Q2 2024 Prosperity Bancshares Inc Earnings Call

Good day and welcome to the Prosperity Bancshares 2nd Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

Operator: Earnings Conference Call. All participants will be in a listen-only mode.

Unknown Executive: and 24 earnings conference call. All participants will be in a listen-only mode; should you need assistance, please signal conference specialists by pressing the star key, followed by zero.

Operator: Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone.

Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch phone. And to have draw your question, please press star, then two.

Operator: And to withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Ms. Charlotte Rasche. Please go ahead, ma'am.

Speaker Change: To ask a question you may press star then 1 on your touchtone phone and to withdraw your question, please press star then 2 Please note this event is being recorded. I would now like to turn the conference over to Miss Charlotte Rasche. Please go ahead ma'am

Unknown Executive: Please note this event is being recorded.

Unknown Executive: I would now like to turn the conference over to Miss Charlotte Rasche. Please go ahead, man.

Unknown Executive: Thank you.

Charlotte M. Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' second quarter 2024 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks.

Charlotte Rasche: Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' second quarter 24 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks.

Charlotte M. Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' second quarter 2024 earnings conference call.

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

Charlotte M. Rasche: 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 Tomanis, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Sapody, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Mae Stavenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter.

Charlotte Rasche: I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Salman, Senior Chairman and Chief Executive Officer, H.E. Tim Tamanish Jr.

Charlotte M. Rasche: I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, and here with me today is David Zalman.

Speaker Change: Senior Chairman and Chief Executive Officer, H.E. Tim Tomanis, Jr. Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Safety, Vice Chairman, Kevin Hanigan, President and Chief Operating Officer,

Charlotte Rasche: Chairman, also back as Monov Chief Financial Officer, Eddie Safedy; Vice Chairman, Kevin Hanigan; President and Chief Operating Officer, Randy has; Sir Chief Landing Officer, May 7; report Director's Corporate Strategy, and Bob Dowdell, Executive Vice President.

Speaker Change: Randy Hester, Chief Lending Officer.

Speaker Change: Mace Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President.

David Zalman: David Salman will lead off with a review of the highlights for the recent quarter.

Speaker Change: 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 Tomanos, who will discuss our lending activities, including asset quality.

Charlotte M. Rasche: He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Tomanis, 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 disclaimer.

David Zalman: He will be followed by Alcabacas Monov, who will review some of our recent financial statistics, and Tim Tamanish, who will discuss our lending activities, including asset quality.

David Zalman: Finally, we will open the call for questions.

Charlotte Rasche: Before we begin, let me make the usual disclaimer. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal security 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.

Speaker Change: Finally, we will open the call for questions.

Speaker Change: Before we begin, let me make the usual disclaimers.

Charlotte M. Rasche: 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 from 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.

Speaker Change: Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the Federal Securities Laws.

Speaker Change: 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.

Charlotte Rasche: 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' filing with the Securities and Exchange Commission, including forms 10-Q and 10-K and other reports and statements we have filed with the SEC.

Speaker Change: Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements

Speaker Change: 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.

Charlotte Rasche: All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Speaker Change: All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

David E. Zalman: Now, Charlotte, I will turn the call over to David Zalman. Thank you. I would like to welcome and thank everyone listening to our second quarter 2024 conference call. We want to welcome the customers and associates from Lone Star State Bank of West Texas and are excited about our partnership, as previously announced on April 1st, 2024. Prosperity completed the merger of Lone Star State Bancshares, Inc. and its wholly owned subsidiary, Lone Star Bank, headquartered in Lubbock, Texas. Lone Star Bank operated five banking offices in the West Texas area.

Charlotte Rasche: Now let me turn the call over to David Salman. Thank you, Charlotte.

Speaker Change: 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 2024 conference call.

David E. Zalman: For the three months ended June 30, 2024, net income was $111 million or $1.17 per diluted common share, compared with $110 million or $1.18 per diluted common share for the three months ended March 31, 2024, net income and net income per diluted common share for the second quarter of 2024 were impacted by an increase in net interest income and a gain on the visa class b1 stock exchange net of investment security sales of 10.7 million and partially offset by a merger related provision for credit losses of 9.1 million, and merger-related expenses of $4.4 million, an FDIC special assessment at $3.6 million and an increase in non-interest expenses related to three months of Lone Star Bank operations. Excluding the merger-related provision and expenses, the gain on the Visa Class B-1 stock exchange, net of investment security sales, and the FDIC special assessment, each net of tax, net income was $116 million, or $1.22 per diluted common share for the three months ending June 30, 2024, and our annualized returns on average assets were 1.17%, and our annualized return on average changeable common equity was 12.34% based on those numbers.

David Zalman: I would like to welcome and thank everyone listening to our second quarter 2020 for a conference call. We want to welcome the customers and associates from Longstar State Bank of West Texas and are excited about our partnership. As previously announced on April 1st, 2024, Prosperity completed the merger of Longstar State Bancshares and its wholly own subsidiary, Longstar Bank, headquartered in Love of Texas. Longstar Bank operated by thanking offices in the West Texas area. For the three-month cending June 32, 2024, net income was $111 million for a dollar 17 cents per diluted common share. Compared with the $110 million or a dollar-18 per diluted common share for the three-month end at March 31, 2024.

David E. Zalman: We are also pleased that our net interest income before provision for credit losses was $258 million for the three months ended June 30, 2024 compared with $238 million for the three months ended March 31, 2021, an increase of $20.5 million or 8.6%. In addition, our net interest margin on a tax equivalent basis was 2.94% for the three months ended June 30, 2024 compared with 2.79% for the three months ended March 31, 2024 and 2.73% for the same period in 2023.

Speaker Change: We want to welcome the customers and associates from Lone Star State Bank of West Texas and are excited about our partnership.

Speaker Change: as previously announced on April 1st, 2024. Prosperity completed the merger of Lone Star State Bancshares Inc. and its wholly owned subsidiary, Lone Star Bank, headquartered in Lubbock, Texas.

David E. Zalman: As mentioned on prior calls, these are the results that we expected, and we anticipate these tailwinds should continue to be positive for the near future. Our loans were $22.3 billion at June 30, 2024, an increase of $666 million or 3.1% when compared with $21.6 billion at June 30, 2023. Our linked core loans increased $1,056,000,000, or 5% from $21.2 billion at March 31, 2021. These increases were primarily due to the Lone Star merger.

David E. Zalman: Excluding loans acquired in the Lone Star and First Capital acquisitions and new production at the acquired banking centers since the respective acquisition dates, loans at June 30, 2024 decreased $37 million or two basis points when compared to last year, June 30, 2023, and an increased $63 million or three basis points compared with March 31, 2024. Excluding these acquisition-related loans and warehouse purchase program loans at June 30, 2024, loans decreased 152 million or Our deposits were $27.9 billion as of June 30, 2024.

David E. Zalman: An increase of $552 million, or 2%, compared with $27.3 billion at June 30, 2023. Our linked core deposits increased $757 million, or 2.8%, from $27.1 billion at March 31, 2024. The increases were primarily due to the Lone Star merger, excluding deposits assumed in the Lone Star and First Capital acquisitions and new deposits generated at the Acquired Banking Centers since the respective acquisition date.

David E. Zalman: Deposits at June 30, 2024 decreased by $470 million, or 1.8% when compared to last year's June 30, 2023, and decreased by $298 million, or 1.2% compared with March 31, 2024. Historically, our deposits are seasonally lower in the second and third quarters and increase again in the fourth quarter. We have not purchased any broker deposits to offset the deposit loss, and we do not currently intend to do so.

Speaker Change: Lone Star Bank operated five banking offices in the West Texas area.

David E. Zalman: Our bankers' focus is on building core deposits. Our net interest-bearing deposits represented 34.7% of our total deposits at June 30, 2024. Our non-performing assets totaled $89 million, or 25 basis points, of quarterly average interest earning assets at June 30, 2024 compared with $83 million, or 24 basis points, of quarterly average interest earning assets at March 31, 2024, and $62 million, or 18 basis points, of quarterly average interest earning assets at June 30, 2023, with a significant portion of the balance for each period attributable to the acquired loan.

Speaker Change: For the three months ended June 30, 2024, net income was $111 million or $1.17 per diluted common share.

Speaker Change: compared with $110 million or $1.18 per diluted common share for the three months ended March 31st, 2024.

David Zalman: Met income and net income per diluted comments share for the second quarter of 2024 were impacted by an increase in that interest income and again on the Visa class B1 stock exchange net investment security sales of $10.7 million, and partially offset by a merger related provision for credit losses of $9.1 million and merger related expenses of $4.4 million, and FDIC special assessment as $3.6 million, and an increase in non-interest expenses related to three months of loan star bank operations. Excluding the merger related provision and expenses, the gain on the Visa class B1 stock exchange, net investment security sales, and yet the ICT Special Assessment, each net attack net income was $116 million, or a dollar-22 cents per diluted comments share for the three months ending June 30, 2024.

David E. Zalman: At June 30, 2024, the allowance for credit losses on loans was $359 million, and the allowance for credit losses on loans and off balance sheet credit exposure was $397 million. The allowance for credit losses on loans was 4.02 times the amount of non-performing assets.

Speaker Change: Net income and net income per diluted common share

Speaker Change: for the second quarter of 2024 were impacted by an increase in net interest income and a gain on the Visa Class B1 Stock Exchange net of investment security sales of $10.7 million.

Speaker Change: and partially offset by a merger-related provision for credit losses of $9.1 million.

Speaker Change: and merger-related expenses of $4.4 million, an FDIC special assessment at $3.6 million, and an increase in non-interest expenses related to three months of Lone Star Bank operations.

Speaker Change: Excluding the merger related provision and expenses the gain on the Visa Class B-1 Stock Exchange net of investment security sales.

Speaker Change: and the FDIC Special Assessment.

Speaker Change: Each net of tax, net income, was $116 million or $1.22 per diluted common share for the three months ending June 30, 2024.

David Zalman: And our annualized returns on average assets for 1.17% and our annualized return on average changeable at the common equity was $12.34 based on those numbers. We are also pleased that our net interest income before provision for credit losses was $258 million for the three months ending June 30, 2024, compared with $238 million for the three months ending March 31, 2020. For an increase of $20.5 million, are 8.6 per cent. In addition, our net interest margin on an attack equivalent basis was 2.94 per cent for the three months ending June 30, 2024, compared with 2.79 per cent for the three months ending March 31, 2020.

Speaker Change: And our annualized returns on average assets were 1.17%, and our annualized return on average tangible common equity was 12.34% based on those numbers.

Speaker Change: We are also pleased that our net interest income before provision for credit losses was $258 million for the three months ended June 30, 2024, compared with $238 million for the three months ended March 31, 2024.

Speaker Change: An increase of $20.5 million or 8.6%.

Speaker Change: In addition, our net interest margin on a tax-equivalent basis was 2.94% for the three months ended June 30, 2024, compared with 2.79% for the three months ended March 31, 2024.

David Zalman: And 2.73 per cent for the same period in 2023. As mentioned on prior calls, these are the results that we expect, and we anticipate these tailwinds should continue to be positive for the near future. Our loans were 22.3 billion at June 30, 2024, an increase of $666 million or 3.1% when compared with $21.6 billion at June 30, 2023. Our late core loans increase from $0.56 million are 5% from the 21.2 billion at March 31, 2024. Loans increase primarily due to the long-star merger, excluding loans acquired in the long-star and First Capital acquisitions and new production at the acquired banking centers since the respective acquisition dates.

Speaker Change: and 2.73% for the same period in 2023. As mentioned on prior calls, these are the results that we expected and we anticipate these tailwinds should continue to be positive for the near future.

Speaker Change: Our loans were $22.3 billion at June 30, 2024, an increase of $666 million, or 3.1%, when compared with $21.6 billion at June 30, 2023.

Speaker Change: Our linked core loans increased $1,056,000,000 or 5% from the $21.2 billion at March 31, 2024.

Speaker Change: Loans increased primarily due to the Lone Star merger.

Speaker Change: Excluding Loans Acquired in the Loan Star and First Capital Acquisitions and New Production at the Acquired Banking Centers.

David E. Zalman: Loans at June 30, 2024, decreased $37 million are two basis points when compared to last year, June 30, 2023, and increased $63 million for three basis points compared with March 31, 2024. Excluding these acquisition-related loans and warehouse purchase program loans at June 30, 2024, decreased loans decreased to 152 million, or 8 basis points compared with March 31, 2024. Our deposits were 27.9 billion, I'm sorry, 27.9 billion, at June 30, 2024, and increased to 552 million, our 2% compared with 27.3 billion, at June 30, 2023. Our linked quarter deposits increased 757 million, or 2.8%, from the 27.1 billion at March 31, 2024.

Speaker Change: Since the respective acquisition date.

Speaker Change: Loans at June 30, 2024.

Speaker Change: Decreased $37 million, or two basis points when compared to last year, June 30, 2023.

Speaker Change: and an increased 63 million or three basis points compared with March 31st of 2024.

Speaker Change: Excluding these Acquisition Related Loans and Warehouse Purchase Program Loans at June 30, 2024, loans decreased $152 million, or 8 basis points, compared with March 31, 2024.

Speaker Change: Our deposits were $27.9 billion at June 30, 2024, an increase of $552 million, or 2% compared with $27.3 billion at June 30, 2023.

Speaker Change: Our linked core deposits increased $757 million, or 2.8%,

Speaker Change: from the $27.1 billion at March 31st, 2024.

David Zalman: The increases were primarily due to the long-star merger, excluding deposits assumed in the long-star and First Capital acquisitions, and new deposits generated at the acquired banking centers since the respective acquisition days. The deposits that June 30, 2024, decreased by 470 million, our 1.8% when compared to last year, June 30, 2023, and decreased by 298 million, our 1.2% compared with March 31, 2024. Historically, our deposits are seasonally lower in the second and third quarters and increase again in the fourth quarter. We have not purchased any broker deposits to offset the deposit loss, and we do not currently intend to do so.

Speaker Change: The increases were primarily due to the Lone Star merger, excluding deposits assumed in the Lone Star and First Capital acquisitions, and new deposits generated at the Acquired Banking Centers since the respective acquisition dates.

Speaker Change: Deposits at June 30, 2024 decreased by $470 million or 1.8% when compared to last year, June 30, 2023.

Speaker Change: and decreased by $298 million are 1.2% compared with March 31st, 2024. Historically, our deposits are seasonally lower in the second and third quarters and increase again in the fourth quarter.

Speaker Change: We have not purchased any broker deposits to offset the deposit loss, and we do not currently intend to do so.

David Zalman: Our bankers' focus is on building quarter deposits; our net-interpreying deposits to represent a 34.7% of our total deposits at June 30, 2024. Our non-performing assets totaled 89 million, our 25 basis points of quarterly average interest earning assets at June 30, 2024. Compared with 83 million, our 24 basis points of quarterly average interest earning assets at March 23, 2024. And 62 million, our 18 basis points of quarterly average interest-earning assets at June 30, 2023. With a significant portion of the balance for each period attributable to the acquired loans. At June 30, 2024, the allowance for credit losses on loans was 359 million, and the allowance for credit losses on loans and all balance sheet credit exposure was 397 million.

Speaker Change: Our banker's focus is on building core deposits. Our net interest bearing deposits represented 34.7% of our total deposits at June 30, 2024.

Speaker Change: Our non-performing assets totaled $89 million, or 25 basis points, of quarterly average interest-earning assets at June 30, 2024.

Speaker Change: compared with 83 million or 24 basis points of quarterly average interest earning assets at March 31st, 2024.

Speaker Change: and 62 million or 18 basis points.

Speaker Change: of Quarterly Average.

Speaker Change: Interest Earning Assets at June 30, 2023, with a significant portion of the balance for each period attributable to the acquired loans.

Speaker Change: At June 30, 2024, the allowance for credit losses on loans was $359 million, and allowance for credit losses on loans and off-balance sheet credit exposure was $397 million.

David E. Zalman: The allowance for credit losses on loans was 4.02 times the amount of non-performing assets. With regard to acquisitions, we continue to have conversations with other bankers considering opportunities. We believe that higher technology and staffing costs, funding costs, loan computation, succession planning concerns, and increased regulatory burden point to continued consolidation. We remain ready to move forward in the event at transaction materializes, and we will be beneficial to our companies, long-term future, and increase shareholder value.

Speaker Change: The allowance for credit losses on loans was 4.02 times the amount of non-performing assets.

David E. Zalman: With regard to acquisitions, we continue to have conversations with other bankers considering opportunities. We believe that higher technology and staffing costs, funding costs... loan competition, succession planning concerns, and increased regulatory burden all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and increased shareholder value. We are optimistic about the future and confident in our ability to create meaningful long-term value for our shareholders.

Speaker Change: With regard to acquisitions, we continue to have conversations with other bankers, considering opportunities. We believe that higher technology and staffing costs, funding costs,

Speaker Change: Loan competition, succession planning concerns, and increased regulatory burden all point to continued consolidation.

Speaker Change: We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and increase shareholder value.

David Zalman: We are optimistic about the future and confidence in our ability to create meaningful, long-term value for our shareholders. Over the last 12 months, we have returned $284 million to shareholders. 74 million through share repurchases and $209 million through cash dividends.

Speaker Change: We are optimistic about the future and confident in our ability to create meaningful long-term value for our shareholders. Over the last 12 months, we have returned $284 million to shareholders.

David E. Zalman: Over the last 12 months, we have returned $284 million to shareholders. $74 million through share repurchases and $209 million through cash dividends. With regard to the economy, CNBC recently announced that Texas was voted the third best state for business in 2024. However, we believe we should have been number one. Sorry, that's Texas humor. It's just the right trying to correct the wrong.

Speaker Change: $74 million through share repurchases and $209 million through cash dividends.

David Zalman: With regard to the economy, CNBC recently announced that Texas was voted the third best state for business in 2024. However, we believe we should have been number one. Sorry, that's Texas humor. It's just a right trying to correct the wrong. Texas continues to shine as more people and companies move to the state because of the business-friendly political structure and those state income tax. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank in a efficient manner while investing in ever changing technology and product distribution channels. We continue to grow the company both organically and through murders and acquisitions.

Speaker Change: With regard to the economy, CNBC recently announced that Texas was voted the third best state for business in 2024. However, we believe we should have been number one.

David E. Zalman: 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 Bank continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels. We intend to 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.

Speaker Change: Sorry, that's Texas humor. It's just the right trying to correct the wrong. 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.

Speaker Change: Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels.

Speaker Change: We intend you to grow the company both organically and through mergers and acquisitions.

David Zalman: I want to thank everyone involved in our company for helping to make it the success that has become.

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

David Zalman: Thanks again for your support of our company.

Asylbek Osmonov: Thanks again for your support of our company. Let me turn the discussion over to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?

Asylbek Osmonov: Let me turn over the discussion to also back us. Mono, our team financial officer, to discuss some of the specific financial results we achieved. Awesome.

Asylbek Osmonov: Thank you, Mr. Zalman.

Asylbek Osmonov: Good morning, everyone. Net interest income before provision for credit losses for the three-month end of June 30, 2024 was $258.8 million, an increase of $20.5 million compared to $238.2 million for the previous year. The increase was partially due to the operation of Lone Star Bank acquired on April 1st, 2024. During the second quarter of 2024, we recognized purchase accounting provision expense of $9.1 million related to the Lone Star acquisition. In addition, fair value loan income was $7.2 million for the second quarter, compared to $1.9 million for the first quarter of 2024.

Asylbek Osmonov: Good morning, everyone. Net interest income before provision for credit losses for the three months and the June 30, 2024, was $258.8 million. An increase of 20.5 million compared to. $238.2 million for the core and its March 31, 2024. An increase of $22.3 million compared to. $236.5 million for the same period in 2023. The increase was partially due to operation of loans start bank acquired on April 1, 2024. During the second quarter of 2024, we recognized purchase accounting provision expense of $9.1 million related to the Loans Start acquisition. In addition, fair value loan income was $7.2 million for the second quarter compared to $1.9 million for the first quarter of 2024.

Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone.

Asylbek Osmonov: Net Interest Income Before...

Asylbek Osmonov: Before provision for credit losses for the three-month end of June 30, 2024 was $258.8 million, an increase of $20.5 million, compared to $238.2 million for the quarter-ended March 31, 2024.

Speaker Change: and an increase of $22.3 million compared to $236.5 million for the same period in 2023. The increase was partially due to the operation of Lone Star Bank acquired on April 1, 2024.

Speaker Change: During the second quarter, 2024, we recognized purchase accounting provision expense of $9.1 million related to the Lone Star acquisition.

Speaker Change: In addition, fair value loan income was $7.2 million for the second quarter, compared to $1.9 million for the first quarter of 2024.

Asylbek Osmonov: The net interest margin on a tax equivalent basis was 2.94% for the three months and the June 30, 2024, compared to 2.79% for the core and its March 31, 2024, and 2.73% for the same period in 2023. The net interest margin for the three months and the June 30, 2024, was 2.86% compared to 2.76% for the core and its March 31, 2024, and 2.7% for the same period in 2023. The net interest income was $46 million for the three months and the June 30, 2024, compared to 38.9 million for the core and its March 31, 2024, and 39.7 million for the same period in 2020.

Asylbek Osmonov: The net interest margin on a tax-equivalent basis was 2.94% for the three months ended June 30, 2024, compared to 2.79% for the quarter ended March 31, 2024 and 2.73% for the same period in 2023. Excluding purchase accounting adjustments, the net interest margin for the three months ended June 30, 2024 was 2.86% compared to 2.76% for the quarter ended March 31, 2024 and 2.7% for the same period in Non-interest income was $46 million for the three-month-ended June 30, 2024, compared to $38.9 million for the quarter-ended March 31, 2024 and $39.7 million for the same period in 2022. Higher non-interest income during the second quarter of 2024 includes a net gain of $10.7 million resulting from visa stock conversion, partially offset by the loss on sale of investment security.

Speaker Change: The net interest margin on a tax-equivalent basis was 2.94%.

Speaker Change: for the three-month-ended June 30th, 2024.

Speaker Change: for the quarter-ended March 31st, 2024, and 2.73% for the same period in 2023.

Speaker Change: excluding purchased accounting adjustments.

Speaker Change: The net interest margin for the three-month-ended June 30, 2024, was 2.86%, compared to 2.76% for the quarter-ended March 31, 2024, and 2.7% for the same period in 2023.

Speaker Change: Non-interest income was $46 million for the three months ended June 30, 2024, compared to $38.9 million for the quarter ended March 31, 2024, and $39.7 million for the same period in 2023.

Asylbek Osmonov: 3. Higher non-interest income during the second quarter of 2024 includes a net gain of 10.7 million resulting from Visa stock conversion, partially offset by the loss on sale of investment securities. Non-interest expense for the 3 months and its June 30, 2024, was 152.8 million compared to 135.8 million for the same period in 2023. The link for the increase was primarily due to merger laid expenses of 4.4 million, 3 months of loan start bank operation, and FDIC special assessment of 3.6 million.

Speaker Change: Higher non-interest income during the second quarter of 2024 includes a net gain of $10.7 million resulting from visa stock conversion, partial offset by the loss on sale of investment securities.

Asylbek Osmonov: Non-interest expense for the three months ended June 30th, 2024 was $152.8 million compared to $135.8 million for the quarter ended March 31st, 2024 and $145.9 million for the same period in 2022. The lien quota increase was primarily due to merger-related expenses of $4.4 million, three months of loan start bank operation, and an FDIC special assessment of $3.6 million. For the third quarter of 2024, we expect non-interest expense to be in the range of $141 to $143 million.

Speaker Change: Non-interest expense for the three months ended June 30, 2024 was $152.8 million.

Speaker Change: compared to 135.8 million.

Speaker Change: for the quarter ended March 31st, 2024 and $145.9 million for the same period in 2023.

Speaker Change: The lien quota increase was primarily due to merger-related expenses of $4.4 million, three months of loan start bank operation, and FDIC special assessment of $3.6 million.

Asylbek Osmonov: For the third quarter of 2024, we have spent non-interest expense to be in the range of 141 to 143 million. The decisions ratio was 51.8% for the 3 months and its June 30, 2024, compared to 49.1% for the quarter and its March 31, 2024, and 53.2% for the same period in 2023. Excluding merger laid expenses, FDIC special assessment and net gain on sale of securities, the decisions ratio was 49.1% for the 3 months and its June 30, 2024.

Speaker Change: For the third quarter 2024, we expect non-interest expense to be in the range of $141 to $143 million.

Asylbek Osmonov: The efficiency ratio was 51.8% for the three months ended June 30, 2024, compared to 49.1% for the quarter ended March 31, 2024, and 53.2% for the same period in 2023. Excluding merger-related expenses, the FDIC special assessment, and net gain on sale of securities, the efficiency ratio was 49.1% for the three months ended June 30, 2024.

Speaker Change: The efficiency ratio was 51.8% for the three months ended June 30th, 2024, compared to 49.1% for the quarter ended March 31st, 2024, and 53.2% for the same period in 2023.

Speaker Change: Excluding merger-related expenses, FDIC special assessment, and net gain on sale of securities, the efficiency ratio was 49.1% for the three months ended June 30, 2024.

Tim Tomanis: The bond portfolio metrics, at $638,024, have a modified duration of 4.1 and projected annual cash flows of approximately $1.9 billion. And with that, let me turn over the presentation to Tim Timanis for some details on the loans and assets. Thank you, Asylbek.

Asylbek Osmonov: The 1.4 million metrics at 6.724 have a modified duration of 4.1 and projected annual cash flows of approximately 1.9 million.

Speaker Change: The bond portfolio metrics at $638,024 have a modified duration of 4.1 and projected annual cash flows of approximately $1.9 billion.

Tim Tamanish: And with that, let me turn over the presentation. The team to manage for some details on loan and asset quality.

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

Tim Tamanish: Thank you, also, Beck. Our non-performing assets, at quarter and June 30, 2024, total $89,570,000, which is 40 basis points of loans and other real estate, compared to $83,811,000, are 39 basis points at March 31, 2024. This represents a 6.8% increase.

Tim Tomanis: Our non-performing assets at quarter end June 30, 2024, totaled $89,570,000, which is 40 basis points of loans and other real estate compared to $83,811,000, or 39 basis points at March 31st, 2024. This represents a 6.87% increase. Since June 30, 2024, $2,517,000 of non-performing assets have been removed or put under contract for sale. The June 30, 2024, non-performing asset total was comprised of $84,497,000 in loans, $113,000 in repossessed assets, and $4,960,000 in other real estate.

Tim Timanis: Thank you, Asylbek.

Tim Timanis: Our non-performing assets at quarter-end June 30th, 2024

Tim Timanis: totaled $89,570,000.

Speaker Change: which is 40 basis points of loans and other real estate.

Speaker Change: compared to $83,811,000 or 39 basis points at March 31st, 2024.

Speaker Change: This represents a 6.87% increase.

Tim Tamanish: Since June 30, 2024, $2,517,000 of non-performing assets have been removed or put under contract for sale. The June 30, 2024, non-performing asset total was comprised of $84,497,000 in loans, $113,000 in loans. And for me, $960,000 in other real estate.

Speaker Change: since June 30th, 2024.

Speaker Change: $2,517,000 of non-performing assets have been removed or put under contract for sale.

Speaker Change: The June 30, 2024, non-performing asset total was comprised of $84,497,000 in loans,

Speaker Change: $113,000 in repossessed assets.

Speaker Change: and $4,960,000 in other real estate.

Tim Tomanis: Net charge-offs for the three months ended June 30, 2024 were $4,368,000, compared to net charge-offs of $2,143,000 for the quarter ended March 31st, 2024. This is a $2,225,000 increase, on a Lankwater basis. Additionally, there was a $9,066,000 addition to the allowance for credit loss during the quarter ended June 30th, 2024, resulting from the Lone Star State Bank of West Texas acquisition. No dollars were taken into income from the allowance during the quarter ended June 30, 2024.

Tim Tamanish: Net charge-offs for the 3 months ended June 30, 2024, were 4,368,000 dollars, compared to net charge-offs of 2,143,000 dollars for the quarter ended March 31, 2024.

Speaker Change: Net charge-offs for the three months ended June 30, 2024.

Speaker Change: were $4,368,000.

Speaker Change: compared to net charge-offs of $2,143,000 for the quarter ended March 31st, 2024.

Speaker Change: This is a $2,225,000 increase.

Speaker Change: on a length quarter basis.

Speaker Change: There was a $9,066,000 addition to the allowance for credit losses.

Speaker Change: During the quarter ended June 30, 2024, resulting from the Lone Star State Bank of West Texas acquisition.

Speaker Change: No dollars were taken into income from the allowance during the quarter ended June 30th, 2024.

Tim Tomanis: The Average Monthly New Loan Production for the quarter ending June 30th, 2024, was $278 million, compared to $308 million for the quarter ending March 31st, 2024. Loans outstanding at June 30, 2024 were approximately $22.321 billion, compared to $21.265 billion at March 31st, 2024. The June 30th, 2024 loan total is made up of 41% fixed rate loans.

Speaker Change: The average monthly new loan production for the quarter ended June 30, 2024, was $278 million.

Speaker Change: compared to $308 million for the quarter ended March 31st, 2024.

Speaker Change: Loans outstanding at June 30, 2024 were approximately $22.321 billion.

Speaker Change: compared to $21.265 billion at March 31st, 2024.

Speaker Change: The June 30, 2024 loan total is made up of 41% fixed rate loans.

Charlotte M. Rasche: 30% floating rate loans. 29% variable rate. I'll now turn it over to Charlotte Rasche. Thank you, Tim.

Speaker Change: 30% floating rate loans.

Speaker Change: and 29% variable rate loans.

Charlotte M. Rasche: At this time, we are prepared to answer your questions. Our call operator will assist us with questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.

Speaker Change: I'll now turn it over to Charlotte Rasche.

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

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question, you may press star then 1 on your touchtone phone.

Operator: If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Peter Winter with D.A. Davidson. Please go ahead. Good morning.

Speaker Change: If you're using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: And the first question will come from Peter Winter with D.A. Davidson. Please go ahead.

Asylbek Osmonov: Really nice margin expansion this quarter, even if I exclude the purchase accounting accretion. Can you just give an update on that NIM outlook by the fourth quarter? It seems like you can do better than the 3% and how you're thinking about the NIM into next year. Here is Asylbek.

Peter J. Winter: Good morning. Really nice margin expansion this quarter, even if I exclude the purchase accounting accretion.

Peter J. Winter: Can you just give an update on that NIM outlook by fourth quarter? It seems like you can do better than the 3% and how you're thinking about the NIM into next year.

David E. Zalman: I think we have to look at our, you know, NIM, what happened in the second quarter. So we had two things going on, right? It was our organic growth on NIM that we expected, plus we had a Lone Star acquisition that helped. So those two combinations gave us a pretty good lift in the margin. So if we look at our model, I think it's still showing improvement on the margin, and continuous improvement on the margin going forward.

Peter J. Winter: Asylbek, I think we have to look at our, you know, NIM, what happened in the second quarter. So we had two things happening, right? It was our organic growth on NIM that we expected.

Speaker Change: Plus, we've had a Lone Star acquisition that's helped.

Speaker Change: So those two combinations gave us a pretty good lift in the margin.

Speaker Change: So if you look at our model...

Speaker Change: I think it's still showing improvement on the margin, continuous improvement on the margin.

David E. Zalman: And for the fourth quarter, I think we expect it to be a little bit better, but right now, we say that, you know, our exit margin will be around 3% as we're guided. So it has not changed since then, but we expect it to be better as we hopefully continue to grow loans and, you know, manage our deposits. I think, Peter, I can probably give you a little bit more reassurance, or at least I feel like I can.

Speaker Change: [inaudible]

Peter J. Winter: I think, Peter, I could probably give you a little bit more reassurance, or at least I feel like I can. I think the net interest margin, at least from the model that we have,

David E. Zalman: I think the net interest margin, at least from the model that we have, shows that, again, I think we'll hit what we said. You know, the Queen Mary is turning around in the driveway out there. I think that we're going to be able to hit what we have said we would hit by the end of the year. I think maybe even, like you said, maybe a little bit better, but, you know, our six month, 12 month, and 24 month net interest margins really show that we should continue to increase, you know, up or down 200 basis points in our model. So I think that we're definitely on the right track. I think in 12 months, we're showing about a 3.2% net interest margin. This is just a model. This is a static model.

Peter J. Winter: Shows that again that I think

Peter J. Winter: will hit what we said.

Peter J. Winter: The Queen Mary is turning around in the driveway out there. I think that we're going to be able to hit what we have said we'll hit by the end of the year. I think maybe even, like you said, maybe a little bit better, but our six-month, 12-month, and 24-month net interest margins really show that we should continue to increase up or down 200 basis points in our model. So I think that we're definitely on the right track, I think, in 12 months.

Peter J. Winter: were sworn about.

Peter J. Winter: 332% Net Interest Margin. This is just a model. This is a static model. I mean,

David E. Zalman: I mean, loans stand where they're at, deposits stand where they're at, and 24 months, I mean, we start getting back up. I'm not going to say what our model says because I think it looks too high, but I'd say we'll still be maybe back to what our normal net interest margin is. It's probably about 3.4, and that's what we're shooting for right now.

Peter J. Winter: David Zalman, Charlotte Rasche, David Zalman, David Zalman, David Zalman, David Zalman, David

Kevin J. Hanigan: And I think that's, you know, that's the way it should go. As far as net interest income is concerned, that may be another issue. I mean, we like seeing the net interest income go up, but again, as interest rates drop, that would put pressure on the net interest income. But the good thing, and it'll take time to reestablish what the interest expense will be, and also takes into consideration what's rolling off at the same time that we have and repricing. So all of that goes.

Peter J. Winter: As far as net interest income, that may be another issue, I mean, we like seeing the net interest income go up, but again, as interest rates, if interest rates do drop.

Peter J. Winter: That would be pressure on the net interest income.

Speaker Change: That's the good, and it'll take time to...

Speaker Change: Re-establish what the interest expense will be in and also goes into consideration what's rolling off at the same time that we have and repricing so all of that goes so what I'm saying is there could be some noise and those numbers short term but long term I think this model is correct and I've seen it go when we started talking

David E. Zalman: So what I'm saying is there could be some noise in those numbers short-term, but long-term, I think this model is correct. And I've seen it go from when we started talking last year at 273, to almost read where we're at today, and I think I see it going forward.

Speaker Change: Last year at 273 to almost read where we're at today, and I think I see it going forward, so.

Kevin Hanigan: Johnson, John, thanks David, and then just a little more question, just let me just talk about loan demand, maybe provide an update, not in the competitive landscape for lending. You know, we did see some pressure on, I'm period and loans from legacy prosperity, and then also just continue run off from first capital. Are we getting closer to the bottom there? You know, this is Kevin. I think we are, Peter, I think it's going to be aided by the prospect of rate cuts, which I think is going to both stabilize deposits. In fact, we were talking earlier in the week that is, it's the prospect of rate cuts that a lot of money that moved off the banking industry's balance sheet in the treasuries will work its way back into the bank.

Kevin J. Hanigan: Thanks, David. And then just one more question. Can you just talk about loan demand, maybe provide an update on the competitive landscape for lending? You know, we did see some pressure on period end loans from Legacy Prosperity and then also just continued runoff from First Capital. Are we getting closer to the bottom there? Yeah, this is Kevin.

Speaker Change: Got it. Thanks, David.

Speaker Change: Just one more question just

Speaker Change: Can you just talk about loan demand and maybe provide an update on the competitive landscape for lending?

Speaker Change: You know, we did see some pressure on period end loans from Legacy Prosperity, and then also just continued runoff from First Capital, are we getting closer to the bottom there?

Kevin J. Hanigan: I think we are. Peter, I think it's going to be aided by the prospect of rate cuts, which I think is going to both stabilize deposits and, in fact, We were talking earlier in the week that with the prospect of rate cuts, a lot of money that moved off the banking industry's balance sheet into Treasuries will work its way back into the bank. I think we were talking about that on Monday, and lo and behold, yesterday, we had a client move back in the process of moving back about $20 million out of treasuries back into a money market account here at the bank. It'll also aid in the way people are thinking about growing their business.

Speaker Change: Yeah, this is Kevin. I think we are, Peter, I think it's going to be aided by the prospect of rate cuts, which I think is going to both stabilize deposits, in fact,

Speaker Change: We were talking earlier in the week that is with the prospect of rate cuts that a lot of money that moved off the banking industry's balance sheet into Treasury's will work its way back into the bank.

Kevin Hanigan: I think we're talking about that on Monday and loan the whole district day. We had a client move back in the process of moving back into about $20 million out of treasuries back into a money market account. Here at the bank, but they'll also aid in the way people are thinking about growing their business. So, I think going back through our guidance so far for the year, and we started off the year with three to five percent growth in core loans. Q2, we backed that off a little bit, saying it’s probably towards the lower end of back-end loaded, and that’s where we said today.

Speaker Change: I think we were talking about that on Monday, and lo and behold, yesterday, we had a client move back, in the process of moving back in, about $20 million out of Treasuries back into a money market account.

Speaker Change: Here at the bank, but it will also aid in the way people are thinking about growing their business.

Kevin J. Hanigan: So I think going back through our guidance so far for the year, you know, we started off the year with three to five percent growth in core loans. In Q2, we backed that off a little bit, saying probably towards the lower end of back-end loaded, and that's where we sit today. It's still very, very competitive out there for almost everything we look at, and so it's still a knife fight when it comes down to rates and things of that nature.

Speaker Change: I think going back through our guidance so far for the year, we started off the year with 3-5% growth.

Speaker Change: and Core Loans.

Speaker Change: Q2, we backed that off a little bit, saying probably towards the lower end of back-end loaded, and that's where we sit today. It's still very, very competitive out there for almost everything we look at.

Tim Tamanish: It's still very, very competitive out there for almost everything we look at. And so it's still a nice bite when it comes down to rates and things of that nature. But I'd say in the last couple of weeks we've seen, particularly in the middle market, customers who, in the short run, are more likely to be borrowing more as construction projects we approve may not fund for six or nine months from now. Some renewed optimism and where the economy's going, and some inventory builds, and some folks in fact expanding plant equipment. So, I think the second half has the prospect to be a much better aided by the general belief that rates are going to moderate.

Speaker Change: And so it's it's still a knife fight when it comes down to rates and things of that nature, but

Kevin J. Hanigan: I'd say in the last couple of weeks, we've seen, particularly among our middle market customers who, in the short run, are more likely to be borrowing more as construction projects we approve may not fund for six or nine months from now, some renewed optimism in where the economy is going and some inventory builds, and some folks, in fact, expanding plant and equipment. So, I think the second half is going to have the prospect of being much better, aided by the general belief that rates are going to moderate. I think it's also important, I could say that.

Speaker Change: I'd say in the last couple of weeks we've seen, particularly in our middle market customers who in the short run are more likely to be borrowing more as construction projects we approve may not fund for

Speaker Change: 6 or 9 months from now.

Speaker Change: Some renewed optimism in where the economy is going and some inventory builds and some folks, in fact, expanding plant and equipment.

Speaker Change: I think the second half has the prospect of being much better aided by the general belief that rates are going to moderate. I think it's also, I could say that.

Kevin Hanigan: I think it's also, I could say that, you know, we, we're the positive have been in our complications been we had had opportunities to increase our position in some shared credits that we have. But again, I think our terms and conditions we kind of toughened up a little bit to holding it. We really want to keep we still want to build customers have true relationships with us. And I think that's held us back a little bit too, but that's by design. We kind of pull back ourselves, hoping and waiting till we see the turnaround and deposits and all that stabilizing come back to the bank.

Kevin J. Hanigan: You know, with where the deposits have been and how the competition's been, we have had opportunities to increase our position in some shared credits that we've had, but again, I think our terms and conditions have kind of toughened up a little bit too, holding that we really want to keep, we still want to build customers that have true relationships with us, and I think that's held us back a little bit too, but that's by design. We What's been encouraging to me is when we talk to existing customers and potential new customers about prospective future loans. They all have things that they want to do.

Speaker Change: You know, uh, we...

Speaker Change: With where the posits have been and how the competition has been, we have had opportunities to increase our position in some shared credits that we've had, but again, I think our terms and conditions, we've kind of toughened up a little bit too.

Speaker Change: We're holding it. We really want to keep, we still want to build customers that have true relationships with us, and I think that's held us back a little bit too. But that's by design. We've kind of pulled back ourselves, hoping and waiting until we see the turnaround in deposits and all that stabilize and come back to the bank.

Tim Tamanish: Timothy.

Tim Tamanish: Yeah, I think everything you guys are saying is absolutely correct. What's been encouraging to me is when we talk to existing customers and potential new customers. About prospective future loans. They all have things that they want to do; they have projects that they want to start. So there's a fair amount of enthusiasm about trying to get things moving and do things, and they're all sitting there waiting for a right cut; is the bottom line. and I think any right cut at all will make some feel better. I think if you get as much as 100 basis points right cut, which won't happen day one with a cut I wouldn't think, but maybe it would.

Speaker Change: Yeah, I think everything you guys are saying is absolutely correct. What's been encouraging to me is when we talk to existing customers and potential new customers,

Kevin J. Hanigan: They have projects that they want to start, so there's... A fair amount of enthusiasm about trying to get things moving and do things, and they're all sitting there waiting for a rate cut, the bottom line. And I think any rate cut at all will make them feel better. I think if you get as much as a 100 basis points rate cut, which won't happen. Day 1 with a cut, I wouldn't think, but maybe it would.

Speaker Change: about prospective future loans.

Speaker Change: They all have things that they want to do. They have projects that they want to start. So there's...

Speaker Change: A fair amount of enthusiasm about trying to get things moving and do things and they're all sitting there waiting for a rate cut is the bottom line.

Speaker Change: And I think any rate cut at all will make them feel better. I think if you get as much as 100 basis points rate cut, which won't happen.

Speaker Change: Day 1 with a cut, I wouldn't think, but maybe it would. I think you'll see some projects coming off the desk.

Kevin J. Hanigan: I think you'll see some projects coming off the desk and moving forward, so I'm reasonably optimistic that things are going to be better as we move forward in the year and certainly in the next. That's great. Thanks for all the color.

Tim Tamanish: I think you'll see some projects coming off the desk and moving forward. So I'm reasonably optimistic that things are going to be better as we move forward in the year. Certainly in the next year. That's great.

Speaker Change: and moving forward. So I'm reasonably optimistic that things are going to be better as we move forward in the year, certainly into next year.

Unknown Executive: Thanks for all the color.

Speaker Change: That's great. Thanks for all the color.

Manan Gosalia: See next question. We'll come from Manan Gofalia with Morgan Stanley. Please go ahead. How are you? Good morning? Good morning. On I know that long yields are a name.

Manan Gosalia: The next question will come from Manan Gosalia with Morgan Stanley. Please go ahead. Hey, good morning.

Speaker Change: The next question will come from Manan Gosalia with Morgan Stanley . Please go ahead.

Asylbek Osmonov: On either loan yields or NIM, are you able to separate out, you know, how much of the expansion came from the core prosperity portfolio and how much came from the LoanStar acquisition? Yeah, if you look at our margin expansion, and I was going to talk about the core name, it improved from 276 to 286. Our organic was very similar, maybe a basis point better than what we did from Q4 of last year to Q1, and the rest of them came from Lone Star acquisitions, so I think if we looked at it like a 50-50 increase was between Lone Star and organic. Got it.

Manan Gosalia: Hey, good morning.

Kevin Hanigan: Are you able to separate out, you know, how much of the expansion came from the core, prosperity portfolio and how much came from the launch track position? Yeah, if you look at our margin expansion, and I will talk with a core name, you know, improved from 276 to 286. Our organic was a very similar, maybe, based on better than what we did from QAQ for last year to Q1. And the rest of them came from Lone Star Acquisition. So I think if we looked at like 50-50, increase was between Lone Star and Organic. Got it.

Manan Gosalia: On either Loan Yields or NIM, are you able to separate out how much of the expansion came from the core Prosperity Portfolio and how much came from the Loan Star Acquisition?

Speaker Change: Yeah, if you look at our margin expansion, and I was going to talk the core name, you know, improved from 276 to 286.

Speaker Change: Our organic was a very similar, maybe basis point better than what we did from Q4 of last year to Q1, and the rest of them came from Lone Star acquisitions, so I think if we looked at it like 50-50 increase was between Lone Star and organic.

Asylbek Osmonov: And that organic expansion is coming from the fixed rate asset repricing. Yeah, the repricing story continues, and we expect it to continue from here. Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. He is a licensed financial professional in both the U.S. and Israel.

Kevin Hanigan: And that organic expansion is coming from the fixed rate asset representing. Yeah, the repricing story continues, and we expected to continue from here. Got it.

Speaker Change: Got it. And that organic expansion is coming from the fixed-rate asset repricing. Yeah, the repricing story continues and we expect it to.

Kevin Hanigan: And then maybe if you can just speak to some friends in the deposit site, you know, what are you seeing on an I.B. Excluding what you got from Lone Star and you know, just as you're thinking about downside deposit data and great cuts from here. How should we expect deposit portfolio to behave? Thanks.

Speaker Change: to continue from here.

Douglas Goldstein: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. He is a licensed financial professional both in the U.S. and Israel. Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE & SIPC, a Fidelity Investments company. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at www.profile-financial.com. All information on this website is purely information and should not be used as the sole basis for making financial decisions. The opinions rendered herein are those of the guests, and not necessarily those of Douglas Goldstein, Profile Investment Services, Ltd., or Israel National News. Readers should consult with a professional financial advisor before making any financial decisions. Please see the complete disclaimer at https://sites.google.com.au If you have any questions or other problems, please post them in the comments.

Kevin J. Hanigan: I don't know if I have the best answer for this, but I'll give it a shot, and you guys, tag in. I think if we look at the month of July, I'd say it's still fierce out there. I mean, we still get some requests for modifications off of the rate sheet, but stabilization would be the word I would use. I mean, through through Tuesday. Anyhow, last time, and I haven't looked at the balance sheet for today, core deposits outside of public funds are actually up. Not very much, but they're up.

Kevin Hanigan: I don't know if I'm a best answer on this, but I'll give it a shot, and you guys can tag in. I think if we look at the month of July, I'd say it's still fierce out there. I mean, we still get some requests for modifications off of rate sheet, but stabilization would be the word I would use. I mean, through through Tuesday and the hell last time, and I haven't looked at the balance sheet for the day deposit. The quarter deposits outside of public funds are actually up. You know, not very much, but they're out.

Speaker Change: I don't know if I have the best answer on this, but I'll give it a shot and you guys can...

Speaker Change: Tag in. I think as we look at the month of July I'd say it's still fierce out there. I mean we still get some requests for modifications off of rate sheet but stabilization would be the word I would use. I mean through

Speaker Change: Through Tuesday, anyhow, last time, and I haven't looked at the balance sheet for today, core deposits outside of public funds are actually up.

Kevin Hanigan: There wasn't brackets around it. And that was encouraging for us to see. So I think stabilization, and to the extent we do have rate cuts, I think that will improve even more so. I think that's exactly right. I mean, that's where I'm seeing this stabilization. I think that we also will see deposit as we quick competing against the government and the trade reason interest rates come down. I think you'll see more people coming back into the banks. So I think we see that.

Douglas Goldstein: You know not very much, but they're up. They're not there wasn't brackets around it and That was encouraging for us to see so I I think stabilization and in

Kevin J. Hanigan: There weren't any brackets around it, and that was encouraging for us to see. So I think stabilization, and to the extent we do have rate cuts, I think that will improve even more. I think that's exactly right. I mean, that's what I'm seeing is stabilization.

Douglas Goldstein: To the extent we do have rate cuts, I think that will improve even more so. I think that's exactly right. I mean, that's what I'm seeing is stabilization.

Kevin J. Hanigan: I think that we also will see deposits as we quit competing against the government and the treasuries and interest rates come down. I think you'll see more people coming back into the banks. So I think we'll see that. Just always keep in mind, though, this is a quarter for us where we can go back historically, and we've always lost deposits this quarter and next quarter seasonally just because of our public. Keep that in mind.

Douglas Goldstein: I think that we also will see deposits as we quit competing against the government and the treasuries and interest rates come down. I think you'll see more people coming back into the banks, so I think we see that. I always keep in mind, though, this is a quarter for us where we can go back historically and we've always lost deposits.

Kevin Hanigan: Just I always keep in mind, though, this is a quarter for us where we, you know, back historically, we always lost deposits this quarter and next quarter season, just because of our public funds. So be that in mind, I think overall overall feeling is that that's the top that's our, you know, we never really went out and bought broker deposits. We really weren't the state where we're at. And so I think we all feel better. Yeah, but we didn't like a lot of Bancshares had higher loan to the positive ratios, had the need to go chase the positives with rate.

Kevin J. Hanigan: But I think overall, our overall feeling is that deposits are, you know, we never really went out and bought broker deposits; we really want to stay where we are. And so I think we all feel about the Yeah, what we didn't, Like a lot of banks, you know, banks that had higher loan-to-deposit ratios had the need to chase deposits with higher rates. We just never really chased through the rate.

Speaker Change: This quarter and next quarter seasonally just because of our public funds. So keep that in mind But I think overall our overall feeling is that that deposits are you know, we never really went out and bought broker deposits We really want to stay where we're at. And so I I think we all feel about the same. Yeah, but we didn't

Speaker Change: Like a lot of banks, you know, banks that had higher loan-to-deposit ratios had the need to go chase deposits with with rate

Kevin J. Hanigan: We just never really chased through rate. I think we've maintained our money market, stated money market rate at 3% on the high end, and there's been some exceptions above that. And you could say, well, that decision cost us to lose some deposits over the last couple of years, not a ton, but we've lost a couple of quarters. I think I may view it on the other side of it. We found out just how strong the core deposit franchise is with people sticking with us. If you just look at overall cost of funds, you guys got it for the universe of Bancs out there.

Kevin J. Hanigan: I think we've, we've maintained our money market stated money market rate at 3% on the high end. And there have been some exceptions above that, but, And you could say, well, that decision cost us to lose some deposits over the last couple of years, not a ton, but the last couple of quarters. I think I may view it on the other side of it.

Speaker Change: We just never really taste through rate. I think we've maintained our stated money market rate at 3% on the high end, and there's been some exceptions above that.

Speaker Change: And you could say, well, that decision cost us to lose some deposits over the last couple of years. Not a ton, but the last couple of quarters.

Kevin J. Hanigan: We found out just how strong the core deposit franchise is with people sticking with us. If you just look at our overall cost of funds, you guys have it for the universe of banks out there. Our cost of funds is... Significantly better than most of our programs.

Speaker Change: I think, I may view it on the other side of it, we found out just how strong the core deposit franchise is with people sticking with us. If you just look at our overall cost of funds, you guys got it for the universe of banks out there. Our cost of funds is...

Kevin Hanigan: Our cost of funds is significantly better than most of our peers. And I think he hit a high point there when you mention people staying with us, sticking with us. When I talk to customers and potential customers, their industries for the obvious reason, the yield, but their preferences to have the money with us. And they'll say that. They really prefer not to have all their money with the Federal government. For whatever reason, that's their own decision. But it's good to hear that dialogue, and how many of them say, you know, we really want to start moving money back to you guys.

Kevin J. Hanigan: And I think you hit a high point there when you mentioned people staying with us, sticking with us. When I talk to customers and potential customers, they're into treasuries for the obvious reason, the yield, but their preference is to have the money with us, and they'll, they'll say that they really prefer not to have all their money with the federal government, for whatever reason.

Speaker Change: significantly better than most of our peers.

Speaker Change: And I think you hit a high point there when you mentioned people staying with us, sticking with us. When I talk to...

Speaker Change: customers and potential customers.

Speaker Change: Bye-bye.

Speaker Change: They're in the treasuries for the obvious reason, the yield.

Speaker Change: But their preference is to have the money with us.

Speaker Change: And they'll say that.

Speaker Change: They really prefer not to have all their money with the federal government.

Kevin J. Hanigan: That's their own decision, but it's good to hear that dialogue and how many of them say, you know, we really want to start moving money back to you guys. Now the proof's in the pudding, whether they do or they don't, but I think there is a desire to do so. And if the Treasury's weakened some more, I think you'll see more money coming our way. That's great, Collin.

Speaker Change: For whatever reason.

Speaker Change: That's their own decision, but...

Speaker Change: It's good to hear that dialogue and how many of them say, you know, we really want to start moving money back to you guys. Now, proof's in the pudding whether they do or they don't.

Kevin J. Hanigan: Now, proofs in the pudding, whether they do or they don't. But I think there is a desire to do so. And if the treasure is weakened, some more, I think you'll see more money coming our way.

Speaker Change: But I think there is a desire to do so, and if the Treasury's weakened some more, I think you'll see more money coming our way.

Unknown Executive: That's great color. Thank you so much.

Speaker Change: That's great, Collin, thank you so much.

David Patrick Rochester: The next question will come from Dave Rochester with Compass Point. Please go ahead. Good morning, guys. Maybe just to round the sound of the loan discussion. It looked like the first bank loans were down maybe almost 25% since the deal closed, but it sounds like that is stabilizing here. How are you thinking about the potential runoff at Loan Store? Is there anything in that book that you want to get rid of? And then outside the core loans on the warehouse side of things, how are you thinking about that trend from here? That would question you guys; it's also good seasonality this quarter, so be good to hear what you're thinking on that.

David Patrick Rochester: The next question will come from Dave Rochester with CompassPoint. Please go ahead. Hey, good morning, guys. Good morning. Morning. Maybe just to round us out on the loan discussion, it looked like the first bank loans were down maybe almost 25% since the deal closed. But it sounds like that's stabilizing here. How are you thinking about the potential runoff at Lone Star? Is there anything in that book that you want to get rid of?

Speaker Change: The next question will come from Dave Rochester with Compass Point. Please go ahead.

David Patrick Rochester: Hey, good morning guys. Good morning.

David Patrick Rochester: Maybe just to round us out on the loan discussion, it looked like the first bank loans were down maybe almost 25% since the deal closed, but it sounds like that's stabilizing here.

Kevin J. Hanigan: And then, outside the core loans on the warehouse side of things, how are you thinking about that trend from here? It looked like you guys saw some good seasonality this quarter, so we want to hear what you're thinking on that front going forward. And are you still adding clients to that business, or is it steady state right now? Thanks.

Speaker Change: How are you thinking about the potential runoff at Lone Star? Is there anything in that book that you want to get rid of? And then outside the core loans on the warehouse side of things, how are you thinking about that trend from here? It looked like you guys saw some good seasonality this quarter, so it'd be good to hear what you're thinking.

David Rochester: So I'm going forward, and are you still adding clients to that business, or is it steady state right now?

Speaker Change: on that front going forward and are you still adding clients to that business or is it steady state right now? Thanks.

Kevin J. Hanigan: Yeah, let me explain there are two parts to that question. And, as it pertains to LoanStar, a very, very different bank than First Capital, really good credit quality loans. We really like underwritten insurance, you know, the way we like to underwrite it. So I don't expect much runoff out of that portfolio, really clean. I mean, when we did due diligence. It's not often for Randy Hester to say this is a really clean bank, and he led the due diligence team, and he came back, but this thing is clean. So, I don't think we'll have a ton of runoff from that portfolio. It's a really good bank. I really love the people there.

David Rochester: Yeah, let me, I guess there's two parts of that question. And is it pertains to the loans that are very, very different than First Capital? Really good credit quality loans. We really like underwritten; you know, the way we like to underwrite them. So I don't expect much runoff out of that portfolio. Really clean. I mean, when we did do diligence, it's not often for Randy Hester to say, "this is a really clean bank." And, you know, he's led to do diligence team, and he came back, but this thing is clean. So I don't think we'll have a ton of runoff off of that portfolio.

Speaker Change: As it pertains to LoanStar, very, very different bank than First Capital, really good credit quality loans. We really like underwritten, you know, the way we like to underwrite them. So I don't expect much runoff out of that portfolio. Really clean. I mean, when we did due diligence,

Randy D. Hester: It's not often for Randy Hester to say this is a really clean bank, and he led the due diligence team, and he came back with this thing is clean.

Randy D. Hester: So, I don't think we'll have a ton of runoff off of that portfolio. It's a really good bank, really love the people, it's a good deal for us.

David Rochester: It's a, it's a really good bank. Really love the people. It's, it's a good deal.

Kevin J. Hanigan: It's a good deal. Warehouse, let me answer the customer question first. We've actually let a number of customers go over the last 15 months. I think our peak customer count in that business was either 43 or 44 customers, and we're down to I think 32. And a lot of that was either rate or, more recently, performance where they might not have been doing as well, and we either reduced our exposure to them or eliminated it. It's not that we were losing customers; we flat out fired a bunch of them.

Speaker Change: Warehouse, let me answer the customer question first.

Speaker Change: We've actually let a number of customers go over the last 15 months. I think our peak customer count in that business was either 43 or 44 customers and we're down to, I think, 32.

Speaker Change: And a lot of that was either rate, and or more recently, performance, where they might not have been doing as well, and we either reduced our exposure to them or eliminated it. So we...

Speaker Change: It's not that we were losing customers, it's we flat-out fired a bunch of them.

Kevin J. Hanigan: Now, the customers we've got have been really good to us, as you said. We're into the seasonal period of this business, which seems to have been lost in all the years of the refi and echo refi booms and all the other things. We're back to business as usual, and I got to tell you when I said we'd averaged $900 million for Q2. At the end of May, I was a little worried we weren't going to get there. April and May were pretty weak, and then June was very strong. The strength of June has continued into July through last night. The average for July is $1.1 billion.

Speaker Change: Now, the customers we've got have been really good to us, as you said.

Speaker Change: We're in the seasonal period of this business, which seems to be lost.

Speaker Change: In all the years of refi and echo refi booms and all the other things, we're back to business as usual. And I've got to tell you, when I said we'd average $900 million for Q2,

Speaker Change: At the end of May, I was a little worried we weren't going to get there. April and May were pretty weak and then June was very strong.

Speaker Change: The strength of June has continued into July through last night. The average for July is $1.1 billion. So, I expect that to continue through August and maybe moderate just a little bit seasonally in September .

Kevin J. Hanigan: So I expect that to continue through August and maybe moderate just a little bit seasonally in September. And part of that will be what happens with rates. I'm not saying September may not moderate as much as usual if rates abate a little bit. If I had to put a number on where I think we average for the quarter, I'd say, on the very low side, just to be conservative, $975 million, but more likely in the billion-to-billion range. Take care.

Speaker Change: and part of that will be what happens with rates. I'm not saying September may not moderate as much as usual if rates abate a little bit so

Speaker Change: If I had to put a number on where I think we average for the quarter, I'd say on the very low side, just to be conservative, $975 million, but more likely in the billion to billion 25 range.

Kevin J. Hanigan: Bye. Bye. I would add, "You look at the comparison between." Loan Star and First Capital, for example, in our non-performing assets as of June 30th, about 36 million are First Capital, in other words, about 40%. On the Lone Star side, it's about 2 million, about 2%. And I think that's indicative of what Kevin mentioned about the difference in the quality of the portfolio. Uh, I would be surprised if we had big drops in loans outstanding from either one of them. I think we've pretty well identified the problems.

Speaker Change: Okay, take care.

Speaker Change: I would add when you look at the comparison between Loan Star and First Capital, for example, in our non-performing assets as of June 30th,

Speaker Change: About $36 million.

Speaker Change: is first capital, in other words, about 40%.

Speaker Change: On the Lone Star side, it's about 2 million, about 2%.

Speaker Change: And I think that's indicative of what Kevin mentioned about the difference in the quality of the portfolios.

Speaker Change: I would be surprised if we had big drops in loans outstanding from either one of them at this point in time.

Speaker Change: I think we've pretty well identified the problems at First Capital. There's always surprises down the road, but I wouldn't think they would be overly material. So I think we're seeing some stabilization there.

Kevin J. Hanigan: At First, capital, there are always surprises down the road, but I wouldn't think they would be overly material. So I think we're, we're seeing some stabilization. Great, that's very helpful. Thank you.

David Patrick Rochester: And maybe switching to M&A, I appreciate all the opening comments there on that front. I was wondering what the conversation level was like at this point. Has that picked up at all with stock prices moving in the right direction here to levels possibly closer to where seller expectations would be? And what do you think the chances are you do get a deal done here over the next year? And then absent a deal, how do you guys think about buybacks going forward with the stock trading where it is but with capital likely continuing to grow at a fairly decent clip here over the next year?

Speaker Change: Great. That's very helpful. Thank you. And maybe switching to M&A, I appreciated all the opening comments there on that front. I was wondering what the conversation level was like at this point. Has that picked up at all?

Speaker Change: with stock prices moving in the right direction here to levels possibly closer to where sellers

Speaker Change: Seller expectations would be and you know what do you think the chances are you do get a deal done here over the next year and then absent a deal how do you guys think about buybacks going forward with the stock trading where it is but with capital likely continuing to grow at a fairly decent clip here over the next year

David Patrick Rochester: There's no question, I think. After you saw the conventions and all the political stuff that's going on right now, there was a lot of optimism a week or so ago about, you know, if there was a change in the administration or there was a change, that would be more favorable to banks, and I think that's true. I think that if you saw a change of administration, you would see more M&A going on, and I think that it would stir up a lot of people.

Speaker Change: There's no question, I think.

Speaker Change: I think after you saw the

Speaker Change: Conventions and all the political stuff that's going on right now. There was a lot of optimism a week or so ago about, you know, if there is a change in the administration or if there is a change.

Speaker Change: That would be more favorable to banks, and I think that's true. I think if you saw a change of administration.

Speaker Change: You would see more M&A going on, and I think that it stirred up a lot of people. We do have more calls coming in.

David E. Zalman: We do have more calls coming in. I think the last week or so, or the last few days or so, it's kind of mitigated a little bit. Nobody really knows which way it's going, but I think if you do see a change in administration, you definitely will see a big uptick in the M&A. [inaudible] Yeah, on the buyback. I think you're right.

Speaker Change: The last week or so, or the last few days or so, it's kind of mitigated a little bit. Nobody really knows which way it's going. But I think if you do see a change in the administration, you definitely will see a big uptick in the M&A market.

David E. Zalman: We, you know, we seem to be making good money, and it even shows that we're going to continue to make more and more money. But when our stock does go down, like it did, it was unfairly priced, and we felt it was an unfair price. We're going to probably always jump in and buy back. All right, great. Thanks, guys. The next question will come from Catherine Mealor with KBW. Please go ahead. Thanks

Speaker Change: Can you enter a story?

Speaker Change: Do you have that on the buybacks?

Speaker Change: You're right, we seem to be making good money and it shows that we're going to continue to make more and more money, but when our stock does go down like it did, that was an unfair price, we're going to probably always jump in and buy back.

Speaker Change: All right, great. Thanks, guys.

Speaker Change: The next question will come from Catherine Mealor with KBW. Please go ahead.

Catherine Fitzhugh Summerson Mealor: I just wanted to follow up on the margin conversation. You mentioned targeting, maybe with some upside, a 3% margin by year-end 24 and then maybe hitting around 320 by mid-25. And that's what you've told us before.

Catherine Fitzhugh Summerson Mealor: Thanks, good morning. I just want to follow up on the margin conversation. You mentioned targeting, maybe with some upside, a 3% margin by year-end 24, and then maybe hitting around 320 by mid-25, and that's what you've told us before. How should we think about the...

David E. Zalman: How should we think about the initial downside to margin once we start to see cuts? You mentioned that there might be some volatility. Is there a scenario where the margin declines, or is there still enough back book asset repricing to where the margin is still going to continue to move up throughout 25, just maybe not at as high of a pace as we factor in the cuts? Again, I don't have the exact numerics that you're looking for, but I would say that basically it goes back to what I said. There'll probably be noise in it, but I think the So it may just be noisy until you can get things readjusted, but we really feel comfortable with this model.

Speaker Change: Some initial downside to margin once we start to see cuts, is there?

Speaker Change: And you mentioned that there's maybe some volatility. Is there a scenario where the margin declines? Or is there still enough back book asset repricing to where the margin still is going to continue to move up throughout 25, just maybe not?

Speaker Change: at as high of a pace, you know, as we factor in the cuts.

Speaker Change: Again, I don't have exactly what the exact numerics that you're looking for, but I would say that basically it goes back to what I said, there'll probably be noise in it, but I think the numbers that we gave to you...

Speaker Change: We should end up there by those periods of time, so it just may be noisy until you can get things readjusted.

David E. Zalman: It's been around for 25 years, as long as I've been here. We have a lot of confidence in it, so we think we will get there, but again, I think it could be noisy. We'll try to look in more to what you're asking, the actual numerics. There could be short-term changes, like when the prime drops like that, and we don't get to change the interest rates immediately where it takes time, or there's the asset that's repricing.

Speaker Change: We really feel comfortable with this model. It's been around for 25 years, as long as I've been here, so we have a lot of confidence in it, so we think we will get there, but I think, again, I think it could be noisy. We'll try to look in more to what you're asking, the actual numerics. There could be short-term.

Speaker Change: Changes like when the prime drops like that and we don't get to change the

Speaker Change: [inaudible]

David E. Zalman: So I know exactly what you're asking, and it's a good question for us, too, and we'll work more on that. Yeah, and just to add to that, our balance sheet has been neutrally positioned when we looked at it, and we run some models up and down, so when we run some models down 50 basis points, our model still shows that at the end of the year, at exit, net interest margin still holds up around 3%, so even with that, we feel confident where we are, and I think... That's a good point. I see that list, as we even have 50 basis points going down, and we still end up with 3 basis points.

Speaker Change: Our model still shows that at the end of the quarter or end of the year at exit

Speaker Change: Net interest margin still holds up around three percent. So even with that we feel confident where we are and I think That's a good point. I mean, I see that list this week. He even had 50 basis points. Yeah We still end up with three because it's neutral position and we still have a tailwind of our Security repricing from 2% we have, you know repricing at 5 plus percent. That's our tailwind that helping us So with that, I don't think that there's much change even with 50 base points Personally, I believe we're gonna have maybe one cut rather than two cuts. Well in a caveat, this is a static balance sheet. I mean

Asylbek Osmonov: Yeah, because it's neutrally positioned, and we still have a tailwind of our security repricing from 2%. We have repricing at 5 plus percent. That's our tailwind that's helping us.

Asylbek Osmonov: So with that, I don't think that there's much change, even with 50 basis points, but personally, I believe we're going to have maybe one cut rather than two cuts. Well, and as a caveat, this is a static balance sheet. The loans drop dramatically, or deposits drop dramatically, or increase either one way. That all affects this when we talk; we're talking really about a static balance.

Speaker Change: The loans dropped dramatically, or deposits dropped dramatically, or increased either one way. That all affects this. When we talk, we're talking really a static balance sheet.

David E. Zalman: Yeah, that's helpful. And can you remind us, do you have the dollar amount of fixed rate repricing, maybe the back half of this year and then into next? I don't know what we have for the next year, historically, we've said we have about two billion dollars in bonds that are repricing, and on the loan side, we have how much? So loan side cash flow, we'd say about five billion dollars, but out of five billion, six is about 40 percent. And so that's going to be repricing on the loan side, and two billion of securities, that is the... I think the fixed is closer to 60, and the fixed and variable is closer to 60.

Speaker Change: Okay, yeah, that's helpful. And can you remind us, do you have the dollar amount of fixed rate repricing, maybe the back half of this year and then into next?

Speaker Change: I don't know if we have the next year. Historically, we've said we have about $2 billion in bonds that are repricing, and on the loan side, we had how much? So, loan side cash flow, we'd say about $5 billion, but out of $5 billion, 6 is about 40%.

Speaker Change: And so that's going to be repricing on the loan side and two billion of securities, that is the... Yeah, I think the fixed is closer to 60. The fixed and variable is closer to 60. Okay, yeah, maybe I'm at 60% on that.

Asylbek Osmonov: Okay, yeah, maybe I'm at 60 percent on the fixed side on the loan side. So three billion a year, a billion and a half in the back half of the year, and Bill Yan from the Security and Insurance Department. Got it. Okay, that's helpful.

Speaker Change: Fixed on the loan side and so three billion a year billion and a half in the back half of the year

Bill Carcache: and Bill Young from the Security in Six Months, so there.

David E. Zalman: Great, great. And then maybe one more margin question. You've talked about excess cash building up to a billion and a half to two billion. Is that still your plan for the back half of the year?

Speaker Change: Got it. Okay, that's helpful. Great, great. And then maybe just one more margin question. You have talked about excess cash building to a billion and a half to two billion. Is that still your plan for the back half of the year, or are we kind of coming back on the lower end of that range?

David E. Zalman: Or are we kind of coming back on the lower end of that range? That would be a yes, unless I can convince the Federal Reserve to change its opinion of what liquidity is. Again, I talk with them, and it's really crazy because we have, we have, we have $15 billion of lines of credit between the Federal Home Loan Bank and the Federal Reserve. And we really consider that a phone call, and they can drop it.

Speaker Change: That would be a yes unless I can convince the Federal Reserve to change their opinion of what's liquidity. Again, I can talk with them. It's really crazy because we have...

Speaker Change: We have $15 billion of lines of credit between the Federal Home Loan Bank and the Federal Reserve. And we really consider that a phone call and it can drop it. So we used to run, we used to run with not a lot of liquidity because we could just draw one of our lines. But again, after...

David E. Zalman: So we used to run; we used to run with not a lot of liquidity because we could just draw on our lines. But again, after the Silicon Valley deal and Asylbek Osmonov, Manan Gosalia, Bill Carcache, Asylbek Osmonov, Brandon King, Braden Gershwin, Okay, especially if you're considering M&A, maybe to be on the high end is a safer place to be, to say that again.

Speaker Change: The Silicon Valley deal and signature and all that, I mean, everything changed and they came up with this deal, but the truth of the matter is you had a billion and a half dollars on hand.

Speaker Change: And there was truly a real run that wouldn't be enough. You have to draw on these lines, and we probably have more liquidity. We have probably more lines available than anybody in our average accounts, like $30,000. So I'm hoping we can convince them to change. It probably will over time. It just probably won't be right away.

Speaker Change: Okay, especially if you're considering M&A, maybe to be on the high end, you know, is a safer place to be.

David E. Zalman: Especially if you're considering M&A, having excess liquidity is probably a safe place to be. We've come a long way in building up that cash already. Part of this was the security sale in the quarter; that helped. And the cash flow from our investment portfolio, for sure. All right, great. That's all I got. Thank you very much. The next question will come from Brett Rabatin with the HUB-D group. Please go ahead, sir.

Speaker Change: I'm going to say that again, especially if you're considering M&A, having excess liquidity is probably a safe place to be. We've come a long way in building the cash already.

Speaker Change: Part of this was the security sale in the quarter. That helped. And the cash flow from our investment portfolio.

Speaker Change: For sure. All right, great. That's all I got. Thank you very much.

Speaker Change: The next question will come from Brett Rabatin with the HUB-D group. Please go ahead, sir.

Brett D. Rabatin: Hey guys, good morning. Morning. Morning.

Brett D. Rabatin: Hey guys, good morning. Good morning.

David E. Zalman: I wanted to ask the M&A question a different way. I feel like the regulators have some idea of what they'd like to see deals announced that are out of market, and low branch closures. And so I wanted to ask, You know, if you're thinking about M&A, do you have to get on a plane to... Have talks, or can you still drive a car, i.e., in Texas?

Brett D. Rabatin: Wanted to ask the M&A question a different way. I feel like the regulators have some...

Speaker Change: idea, they'd like to see deals announced that are out of market, low branch closures.

Speaker Change: If you're thinking about M&A, do you have to get on a plane to have talks, or can you still drive a car, i.e. in Texas? Any comments, David, you have on whether in-state or out-state might be more likely for you?

David E. Zalman: Any comments, David, on whether in-state or out-of-state might be more likely for you? Well, I think it goes back to my conversation. If there's a change in administration, I don't think it's gonna matter if it's in Texas or another state. Right now, I think that you're probably right. They'd like to see something.

David E. Zalman: Well, I think it goes back to my conversation. There's a change in administration.

David E. Zalman: I don't think it's going to matter if it's in Texas.

Speaker Change: or another state. Right now, I think that you're probably right. They'd like to see something. I mean, the whole philosophy, and again, this is coming down from the upper administration, not just the heads of the FDIC or the, you know, the OCC. That's really coming from their bosses upstairs.

David E. Zalman: I mean, the whole philosophy, and again, this is coming down from the upper administration, not just the heads of the FDIC or the OCC. That's really coming from their bosses upstairs, closing down something. But again, I, I again, I think that there's a change, and I can even tell the tone. I'm probably going to have some of them listening; they'll probably call me in a minute after y'all get through. But I think the tone is changing.

Speaker Change: FTC and everybody, they'd rather see stuff that, you know, you're not, you're not.

Speaker Change: closing down something. But again, I think that there is a change of administration.

Speaker Change: And I can even tell the tone. I probably have some of them listening. They'll probably call me in a minute after y'all get through, but I think the tone is changing. I think that they are looking to know that we do have to have some M&A.

David E. Zalman: I think that they are looking to know that we do have to have some M&A. And I, you know, my gut feeling is it will, unless, unless, unless the administration doesn't change. Then I think we're back to where we were. I could say we're back to where we are. But even I don't even know that I would go that far.

Speaker Change: And, you know, my gut feeling is it will, unless the administration doesn't change, then

Speaker Change: I think we're back to where we were. I could say we're back to where we were, but I don't even know that I would go that far. I do think that the tone of the regulators is changing. I think when you had Silicon Valley Bank closed, you had Signature Republic, I mean, all of that.

David E. Zalman: I do think that the tone of the regulators is changing. I think when you had Silicon Valley Bank closed, you had Signature Republic, I mean, all of that, it made all the regular regulatory agencies unnerved. And I think it's taken them a little bit of a while, just to get a handle on where all the banks are and where they're comfortable. I think that is happening.

Speaker Change: It made all the regulatory agencies unnerved.

Speaker Change: And I think it's taken them a little bit of a while.

Speaker Change: [inaudible]

David E. Zalman: So I think either way, there will be, it'll be somewhat better, the tone will be somewhat better. But if the administration changes, then I think you're going to have like a little mini-boom probably. And Brent, you know, keep in mind, it's a 10-hour car drive from Houston to far west Texas.

David E. Zalman: Fair enough. The other question I wanted to ask was, you know, this quarter you had a provision, and last year you had one quarter with a provision. How should we think about, you know, any thoughts on thinking about provisioning from here? And I know that obviously depends on if loan growth, you know, re-accelerates, what have you. I'll sit back and answer in a minute, but the provision this time was just solely based on our CECL calculation and because of the merger. But I mean, really, we have $359 million in reserve, $397 million if you count what's in our other reserve for unfunded loans, and we have $80-something million in loans.

Speaker Change: The other question I wanted to ask was, you know, this quarter you had a provision, you know, last year you had one quarter with a provision.

Speaker Change: How should we think about, you know, any thoughts on thinking about provisioning from here? And I know that obviously depends on if loan growth, you know, re-accelerates, what have you.

Speaker Change: But the provision this time was just solely based on our CISO calculation and because of the merger. But, I mean, really, we have...

Speaker Change: Three hundred and...

Speaker Change: I'm talking from the top of my head, $359 million in reserve.

Speaker Change: $397 million if you count what's in our other reserve for unfunded loans.

David E. Zalman: So we have over four times the amount of reserves as what we have that is non-performing. So I think we're pretty good right there. Yeah, but the only reserves we've put up in the last couple of years have been acquisition-related, the day one CECL numbers. So the two points in time you're referencing were both acquisition-related. Yeah, well, the second quarter of last year and the second quarter are both related because last year was the first capital bank acquisition. This quarter's loans are per CECL rules and GAAP rules. You have to put provision expense on the loans you're bringing over. That's a rule change, but there was no provision for ourselves.

Speaker Change: And we have 80-something million dollars in loans. So we have over four times the amount of, we have over four times the amount of reserves as what we have is non-performing. Yeah. So I think we're pretty good right there. Yeah, but the only reserves we've put up in the last couple of years have been acquisition-related, the day one CECL numbers, so.

Speaker Change: The two.

Speaker Change: Points in time you're referencing were both acquisition. Yeah, well second quarter of last year and second quarter both related first last year was the first capital bank Acquisition this quarter's loan star per sisal rules and gap rules You have to put provision expense on the loans you bringing over. That's a rule change and

Asylbek Osmonov: Yeah, I think it's safe to say, unless something changes materially, and we look at a separate quarter, and we run our models, but in our minds... Things would have to change pretty materially for us to be thinking about posting revisions this year, outside of the acquisition. Okay, great. And maybe just lastly on the expense guide, 141 to 143 in the third quarter.

Speaker Change: I think it's safe to say, unless something changes materially, and we look at a separate quarter and we run our models, but in our minds,

Speaker Change: Things would have to change pretty materially for us to be thinking about posting a provision this year. Right. Outside of the acquisition.

Speaker Change: And maybe just lastly, on the expense guidance, 141 to 143 in the third quarter, is that net of expense savings? Can you maybe give us a little more color on how you get to that number in 3Q?

Asylbek Osmonov: Is that, you know, net of expense savings? Can you maybe give us a little more color on how you get to that number in 3Q? Yeah, just this quarter we had a little bit higher because of extraordinary items and we had some projects we had, so that's why we came a little bit higher. But $141, $143 is including the Lone Star operation we're going to have, and that's in combination. We're going to still continue to have some savings from the Lone Star acquisition, but we're working on some projects that's going to run up the expenses. So in the net, the two are kind of offset by each other.

Speaker Change: Yeah, just this quarter we had a little bit higher because of extraordinary items and we had some projects we had, so that's why we came a little bit higher, but $141, $143 is including the Lone Star operation we're going to have.

Speaker Change: And that's in combination. We're going to still continue to have some savings from the Lone Star acquisition, but we're working on some project that's going to run up the expenses. So in the net-net, it's going to offset each other. That's why our guidance did not change from 141 to 143, and we feel pretty confident about that on the third quarter.

Asylbek Osmonov: That's why our guidance did not change from $141 to $143, and we feel pretty confident about that for the third quarter. Okay, great, appreciate all the power. The next question will come from Michael Rose with Raymond James. Please go ahead.

Speaker Change: Okay, great, appreciate all the power.

Speaker Change: The next question will come from Michael Rose with Raymond James. Please go ahead.

Michael Edward Rose: Hey, thanks for taking my questions. Just wanted to clarify on the, sorry to go back to the margin, but the exit rate for the fourth quarter. Can you guys hear me?

Michael Edward Rose: Hey, thanks for taking my questions.

Michael Edward Rose: Just wanted to clarify on the, sorry to go back to the margin, but the exit rate for the fourth quarter.

David E. Zalman: David Zalman.

Operator: Yes. Okay, sorry about that. So the XRA for the fourth quarter, is that on a core basis? Or would that include the accretion income? And just separately, Asylbek, what would you expect to see in the next couple of quarters? Thanks. Okay, I'll answer that first. The second question first.

David E. Zalman: Can you guys hear me?

Asylbek Osmonov: So the x-ray for the fourth quarter, is that on a core basis or would that include the accretion income and just separately Asylbek, what would you expect, what's the scheduled accretion for the next couple quarters?

Asylbek Osmonov: So our expectation that normalized accretion for the third quarter will be four and a half million dollars. And so when we gave guidance of being a 3% at exit, that's including the normalized, I would say run rate, or fair value income. Okay, so that's inclusive of the purchase accounting accretion. Okay. That's perfect.

Speaker Change: Okay, I'll answer the second question first.

Asylbek Osmonov: Our expectation that normalized accretion for the third quarter will be four and a half million dollars for third quarter. And so when we gave guidance of being a three percent at exit, that's including the normalized, I would say, run rate or fair value income.

Speaker Change #100: Okay, so that's inclusive of the Purchase Accounting Accretion. Okay.

Asylbek Osmonov: And then separately, I noticed that the trust fees were down this quarter. I just wanted to see if there's anything in there. I think most banks have actually seen that up a little bit, so any color would be great. Thanks. Yeah, I think our trust income kind of stays the same as we are. We did not lose any customers.

Speaker Change #101: That's perfect. And then separately, just I noticed that the trust fees were down this quarter. I just want to see if there's anything in there. I think most banks have actually seen that up a little bit. So any color would be great. Thanks.

Michael Edward Rose: Yeah, I think our trust income kind of stayed the same as we are. We did not lose any customers. What happened in the second quarter, we had some one-off ordinary income in the second quarter. I'm sorry, on the first quarter, we had some extraordinary income came in. There was a trust, I think, sale or not sale, it was a state fee came in. That's why it was unusual in the first quarter. But what we have 3.6 million, that's a normal run rate. And if you look at, Michael, from the last year to this year in six months, our trust income up by more than a million dollars. So it just looks like it went down, but it was an unusual event happened in Q1. In fact, our trust assets continue to grow year over year. A lot of the deposits that were in the bank are in the trust deposit.

Asylbek Osmonov: What happened in the second quarter, we had some one-off ordinary income. I'm sorry, in the first quarter, we had some extraordinary income come in. There was a trust, I think, sale or not sale. It was a state fee came in. That's why it was unusual in the first quarter.

Asylbek Osmonov: But what we have $3.6 million, that's a normal run rate. And if you look at Michael, from the last year to this year, in six months, our trust income is up by more than a million dollars. So it just looks like it went down, but it was an unusual event happened in Q1.

Asylbek Osmonov: In fact, our trust assets continue to grow year over year. In fact, a lot of the deposits that were in the bank are in the trust department now. That's correct. Yeah, that's what I was asking.

Asylbek Osmonov: Also, just last for me, just in the other income, that was down about $2.2 million in Q1Q. I know it bumps around a little bit, but that's the lowest level we've seen in a while. Anything unusual happened this quarter or offsets or anything we should consider? Thanks. Yeah, there was nothing unusual.

Michael Edward Rose: [inaudible]

Speaker Change #102: That was down about, you know, 2.2 million queue-on-queue. I know it bumps around a little bit, but that's the lowest level we've seen in a while. Anything...

Asylbek Osmonov: Usually, we have one-off income every quarter here and there, and we had a significant one-off income happen in Q1, which we did not see this one. But I think the run rate we had of, I saw 36 to 38 stats, will be a normal run rate, and we should be expecting that in Q3 and 4. All right, thanks for taking my question. The next question will come from Brandon King with Truist Securities. Please go ahead. Hey, good morning.

Speaker Change #102: [inaudible]

Speaker Change #103: I saw 36 to 38 stats will be normal run rate and we should be expecting that in the Q3 and Q4.

Speaker Change #104: Alright, thanks for taking my questions.

Speaker Change #104: The next question will come from Brandon King with Truist Securities. Please go ahead. Thank you.

Brandon Thomas King: Morning. So, I wanted to follow up on expenses. I think you mentioned how there are some investments being made. How are you thinking about expense growth beyond the third quarter and what are you expecting also from an inflationary standpoint on your expenses? So I think, uh... Looking like fourth quarter, I think.

Brandon Thomas King: Hey, good morning. Good morning.

Brandon Thomas King: So, I wanted to follow up on expenses, I think you mentioned how there's some investments being made. So, just how are you thinking about expense growth beyond the third quarter and what are you expecting also from an inflationary standpoint in your expense space?

Brandon Thomas King: So I think, looking like fourth quarter, I think...

Asylbek Osmonov: We should stay stable. I don't see anything increasing significantly in the fourth quarter. And going beyond, it's kind of hard to say, but we don't see anything significant. I know we work on some projects that will have increasing expenses for maybe another 25, but I don't see anything significant. Let's say that. And you've been accruing for some of those additional expenses, haven't you, a little bit, that we'll be facing later on? Yeah, the incurred expenses we had not paid that we accrued, and that was the second quarter for additional expenses.

Brandon Thomas King: David Zalman, Charlotte Rasche, David Zalman, David Zalman, David Zalman, David Zalman,

Asylbek Osmonov: But I think I gave you guidance, so maybe like a 2 to 3% increase year two or three, so that probably happens, but right now, I can't think of anything. Brandon, it's always hard to come up with something like that, but again, if we don't...

Brandon Thomas King: David Zalman, Charlotte Rasche, David Zalman, David Zalman, David Zalman, David Zalman,

Asylbek Osmonov: We've been very good at bringing our costs down and finding a way to cut the cost if we don't have the income to come in, to increase it. So historically, we've found ways to keep it where it's at. Yeah. Okay. And then a question on long-term growth.

Speaker Change #106: If we've been very good at bringing our costs down and finding a way to cut the cost if we don't have the income to come in to increase the expense. So historically we've found ways to keep it where it's at.

Speaker Change #106: Yeah.

Speaker Change #106: Okay.

Speaker Change #107: And then a question on loan growth, I know before you mentioned how you've been holding more resi loans production on the balance sheet instead of selling it, but any updated thoughts there in how you're thinking about, you know, whether keeping more residential production on the balance sheet or maybe being more opportunistic in the secondary markets?

Kevin J. Hanigan: I know before you mentioned how you've been holding more residential loans production on the balance sheet instead of selling it. But any updated thoughts there on how you're thinking about, you know, whether keeping more residential production on the balance sheet or maybe being more opportunistic in the secondary. I'd say more opportunistic in the secondary markets. However, we have curtailed, largely curtailed, the growth in that portfolio. We do have, I mean, we do take care of our core customers.

Speaker Change #108: I'd say more opportunistic in the secondary markets.

Speaker Change #109: Largely curtailed.

Speaker Change #110: The growth in that portfolio, we do have, I mean, we do take care of our core customers.

Kevin J. Hanigan: We do have some one-time closed products that continue to fund and complete. But in terms of new originations, they're down, and it was more a matter of balance sheet size in our case. You know, the category got to be 33, 34 percent?

Speaker Change #111: We do have some one-time closed products that continue to fund up and complete, but in terms of new originations, they're down.

Kevin J. Hanigan: Correct. On the balance sheet, we just think that's a comfortable level for us, the high end of the comfortable level. So we've set Pricing in that category to refer to, to get paid for what we are going to produce and what we will produce. We hope, in many cases, it will be available in the secondary market and we can generate fee income through through months. Got it. Got it.

Speaker Change #111: And it was more a matter of balance sheet size in our case, you know, the category got to be 33.

Speaker Change #112: 34%? Correct.

Speaker Change #112: Pricing in that category to refer to, uh...

Speaker Change #112: To get paid for what we are going to produce and what we will produce We hope in many cases it will be available to the secondary market and we can generate some fee income through through loan sales

Asylbek Osmonov: And then lastly, also, going back to your comment on, I think, the purchase account increase should be four and a half million. Is that just for LoanStar, or is that total purchase accounting accretion for all purchase accounting acquisitions? That is total, including LoanStar, FCB, and other acquisitions. So it's in total.

Asylbek Osmonov: Got it, got it. And then lastly, also by going back to your comment on, I think, purchase account increase in being four and a half million, is that just for LoanStar or is that total purchase accounting increase? That is total, including the LoanStar, FCB, and other acquisitions, so it's in total.

Brandon Thomas King: Okay, thanks for taking my question. The next question will come from Jared Shaw with Barclays. Please go ahead. Hi, good morning.

Asylbek Osmonov: Okay, thanks for taking my questions.

Speaker Change #113: The next question will come from Jared Shaw with Barclays. Please go ahead.

Jared David Wesley Shaw: Thanks. And just looking at the discussion around loan growth, as well as cash insecurities, where do you think a good exit rate for average earning assets is for the end of 24? What will the average earning yield be? Yeah, average earning assets at the end of the year. Yeah, I think as we, you know, look at our model, we continue to grow and see growth in that area. I mean, I don't know if I can pinpoint exactly what it's going to be. I mean, right now, in the second quarter, we had 468.

Jared David Wesley Shaw: Just looking at the discussion around loan growth as well as the cash insecurities, where do you think a good exit rate for average earning assets is for the end of 24?

Jared David Wesley Shaw: Let's see, what?

Speaker Change #115: What will the average earning asset yield be? Yeah, average earning assets at the end of the year.

Speaker Change #116: I think as we look at our model, we continue to see growth in that area. I mean, I don't know if I can pinpoint exactly what it's going to be. I mean, right now in the second quarter, we had 468. I think it's going to be continuing to increase.

Asylbek Osmonov: I think we're going to be continuing to increase. But it's hard because, I mean, https://www.youtube.com.au/watch?v=8ZZWjY, Okay, yeah, you know, just in terms of, you know, using cash flow from securities to fund loan growth versus deposits, just trying to see where an exit rate could be given the loan growth expectation. It's not bad to ask something like that, but again, it's going to be a lot of really theoretical, I think, but we can look at it.

Speaker Change #116: Well, it's hard because, I mean, if the interest, you know, the Fed does come down on rates. I mean, on a static basis, there's no question it would continue to go up. I think that would change if the rates are lower. That's just a really hard question, I think.

Speaker Change #117: Okay yeah you know just in terms of you know using cash flow from securities to fund loan growth versus deposits just trying to to see where where an exit rate could be given the loan growth expectation.

Speaker Change #118: It's not bad to ask on something like that, but again, it's going to be really theoretical, I think, but we can look at it.

David E. Zalman: Yeah, and even the runoff of the securities, even to the extent we put it in cash, we're getting overnight 540. So we're going from 2 to 540, even in those cash holdings. It's a lost opportunity to the extent that it could have gone into loans at something higher. But it's still, we're picking up 340 bases.

Speaker Change #119: The runoff of the securities, even to the extent we put it in cash, we're getting over night 540 540 So we're going from 2 to 540 even if even in those cash holdings, so it's what well

Speaker Change #119: It's a lost opportunity to the extent that it could have gone into loans at something higher. It's still, we're picking up 340 basis points.

David E. Zalman: Yep, yep. Okay. And then just the last for me, just circling back to something, David, you said in your comments, you know, if we look at lower rates, I think you said, you know, margin should still be neutral, but that could spur deposits coming onto the balance sheet as well as some loan growth, but that NII could be under pressure. I guess I'm just trying to square that how, you know, still seeing good growth with stable margins, you would think that that would be driving better NII.

Speaker Change #119: Yep, yep. Okay, and then just the last for me, just circling back to something...

Speaker Change #119: David, you'd said in your your comments, you know, if we if we look at lower rates I think you'd said, you know margin should still be neutral, but that could spur Deposits coming on to the balance sheet as well as some loan growth, but that NII could be under pressure I guess I'm just trying to do

Speaker Change #120: Square that, how, you know, still seeing good growth with stable margins, you would think that that would be driving better NII.

David E. Zalman: Yeah, well, again, this is just me again, I'm not, I don't have the model, and it's going to be. You would think that net interest income would be harder to grow because interest rates are coming down. So, to look at continued early increases in net interest income may be tougher to do.

David E. Zalman: Yeah, well, again, this is just me again, I'm not...

Speaker Change #121: I don't have the model in front of me, you would think that the net interest income would be harder to grow because interest rates are coming down, so to look at continued early increases in net interest income may be tougher to do, but our net interest margin,

David E. Zalman: But our net interest margin does show us, with interest rates coming up or down 200 basis points, still increasing over the next year. Asylbek Osmonov, as well as the existing assets that we have, as well as lowering the deposit expense that we have too. You have a lot of moving parts in there, and I agree with you. If you don't have these models today, trying to square something like this in your head is pretty hard.

Speaker Change #122: Does show us with interest rates coming up or down 200 basis points still increasing over the next

David E. Zalman: 6, 12, and 24 month time frame and that has to do with

David E. Zalman: That even though net interest is coming down, that's because of the repricing of the existing assets that we have.

Speaker Change #124: Asylbek Osmonov, Charlotte Rasche, David Zalman

David E. Zalman: But I do feel very comfortable where we're at. Yeah, I think what Dave, let me try to put another twist on maybe what David was saying, because I do think NII is going to continue to grow. But there will be a period of time when our floating rate book moves down with rates overnight, and deposits won't move as fast. So when he talks about some little blips in the short run, like over a six-month period of time,

Speaker Change #124: Yeah, I think what Dave, let me try to put another cut on what, maybe what David was saying, because I do think NII is going to continue to grow.

Speaker Change #123: But there will be a period of time when our floating rate book moves down with rates overnight and deposits won't move as fast. Exactly.

David E. Zalman: So when he talks about some little blip in the short run.

David E. Zalman: It'll be dampened a little bit because the deposit rates won't move down as fast as our floating rate loans move down. That's exactly what I'm trying to say; that's the noise that I can make. That's his version of the noise.

Speaker Change #125: Like over a six month period of time.

Speaker Change #127: It'll be dampened a little bit because the deposit rates won't move down as fast as our floating rate loans move down. That's exactly what I'm trying to say. That's the noise that I make. That's his version of the noise.

David E. Zalman: Got it, got it. Okay, great. Thank you very much. The next question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Speaker Change #128: Got it. Got it. Okay. Great. Thank you very much.

Speaker Change #125: The next question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Glenn Arfstrom: Hey, thanks. Hi, everyone. Hey, David, maybe another way to ask some of these margin questions. You kind of alluded to it earlier, but what do you think a normalized margin is? For prosperity.

Jon Glenn Arfstrom: Hey, thanks

Jon Glenn Arfstrom: Hi everyone.

Jon Glenn Arfstrom: David, maybe another way to ask some of these margin questions, what do you, you kind of alluded to it earlier, but what do you think a normalized margin is?

David E. Zalman: I know it's a tough question, but you talked about 340. We're trying to get all these little nuances about what happens if rates go up or down, but what do you think? I think historically, we went back and looked at our historical net interest margin. I'm looking at Colin because he did this for me, so if I'm wrong, jump in, but historically, a normal net interest margin for us has been around 3.4. 330.

Speaker Change #132: For prosperity, I know it's a tough question, but you

Speaker Change #129: You talked about 340. We're trying to get all these little nuances about what happens if rates go up or down, but what what do you think?

Speaker Change #130: I think historically, we went back and looked in our historical net interest margin, I'm looking at Colin because he did this for me, so if I'm wrong, jump in, but normally a normal net interest margin for us historically has been around 3.40.

David E. Zalman: There's been some highs, and there's been some lows. Historically, that's where we would end up. Is the balance sheet any different, or do you think that we can eventually get there? Okay, absolutely. Yeah, I mean, I think that we're again, I feel very comfortable with these numbers. I, you know, they're not just made up. This is a model that we've used for the last 25 or 30 years.

Colin: I think that's right.

Colin: 333.40. 333.40. There's been some highs and there's been some lows, but historically that's where we would end up at. Okay. And do you think, you know, we had these liquidity discussions a quarter or two ago, do you think

Speaker Change #133: Is the balance sheet any different, or do you think that we can eventually get there?

David E. Zalman: And I really do believe in them. I mean, the only caveat I would say is, if there's a big change in loans, up or down, or a big change in deposits, up or down, I see both of those as positive. I think that we've gone, you know, after COVID and the money dropping into the banks. We just had so much money come in, and we really didn't pay much attention to it.

Speaker Change #134: Okay, absolutely. Yeah, I mean, I think that, again, I feel very comfortable with these numbers. You know, they're not just made up. This is a model that we've used for the last 25 or 30 years, and I really do believe in them. I mean, the only caveat I would say is, like, if there's a big change in...

Speaker Change #134: loans up or down, or big change in deposits up or down. So I see both of those as positive. I think that we've gone

Speaker Change #135: You know, after COVID and the money drop into the banks, we just had so much money come in. We really didn't pay much attention to it. And then the last year and a half or two, I mean, we really been sucking wind with, you know, interest rates going up and deposits going out the other way. I, I, I really think that.

David E. Zalman: And then the last year and a half or two, I mean, we've really been sucking wind with, you know, interest rates going up and deposits going out the other way. I really think that what happens is supposed to happen. I think that we're, you know, it's moving in our favor. I think that as interest rates come down, we do think that money that was outside the bank will come back in. That's from Treasury, people are feeling better about it.

Speaker Change #135: What happens is supposed to happen. I think that we're...

Speaker Change #135: You know, it's moving in our favor, I think that as interest rates come down.

Speaker Change #135: We do think that money that was outside the bank will come back in, and that's from treasuries and people feeling better about it, and so that will also provide more money for loans because people will do more loans because interest rates are going down that they put on hold right now that Tim mentioned a while ago.

David E. Zalman: That will also provide more money for loans because people will make more loans because interest rates are going down, and they have put on hold right now, as Tim mentioned a while ago. So I think it's all positive, but having said that, you know, it's a crazy world. Things could go the other way, you never know, but just looking at it from common sense, we should be in a positive mode over the next two years.

Speaker Change #136: So, I think it's all positive, but having said that, you know, it's a crazy world. Things could go the other way, you never know, but just looking at it from common sense, we should be in a positive mode over the next two years for sure.

David E. Zalman: I don't know if this will make any sense to you or not, but I'd say we are always confident in these NIM numbers we've been giving you, and we've hit them consistently throughout the year. No delays, nothing else; we've been right on the mark. If anything, we've become increasingly confident. Yeah, I think so.

Speaker Change #137: I don't know if this will make any sense to you or not, but I'd say we were always confident in these NIM numbers we've been giving you, and we've hit them consistently throughout the year. No delays, nothing else, we've been right on the mark. If anything, we've become increasingly confident.

David E. Zalman: Okay, okay, that's helpful. How about a return on tangible normalization? I mean, you can see it in the charts, right?

Speaker Change #138: Okay, okay, that's helpful. How about a return on tangible?

Speaker Change #139: Normalization. I mean, you can see it in the charts, right? I mean, obviously, it seems like it's a margin issue, and you alluded to it, David, but what do you think is an appropriate return on tangible for your company?

David E. Zalman: I mean, obviously, it's a seems like it's a margin issue, and you alluded to it, David, but, What do you think is an appropriate return on tangible assets for your company? I think before, again, before the loss in earnings because of the net interest margin and the spread, I think we used to hit, again, jump in, Cone, if you want to, or Asylbek, I think we used to hit about 15 or 16% return on tangible capital.

Cone: I think before, again, before the loss in earnings because of the net interest margin and the spread, I think we used to hit, again, jump in, Cone, if you want to, or Asylbek, I think we used to hit about 15 or 16% return on tangible capital, and I think that that's

David E. Zalman: And I think that that's, I think that's fair, and I think that's where we want to go again. But keep in mind, too, that we have higher tangible capital than most banks. I mean, a lot of banks are 7 and 8%; we're over, our leverage ratio is over 10%. We can probably be criticized for keeping so much capital.

Cone: I think that's fair and I think that's where we want to go again, but keep in mind too that we have a higher, we have higher tangible capital than most banks, I mean we're, a lot of banks are 7 or 8 percent, we're over, our leverage ratio is over 10 percent, so again we

David E. Zalman: But again, it's been nice to have when we've been able to buy stock back. It's been nice to have some. I have a follow-up story for you, David, off the call, but just one more, last one. Not a big deal, and credit obviously looks good, but you guys show your non-owner-occupied commercial real estate. Can you just talk a little bit about what you're seeing there when things come up for renewal and maybe the overall health of that book? I'd say it's really strong and competitive.

Cone: We could probably be criticized for keeping so much capital, but again, it's been nice to have when we've been able to buy stock back. It's been nice to have in the pursuit of an acquisition. So we can make that number even a lot higher right now, but we've elected to keep that capital high. So I think...

Cone: You know, it is, it's just, we run that kind of bank, I mean, we...

Speaker Change #141: We're always covered, it's like my wife said, you always have pairs of socks and underwear that you haven't used, why don't you keep buying them?

Speaker Change #142: That's good.

David E. Zalman: That's good. I don't have enough. That's a new one for me, David. I have a follow-up story for you, David, off the call. Just one more last one. Not a big deal. And credit obviously looks good.

Speaker Change #143: Show Your Non-Owner-Occupied Commercial Real Estate. Can you just talk a little bit about what you're seeing there when things come up for renewal and maybe the overall health of that book? Thank you.

David E. Zalman: I'd say that book's really strong, competitive. We were looking at something the other day and...

Kevin J. Hanigan: We were looking at something the other day, and our lender, who brought in a relatively lower rate than we would have liked, I think he was talking $7.99 or something, he was... He was highlighting all the banks on Owner Occupied. We have special deals going that are somewhere between $7 and $7.50. So, it's a competitive side of the market right now because it usually comes with a full wallet. You end up getting the company's revolver, you get the treasury management business, and it's been competitive. But in terms of credit quality, it's holding up very well.

Speaker Change #144: and our lender who brought in a relatively, for us, lower rate than we would have liked. I think he was talking $7.99 or something. He was highlighting all the banks, unowner-occupied, who have special deals going that are somewhere between $7 and $7.50.

Speaker Change #145: So, it's a competitive side of the market right now because it usually comes with a full wallet. You end up getting the company's revolver, you get the treasury management business, and it's been competitive, but in terms of credit quality, it's holding up very well.

Jon Glenn Arfstrom: Okay, thanks. I appreciate it. This concludes our question and answer session. I would like to turn the conference back over to Ms. Charlotte Rasche for any closing remarks. Please go ahead, ma'am. 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change #146: Okay, thanks. Appreciate it.

Speaker Change #147: This concludes our question and answer session.

Unknown Executive: The conference has now concluded. Thank you for attending today's presentation.

Speaker Change #148: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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