forma CET1, it will be about 13.5%, which is slightly above peers, but definitely more normalized. And in the past or at least over the 5 years, you've had CET1 running above peers, just given the size of the deal, which was more meaningful than the recent ones and the Proforma CET1 post the Stellar deal, does this change your appetite for M&A, whether it's your appetite for M&A itself or the type of deals that you might be potentially looking at in the future?

Now even like I mentioned a while ago, we -- when these things are combined, you're going to have over $600 million a year just in excess of cash flow. We had excess capital that everybody was asking what we were going to do this time. Again, we didn't have -- it wasn't a requirement that we pay 30% in cash down we did to try to utilize our capital to get a better return on our average tangible capital. And I think probably just in earnings over a couple of years, if you've done the ratios to see where we're back up within a year or 2, aren't we...

On how fast we build our capital back. Yes, we'll be back in a couple of years at minimum.

Minimum a couple of years, we'll be back to exactly where we're at.

Got it. That's fair. For loan growth, so it seems like the potential acquired portfolio runoffs from loans or deposits from the Stellar deal with not be material or meaningful. So in terms of 2026, I believe you were hoping for that low single digits -- or low to mid-single digits kind of growth on balance sheet. Is that the fair way to assume or I don't want to put words in your mouth, but how should we be thinking about the overall trajectory there?

Yes, I think that's a good assumption. This is Kevin. Low single digits is good. As you know, Stellar has been growing faster than that, and we don't see any reason that, that would change. I think American Bank has been growing faster than that as well.

And we talked about the quality of the Stellar portfolio, I'd say the same about the American Bank portfolio. They were -- we talked about Stellar maybe being cleaner than us, I think American Bank was cleaner than that. So in terms of the quality of the assets we've purchased here between American and Stellar, they are Stellar.

Next question is from Peter Winter with D.A. Davidson.

Can you just talk a little bit -- you mentioned the increase in nonperforming assets. If you could give a little bit more detail. Last quarter, you highlighted like a $35 million SNC credit. Just wondering if that was part of the increase in nonperforming assets and just how you're thinking about credit quality going forward?

As we said, and I would reiterate what we said last quarter, we said that the portfolio is very clean. We had our eye on one particular asset, which we had downgraded to substandard in the third quarter to $35 million shared national credit that we're not the agent on. That credit was downgraded further in the fourth quarter to nonperforming. So it's still substandard, but now nonaccrual. As I said on the call in the third quarter, if that became more problematic.

And at this stage, it has become more problematic, and we haven't worked things out, although it is, I will tell you, it is a well-known, very large private equity firm, who has a history of backing their deals. So it doesn't mean they're backing this one, but they have a history of doing so. It's just that the resolution conversations have been challenging. Were challenging in the fourth quarter and continue to be challenging. We don't see a need on this or the other credit we talked about last quarter, which was in the buy-here-pay-here space. We don't see the need at this stage or something further wrong with these credits that we need to post to reserve as a result of it.

I'd add at the other large...

Post a provision, I should say. We have reserves up against both.

And I'd say the other large credit is a participation for 1 of the banks that we bought actually we originated and sold the majority of it to another bank from the Lone Star deal. And basically, it's well secured with real estate. In fact, there should be excess equity in that they shouldn't be loss in that.

Got it. And with the Stellar deal, what is the purchase accounting accretion going to the run rate? You gave it for the first quarter off the back, but I'm just wondering what it is after Stellar?

So the guidance that I provided on purchase accounting fair value loan income, that's for American Bank and the Texas Partners Bank. If you look at just Stellar, I think, on the Page 16, we disclosed what the loan marks and AOCI mark.

So I think on the loan mark, we're having about $31 million on loan marks that is pretax. And we have about [ $73 million ] net of tax in AOCI. So for our modeling purposes, we use some of your digits calculation. So if you look at for the 2027, I think the mark accretion is about $30 million combined, $30 million, $31 million combined.

Next question is from Michael Rose with Raymond James.

Anything to do once the deal is either leading up to or once the deal is closed, just on the bond book, I know most of legacy Prosperity's book is HTM, but Stellar's is AFS. Just wanted to see if there's an opportunity for a potential restructuring that may be not included in the pro formas here?

It's not -- everybody asked, why don't you just do financial engineering, sell your deal, sell your portfolio. If you can do the math on $10 billion, you make an extra 2% here is another $200 million of income a year. So you take your loss after tax, $600 million and you get it back in 3 years. But I just -- again, I just feel like it's just financial engineering, we could do it. It would make us look good, make us look like, well, you do $200 million after tax and see what we have extra income between us.

I mean we'd making a whole lot of money, but -- but again, I think that's just financial engineering. And again, we've always said that we're not trying to call rates one way or play the market. We're just trying to be in every market and buy with a 3.8 -- year duration. And so sometimes it will be real good and sometimes it will be low. But I don't see any change in that. And again, we will mark-to-market the portfolio from Stellar for sure.

And what would that do to the asset liability sensitivity?

I think there are a little bit of asset sensitive on that. I think what we're going to do if we -- I mean there will be some securities that we're going to sell and kind of buy back in a mortgage-backed security like we do. So I think from the standpoint, it's going to be maybe the same as a slight asset-sensitive.

We'll try to buy ahead so that it's not so asset sensitive. We'll try to get back to the neutral, if we can.

Understood. And then maybe just finally, if there's any Stellar guys in the room, I think Paul was in there. I guess, just given how robust the NII forecasts are versus where consensus is. I guess the question is, from your point of view, why sell now if the outlook is -- are merge -- merge with the Prosperity now if the outlook is so good?

Well, I think it's rare to get the opportunity to find somebody that kind of looks like you, thinks about the world the same way that you do. We've always concentrated on a real quality deposit base. I think that's what Prosperity is always done. We're really sensitive around the way we fund ourselves to get our high-quality deposit base, low cost of funds so that we can control that part of the deal.

It's hard to find people to partner with that look like that. But I think the expanded balance sheet, the ability to continue to do kind of where the momentum started back in the third quarter into the fourth quarter, and we can see it in the first quarter, started to have a real good momentum.

And because we look so similar, and we do similar loans, similar types of deals it's not a heavy lift to understand that we could continue to do those kind of things. So we think we're going to continue to drive that momentum. And we feel good about what the future looks like over the -- certainly over the next 12 months because I think we're on a good path.

Next question is from Jared Shaw with Barclays Capital.

Good afternoon. Maybe just going back to the original comment just about how your internal expectation for Stellar is better. When we look at their pipeline, are they David, do you feel like they're able to get the pricing and terms that you said you're not able to get in other markets?

And if so, would that cause you to reallocate more internal prosperity resources to those markets to take advantage of that maybe disruption or relative difference between their markets and the rest of yours what you're doing in the state?

I would like to say to tell you that it would be great. We just use their loan team, and they'll make higher rate loans. But what usually happens there is we usually banks that we joined together. Usually, the return actually comes down. I mean the net interest margin, it gets -- they're getting -- they're probably -- there's what is at 4.2% you said? Margins -- our 3.5%. So part of that margin is because they don't have as big of a bond portfolio.

So their margin is better because they have a better loan-to-deposit so, too. But even having said that, even as we start merging together, it seems like the pricing from the banks that joined us comes down a little bit. But I just think the number of people, though, that Stellar has on the ground. And even with American Bank that had -- they had a lot of production office here in the Houston market to together, we should really be able to inundate the market. This is such a big market. I mean, I don't know that people realize how many people move in, what the GDP is of Texas, it's just -- it's really phenomenal.

So I think the opportunities are just unlimited, especially we get momentum, put our groups to put our guys together, guys and girls. I think the momentum is really going to be good for everybody. Again I think that we'll -- they maybe even had a better -- better than us, where we -- a lot of our payment or paid to lenders is maybe more discretionary. We do look at the actual production. They were more formula-driven deal.

And so that -- I think that helps them too. So we'll probably look at -- every bank that we join with. It looks like we take the -- we try to do the best. We take the best from them and bring it to us. And so I think they should be able to help us with some of this stuff, too. And hopefully, they won't lower their rates that they're charging let's say that.

David, let me -- if I can tag on to you on that. I'll be real simple. I think the margin differential is threefold and then Bob or somebody from Stellar could comment whether they agree with us on that. But the obvious difference is we've got $10.5 billion in securities earning 2.17%. That's a drag.

The second big item on our balance sheet that's a drag is $8.3 billion of single-family mortgages that were originated in times, where rates were pretty low. And that portfolio is a drag. So those are the 2 biggies. But the one that doesn't jump out at you all that we see and we saw throughout due diligence is on the loan side of the bank, the basic commercial lending side of the bank, not forget single-family mortgages and some of the other stuff, just the basic commercial lending, they have a way more granular portfolio.

And the granularity of that portfolio basically means it's smaller deals, for the most part, they still do some big deals, but if it's just on average, smaller deals, for the most part, tend to get higher pricing. So it's those 3 factors that really drive their margin relative to ours. And I see ours improving as those low rate assets run off. And I don't see there's really having to come down all that much. Bob, would you...

Yes, I agree, Kevin. I mean we do have a granular portfolio. I think there's getting to be more and more balance to that over time. But it certainly started off that way when we combine the 2 banks together. But the pricing is competitive. We're in Houston, Texas and price is competitive. So we're not -- 1 is not going to be better pricing than the other. You guys are just as good at us pricing loans. So -- but for the most part, it is granular and we do get a little bit higher pricing on the small side. So yes, I would agree with that.

Okay. And then just as a follow-up...

Which goes with cheap deposits. Yes, which is why you're not interest-bearing deposits are generally a bit higher than ours. So just a little additional inside baseball.

Great. And I guess just as a follow-up, what are some of the assumptions on customer retention as this will be, I guess, an additional name change over the past few years for Stellar. Do you think that there's -- where do you think the risk is of retention?

I'll answer first or Bob, do you want to go first?

I was just going to say, I mean, we're -- I think we're doing a good job of retaining our guys. And I think that's the big key is to make sure that we -- we keep our customer-facing folks out there that our customers see every day and not changing that.

Yes. I mean we entered into about 15 non-compete agreements and about 70 letter retention agreements. So we -- I think the team is on board it doesn't mean you won't lose somebody. I think for the most part, we'll be able to retain the customers, and it's not like -- it's not like another bank that's coming out from another state that is jumping in. They know who we are. We've advertised here. We -- it's not somebody that they're not familiar. So I think the retention is good here. I think -- and again, they don't have a lot of high-yield time deposits or something that's going to run off like that.

So I mean, this is really a great combination guys. It's truly it's a marriage made in heaven.

And the other piece, David, I think, is the credit cultures are very similar. We've always thought about the world the same way. So I don't think you see that drastic change that you do in some combinations where people say, oh, gosh, maybe this is too conservative or whatever they might think.

Well, you're a lot like me, some of the guys, I mean even analysts, they want to say, okay, you got to have double-digit loan growth. You got to do this, got to have 6%, 10% every year.

Well, and your deposits are growing 3%, what do you do when you run out of money. So we -- I think we have a lot of the same logics that we're used to around the 80% loan-to-deposit ratio. Again, we bring in new deposits, we'll make more. But we have a lot of liquidity, I think, if there's ever a run on our bank, for example, I think we have like $16 billion that we can draw in a minute. So we have a lot of liquidity. You got to have a lot of liquidity, so the combined earnings of these 2 banks, the liquidity of these 2 banks are so similar, I think it's a good deal.

Next question is from Jon Arfstrom with RBC Capital Markets.

Hello, everybody. David, for you, just a couple on the numbers. What's your level of confidence in the $7.34 estimate for 2027? I don't think you have any revenue synergies in there. So it seems like it's just cost saves, but consensus [ $6.80 ], you talk about the accretion, how confident are you in the $7.34?

Colin just handed me to $7.34 ,so if he's wrong, we'll shoot him. But we feel very confident, and I think we do have some triggers that I think that above beyond expenses. I mean, right now, they don't charge NSFs, the charges. I'm not saying one way or another, we'll go the other way. their cost of money is a little bit higher than ours.

So we do have some other triggers, but I feel very confident in the $7.34 once we get everything combined, I think', that's a really real number. And that's why I can't believe trading where we're trading, if we're going to make $7.34. I mean, again, we should have a $95 to $100 price target, really, even you, Jon. That's $75 stuff or $78.

Okay. This begs the next question, then you kind of open the door to it. Well, with your 15x acquisition multiple math that you shared earlier. The question is, I'm not saying you should do it, but due to larger regionals call on you frequently. And is there a bit if you want it? Again, I'm not saying you should, but I'm just -- I'm curious on that.

I was on the Federal Reserve Advisory Board in Washington every bank that you can imagine that size was on there. I mean you had P&C, Truist regions. The answer to your question is they would all love us a lot. They would love us, and I would tell you that I wouldn't even accept 15x because I think we could even do better.

And anybody that really wants to break into a market like Texas, you can't do it. I mean if you really want to break into Texas, I want to be the largest bank in Texas, it's going to cost you something, and that's the difference in the price of cars, one is a Ford Pinto and one's a Jaguar. I mean it's just -- there's just a big difference. And again, I'm not saying we are selling or not. I'm just telling that we are truly, truly undervalued in a takeout.

Okay. Yes, I think it adds a lot of franchise value despite today.

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

Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

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

Good day, and welcome to the Prosperity Bancshares Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Third Quarter 2025 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks.

I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; and Mays Davenport, Director of Corporate Strategy. Bob Dowdell, Executive Vice President, is unable to join us today.

David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions.

Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of Federal Securities Laws, and as such, may involve known and unknown risks, uncertainties and other factors, which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause the actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now let me turn the call over to David Zalman.

Thank you, Charlotte. I'd like to welcome and thank everyone listening to our third quarter 2025 conference call. In the third quarter, we signed a definitive merger agreement with Southwest Bancshares Inc., the parent company of Texas Partners Bank headquartered in San Antonio, Texas. We are excited about this transaction as it significantly expands our San Antonio metro footprint with four additional branches and increased our deposit market share and bolstered our presence in the Texas Hill Country and adds an experienced C&I lending team.

I would also be remiss not to mention how excited we are about our pending merger with American Bank Holding Corporation in Corpus Christi, Texas. The combination will strengthen our presence and operations in South Texas and the surrounding areas and enhance our presence in Central Texas, including San Antonio. Combined with the Texas Partners acquisition, we will have 10 banking centers in the San Antonio area.

I am pleased to announce that the Board of Directors approved increasing the fourth quarter 2025 dividend to $0.60 per share from $0.58 per share that was paid in the prior 4 quarters. The increase reflects the continued confidence the Board has in our company and our markets. The compound annual growth rate in dividends declared from 2003 to 2025 was 10.7%. We continue to share our success with our shareholders through the payment of dividends, and opportunistic stock repurchases while also continuing to grow our capital.

Prosperity reported net income of $137.6 million for the quarter ending September 30, 2025 compared with $127.3 million for the same period in 2024. Net income per diluted common share was $1.45 for the quarter ended September 30, 2025 compared with $1.34 for the same period in 2024, an increase of 8.2%. Our earnings were primarily impacted by a higher net interest margin. The net interest margin on a tax equivalent basis was 3.24% for the 3 months ending September 30, 2025, compared with 2.95% for the same period in 2024.

As mentioned in previous calls, our net interest margin should continue to improve over the next 24 to 36 months with interest rate either increasing or decreasing 200 basis points. Prosperity continues to exhibit solid operating metrics with annualized return on tangible equity of 13.43% and return on assets of 1.44%. Our loans, excluding the Warehouse Purchase Program loans, were $20.7 billion at September 30, 2025, compared with $20.9 billion at June 30, 2025, a decrease of $160 million or 77 basis points. We continue to work through credits acquired in previous mergers and we are experiencing borrowers using their own cash to pay down balances, are not drawing on their lines.

It is also an extremely competitive lending environment with aggressive terms and conditions being offered, and in some cases, we've just elected not to participate. Deposits were $27.7 billion at September 30, 2025, an increase of $308 million or 1.1%, 4.5% annualized from the $27.4 billion at June 30, 2025. We are encouraged that the core deposits have grown. Importantly, Prosperity does not have any broker deposits. Our nonperforming assets totaled $119 million or 36 basis points of quarterly average earning assets at September 30, 2025 compared with $110 million or 33 basis points of quarterly average interest-earning assets at June 30, 2025. There is a slight increase in NPAs. However, credit remains strong with some isolated incidences.

The allowance for credit losses on loans and off-balance sheet credit exposure was $377 million at September 30, 2025 compared to the $119 million and nonperforming assets as of September 30, 2025. We remain focused on completing our pending acquisitions of American Bank Holding Company and Southwest Bancshares, Inc. We also continue to have conversations with other banks considering strategic opportunities. We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns and regulatory burden, all point to continued consolidation. We remain ready to move forward in the event of transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value.

As of October 2025, Texas boasts one of the world's strongest and most diverse economies, ranking eighth largest globally with a GDP of approximately $2.7 trillion in 2024. The state produces 9.3% of the U.S. GDP and continues to outpace national growth in many metrics. Although the economy is showing some signs of moderation influenced by factors such as tariffs and immigration policies, we believe Texas remains the best place for business with a pro-business attitude and no state income tax. This is evidenced by major corporations continuing to move their operations to Texas and Oklahoma.

As of October 2025, Oklahoma's economy is demonstrating resilience and modest growth, outpacing national averages in key areas like unemployment and population expansion despite broader U.S. slowdowns from tariffs and policy uncertainties. Thanks again for your support of our company.

Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss the specific financial results we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended September 30, 2025, was $273.4 million, an increase of $11.7 million compared to $261.7 million for the same period in 2024, an increase of $5.7 million compared to $267.7 million for the quarter ended June 30, 2025. Fair value loan income for the third quarter of 2025 was $2.9 million compared to $3.1 million for the second quarter of 2025. The fair value loan income for the fourth quarter of 2025 is expected to be in the range of $2 million to $3 million. The net interest margin on a tax equivalent basis was 3.24% for the 3 months ended September 30, 2025, an increase of 29 basis points compared to 2.95% for the same period in 2024, an increase of 6 basis points compared to 3.18% for the quarter ended June 30, 2025.

Excluding purchase accounting adjustments, the net interest margin for the 3 months ended September 30, 2025, was 3.21% compared to 2.89% for the same period in 2024 and 3.14% for the quarter ended June 30, 2025. Noninterest income was $41.2 million for the 3 months ended September 30, 2025, compared to $43 million for the quarter ended June 30, 2025, and $41.1 million for the same period in 2024. Noninterest expense was $138.6 million for the 3 months ended September 30, 2025, and for the 3 months ended June 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 million to $143 million. The efficiency ratio was 44.1% for the 3 months ended September 30, 2025, compared to 44.8% for the quarter ended June 30, 2025, and 46.9% for the same period in 2024. The bond portfolio metrics at 9/30 2025 have a modified duration of 3.8 and projected annual cash flows of approximately $1.9 billion.

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

Thank you, Asylbek. Our nonperforming assets at quarter end September 30, 2025, totaled $119,563,000 or 54 basis points of loans and other real estate compared to $110,487,000 or 50 basis points at June 30, 2025. This is an increase of $9,076,000. Since September 30, 2025, $1,121,000 of nonperforming assets have been removed as a result of the sale of homes. The September 30, 2025 nonperforming asset total was made up of $105,797,000 in loans, $16,000 in repossessed assets and $13,750,000 in other real estate. Net charge-offs for the 3 months ended September 30, 2025 were $6,458, 000 compared to net charge-offs of $3,017,000 for the quarter ended June 30, 2025. This is an increase of $3,441,000 on a linked quarter basis.

There was no addition to the allowance for credit losses during the quarter ended September 30, 2025. No dollars were taken into income from the allowance during the quarter ended September 30, 2025. The average monthly new loan production for the quarter ended September 30, 2025, was $356 million compared to $353 million for the quarter ended June 30, 2025. Loans outstanding at September 30, 2025, were approximately $22.028 billion compared to $22.197 billion at June 30, 2025. The September 30, 2025 loan total is made up of 36% fixed rate loans, 34% floating rate loans and 30% variable rate loans.

I will now turn it over to Charlotte Rasche.

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

[Operator Instructions]

Our first question comes from Catherine Mealor with KBW.

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

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 leading comments, we're seeing some structure and pricing aspects that are not favorable in terms of the way we're thinking about credit still and maybe on an accelerated basis. So between that and some elevated payoffs in the fourth quarter, I think this is going to be a flat quarter, which I know is disappointing, but I think that's really where we're going to kind of come out of this.

Going into next year, we feel a little bit better about it and that we've got a bunch of construction deals that we have approved over the course of this year that have not funded up yet, but we're still waiting for all the equity to go into those deals. So just off of a steady state book, I would say low single digits for next year. And as you know, we expect to have both of the acquisitions that we have announced closed and on the books into next year, probably by the end of the first quarter of next year, which will help out, obviously, for just the total volumes.

The only thing I would caution out of all of what I've said is 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 2 acquisitions. I think that's probably a fair summary, but David or Tim may want to add to that.

Well, I would just remind everybody that when you're in a market that's very aggressive in terms of pricing and terms, and that's what we have had for some time now, you just simply 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 want to make a mistake and end up having a problem with our net interest margin because we priced too low and things of that nature. And we see a lot of that going on in the market. So we just need to be careful and prudent, and things will be fine.

Yes. The last thing I probably should have mentioned is it's not lost on you or us 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 15, 20, 30 years ago, there's a fair amount of Texas-based businesses that want to bank with a 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, we're Texans and we want to bank with a Texas Bank, somebody we can look in the eye in terms of the top decision-makers. So I think net-net, that probably plays out on a positive basis for us.

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

And so how should we think about if -- because I think you're right. I think the competitive landscape, I mean, if you -- if you see 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 going to get worse next year. But I appreciate the comment on Texans wanting to bank 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?

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

Catherine, I would say that I've read a lot of the analyst things that came out this morning. And I think once the herd gets into a certain motion, they 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 might have closed at $2 billion, but we probably average about $1.5 billion borrowings a day. So we -- maybe $1.5 billion to $1.8 billion. So we really lowered our balance sheet.

The things that -- I guess they'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 1 year, I think everybody would be ecstatic. Well, that's what's happened. Our earnings from 9 months last year to 9 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 your projections, you have that to look forward for 2026 and 2027 double-digit growth.

So yes, we're very excited about the quarter. And yes, at the low prices that we're at right now, we're going to back up the truck. There's no question. We're -- 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 FirstBank 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 15x 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, $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.

The next question comes from Michael Rose with Raymond James.

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 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 and the fixed asset repricing, but it's kind of price times volume, right? And I think we'd like to -- we'd all like to see some greater earning asset growth to really reap the benefit of that margin expansion.

Yes. We're constantly looking at people that potentially can come in and help to grow our bank. I've approved 3 or 4 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 should they still be with us or not. So there are 2 sides to that coin, but we absolutely are looking at bringing people in, and we have approved a fair number here over the last year really and some recently. So we're active in that regard.

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

Yes. Thanks for the question, Michael. First of all, I have to say after a 6- or 7-year run of really hitting the nail on the head on our thought process about a forward look in this space. I missed it this quarter. I said $1.250 billion. We averaged $1.218 billion. So the record is broken. Michael, quarter-to-date, through last night, we're averaging $1.222 billion. So basically flat to the average of last quarter. Typically, the warehouse is decent in October, and November and December are relatively weak months. In fact, it wouldn't surprise me if we saw a week or 2 at below $1 billion or below $900 million before the year is out. Now all that's rate dependent. But I would say for the quarter, we probably averaged $1.1 billion.

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

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

The next question comes from Dave Rochester with Cantor.

Maybe if I could just start on the margin. I know that's continuing to trend higher. What's the medium-term outlook on that or the 1-year view on that expansion you're looking for? And then maybe the more normalized margin that you expect just given your rate outlook? And then if you could just quantify or update the number that you're seeing in terms of fixed rate loans that are going to be repricing over the next year or 2, that would be great.

I can probably start on the margin Asylbek if it's okay. I mean 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 hit -- I think we've got really close to what we said right now. We still see margin increasing over the next 12, 24 and 36 months. I mean -- sometimes these models that we have, they look too good, so I don't want to give you these numbers because I think that we -- our rates are lower, for example, like on the money market, if you have $1 million with us, it may be 3% at our bank, if you're at one of the other banks, they may be making 4%. So as interest rates come down, we may not go down as much as some of the other banks go down right upfront.

I mean the exception rates absolutely will go down on those. But the overall rates, we probably won't see as much rates 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 as we would like them to go up with the interest rates going up or down. So we still see margin improvement for 12, 24 and 36 months. I mean it looks really good for us. I mean there's no question. You've got a $10 billion portfolio of bonds at a little over 2% that's with a 3 something year duration. So as those are maturing, I mean, it's just -- it will be a home run for us.

I agree and what we just discussed, the security and the fixed loans will be tailwind for us that continue to reprice for several years. That's what 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 are fixed rate loans.

In terms of just what's rolling over the next year or 2, any sense for dollar amounts there?

I think just if you look at it, it's rolling off probably from a repricing standpoint, of course, that floating and variable will be faster than fixed one. But I think it -- we'll have a good volume of repricing it. If you look at the 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 the $2 billion is already at the floating rate. So...

Then you get another $2 billion of our security.

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

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

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

I'd say between 6.50% and 7.25%.

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

Those we aren't doing.

We try to stay away from those. That's correct.

I think the one we chased was probably 6.25% maybe.

If we went that low, it was only because the customer had as much deposits as we had in loans. But for the most part, we're -- I mean we're seeing some people pricing 30-day SOFR plus 2. And I mean we just haven't gone to those kind of levels.

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

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

Okay. Great. 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 guys 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 field an inbound call from one of these larger bank CEOs who loves your footprint, your lower cost of deposits, you got stellar credit quality. What would you look for in one of those combinations potentially? And are you starting to see any of that interest come your way at all?

You got a future in politics, the way you phrased that.

I really think that's what the market is missing. I mean, again, our bank is not up for sale, but at the same time, what is the real value of our bank. When you look at the banks that have sold like FirstBank in Colorado and the -- I mean, they're 15x 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 we have one hedge fund owning the stock or another hedge fund on the stock, but we're always going to do right by the shareholder. And we always have in the past, and we'll continue to do that. But I think that the market is really missing the optionalities that we do have.

Our scarcity value is increasing.

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

The next question comes from Manan Gosalia with Morgan Stanley.

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 risk return parameters, maybe increasing branches or investing in your product set or hiring more? Is there anything else that can be done here?

No, no.

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

But again, I say again, analysts are always on one side, they're always focused just on loan growth. I mean the bottom line is, guys, we have an 80% loan-to-deposit ratio. We don't want to be 100% loan-to-deposit ratio. A lot of our growth depends on our growth on deposits, and that's where your real money is really made, not in deposits that you're paying 4% and 5% 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 we made the same kind of return when we were 60% or 65% loan-to-deposit ratio as we are now is 80%. But again, we're focused on it, and we're going to continue to make loans. But again, 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 is impressed with the net interest income growth. But if you're a long-term shareholder like I am, I'm not looking 1 year out or 6 months out, I'm looking 5 and 10 years out.

And just give you some statistic. I know Tim mentioned what the average monthly production was for third quarter was $356 million, and our production for the second quarter average was $353 million. But if you just compare what we had a year ago in the same period, 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-over-period, our production up almost $100 million. So we -- 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.

If you look at the amount of loans that we decreased this time, the majority of the loans were in the category of 1 to 4 family residential home loans. And again, people -- the home prices were higher, interest rates were higher. And again, we were trying to get out of those more and sell more of those to the market where we could keep more of those, and we can easily build 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.

Got it. 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?

I don't think so on the product side. We've never redlined necessarily very many products, if any. We're willing to look at anything that's reasonable. So I don't think there's an obvious gap in products anywhere.

I don't know -- I mean, we're really -- we offer just about any type of loan that you could want. I mean we're one of the biggest ag lenders in the state of Texas in the United States, really. We're in construction lending. We're in commercial and industrial. We're -- there's probably -- we're in middle market lending. We're in oil and gas. I mean I can go on and on. There's not many areas that we don't touch. So we touch almost all the areas that are out there actually.

Got it. Very clear. And then maybe a follow-up on the buyback comment. You noted that 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 to mean that you are pivoting away from an M&A strategy to a buyback strategy in the near term while your stock is at these prices?

I think that we'll always look at M&A, but 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 and say that we just heard during this meeting that we have gotten all of our approvals on the American Bank and Corpus Christi. So we're excited about that. We're excited about putting the 2 banks in San Antonio and Corpus together. It would definitely give us from Victoria all the way to Corpus Christi, it will give us a dominant market share along what we call the Gulf of America there. So we're excited about that. But again, our main focus right now will be to get our stock price up. We think it's terribly undervalued. And again, you can never say no to M&A because if it's -- again, if it's a cash deal, it really doesn't matter. It's only stock that if we give our stock and it's too low a way, 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.

Next question comes from Peter Winter with D.A. Davidson.

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

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

FirstCapital.

FirstCapital, I mean Lone Star has been buying. I'm sorry. They're both -- first of all, they're both pretty high-quality credit banks. I mean we did a deep -- as we do on all acquisitions, we did a deep, deep credit dive on both of these. American Bank is -- it's one of the cleaner banks we've seen ever. So I think it's going to be muted compared to what we've experienced here more recently. There's always going to be some. But I think it will be muted compared to what we have seen in the past. I think Tim and David could probably add.

Yes. Peter, both of those banks, we did due diligence on both of them. I don't want to say clean as a whistle because there's always issues that come up. But again, nothing like on the FirstCapital deal that we did in West Texas, we probably outsourced over $460 million in loans. We don't expect anything like that with these 2 deals right here, nothing like that.

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.

And our experience, especially along that Gulf Coast right there, our experience with Victoria, we paid a lot for that bank, which we paid a lot for the American Bank at the same time, 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 will just be -- I think it's going to be really a good deal.

Got it. That's helpful. 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 forward 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?

Yes. I think there was a 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 12 months, 24 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.

But again, even at 100 basis points down, it may be slower as accomplished but 12 months from now, I hate to give these numbers out because then if we're not accurate, but we're still showing close to what you said, I think, at 3.38%.

And so I'm sorry, just to follow up. So when you say about tick lower -- tick lower from the 3.40%?

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

We're 3.48% with no in a static market. Again, I will say this, Peter. As you go out 24 months and further, we do still pick up pretty significantly even with interest rates going down 100 basis points.

And that was -- just to clarify, that was stand-alone, not including American or Partners.

Correct.

Are we ready for the next question?

Yes.

Our next question comes from Jared Shaw with Barclays Capital.

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

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

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

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

The next question comes from David Chiaverini with Jefferies.

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

Yes. I mean we're at 80%. We probably would go to 85% our loan-to-deposit ratio at that limit, we would probably stop. We're still focused on core deposits. We don't have any broker deposits. And really, when we go out, we really try to go -- we're really trying to get a total deposit relationship, not just the certificate of deposits to build up deposits. And so I mean that's what we're focused on. We do see the people coming in, especially -- I may take a different 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 in building market share, especially in deposits.

I'm almost thinking since now they're making headway into the state and they really have some market share, they may not be under so much pressure to show 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.

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

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

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

I think I can give you some color on that. Out of 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, et cetera. And we did not get the down payments that we would normally want et cetera. 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 -- if we 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 are expecting.

That's correct.

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

That's exactly right.

It was a regulatory issue.

It was a regulatory issue. And please don't misunderstand what I'm saying. I'm not implying that we don't have a good relationship with the regulators. But the facts are what they are. And during the last 2 or 3 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.

And 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 is trying to get and everybody is fighting for these customers, and that's just one of the things that happened really.

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

Yes. And in terms of any pockets we're looking at -- we look at the 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.

Shared national credit.

It's a shared national credit. We don't have a lot of shared national credits, but it's a shared national credit that we've got our eye on. It's still performing. It's making its payments, but it's one we got our eye on. And it's $35 million. Outside of that, the portfolio looks pretty good. 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 number, $153 million of that is stuff we agent. So a lot of that is structured and sold by us.

The next question comes from Ben Gerlinger with Citi.

When you guys think about the 2 pending deals, I think you said, David, that you just got regulatory approval while we're on the phone here. Fine-tune the potential close dates for these 2.

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

Got you. Okay. That's helpful.

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

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

Right.

Got you. Okay. That is helpful. And then also, you've done a really good job of taking a change out of the expense base of the banks that you guys pick up. Is it fair to assume it's going to be kind of business as usual extracting the savings? Or is there anything long tail associated with we should think about it might bleed into 2Q or 3Q next year?

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

Got you. I appreciate the help. And then I just wanted to fine-tune the buyback comment of backing up the truck, does that mean you have to wait until the second one closes and then you could just be there the next day? Or is there something else on that?

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

Next week.

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

The next question comes from Matt Olney with Stephens.

David, can you clarify your commentary about the current balance of the borrowings? I think it was around $2.4 billion at 9/30. I thought I heard you say it was below that.

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

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

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

No, no, we're much lower.

What do you think the average was probably for that month. You're looking at the quarter, but again, we started reducing it.

We started reducing.

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

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

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

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

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

On normal big customer deposits.

And big customer deposits from the...

Anyway, commercial side. Yes.

The next question comes from Janet Lee with TD Cowen.

Dialing into deposits a little. So I believe there was about $150 million of runoffs from Lone Star acquisition on the deposit side as well through June. Do you expect any sort of deposit runoffs from the 2 acquisitions as well heading into 2026?

The American Bank acquisition is very solid. I mean their deposit is made up of -- they're probably as close to 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 again, it's probably the difference because you saw in the prices, they have a big treasury department with a lot of commercial accounts that it's just a bigger part of their -- it's a 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 treasury area. So there is more risk in that for sure.

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

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

The next question comes from Jon Arfstrom with RBC Capital Markets.

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

We were saving a lot of our capital because we had aspirations of -- we were bidding on a bigger bank. We didn't get the bigger bank, and we thought we would have needed the cash as part of the deal. We didn't get it. With our stock being this low, I think we have a lot of room. I mean you can do what, 11% plus leverage ratio right now. So I mean, you can do the math yourself and with 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.

Okay. One other thing.

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

Yes. Okay. Okay. Well, we look forward to that. 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?

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

Having said that, again, I don't think there'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 have JPMorgan Chase has more employees here than they have in New York City. You just had Wells Fargo open up one of the biggest operations centers on the other side. I think it was Irving. Everybody is moving to this deal. So when I say moderation, there is -- I think there's a slight moderation. I think it will change. I think what Kevin said earlier, you'll see a pickup, I think, in probably the first quarter of next year. And so Texas, I think, is still going to always be good. But again, compared to where it was, I do feel a little bit of moderation.

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

Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

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