Q2 2025 Prosperity Bancshares Inc Earnings Call
Okay.
Unknown Executive: Good morning, and welcome to the Prosperity Bancshares second quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: Good morning and welcome to the Prosperity Bank shares. Second quarter 2025 earnings conference call.
Speaker Change: All participants will be in listen-only mode.
Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event is being recorded.
Speaker Change: Should you need assistance please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: to ask a question, you may press star then 1 on your telephone keypad,
Speaker Change: To withdraw your question. Please. Press star. Then 2
Charlotte Rasche: I would now like to turn the conference over to Charlotte Rasche. Please go ahead. Thank you.
Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Charlotte Rashi. Please go ahead.
Charlotte Rasche: Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' second quarter 2025 earnings conference call. This call is being broadcast live over on our website and will be available for replay for the next few weeks.
Charlotte 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 Tomanish, Jr., Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Safady, Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Mace Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President.
Speaker Change: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank shares. Second quarter 2025 earnings conference. Call, this call is being broadcast live over on our website and will be available for Replay for the next few weeks. I'm Charlotte, Rashi Executive, Vice President, and general counsel of Prosperity Bank shares. And here with me, today is David Zolman senior chairman and chief executive officer. He Tim to manage Junior.
David Zalman: David Zalman will lead off with a review of the recent quarter.
Asylbek Osmonov: He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Tomanish, who will discuss our lending activities, including asset quality.
Unknown Executive: Finally, we will open the call for questions.
Unknown Executive: 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 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 bankshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed.
Speaker Change: Chairman also back, osmanah Chief Financial Officer, Eddie savitee Vice chairman, Kevin Hannigan president and Chief Operating Officer Randy Hester. Chief lending officer May 7, Port director of corporate strategy and Bob dowel Executive Vice President. David zulman will lead off with a review of the highlights for the recent quarter. He will be followed by Alec osmanov who will review some of our recent Financial specifics and Tim to Manas who will discuss our lending activities, including asset quality. Finally, we will open the call for questions
Speaker Change: Before we begin, let me make the usual disclaimers.
Speaker Change: Certain of the matters discussed in this presentation, May constitute forward-looking statements for the purposes of the Federal Security flaws. And as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bank shares to be materially different from future results or performance expressed or implied by such forward-looking statements,
Unknown Executive: All forward-looking statements are expressly qualified in their entirety by these cautionary statements.
Speaker Change: Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in our filings with the Securities and Exchange Commission. Including forms, 10q, and 10K, and other reports. And statements, we have filed.
Charlotte Rasche: Now let me turn the call over to David Zalman. Thank you, Charlotte.
Speaker Change: All 4 were looking statements or expressive qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Salman.
David Zalman: I would like to welcome and thank everyone listening to our second quarter 2025 conference call.
David Zalman: I'm proud to announce that we entered into a definitive agreement with American Bank Holding Company and Corpus Christi to merge. We have followed American Bank closely for more than two decades and have tremendous respect for the bank and for the people that have contributed to its success. Our banks have a complementary footprint, and we are familiar with and remain committed to the communities that American Banks serves, including with both financial products and community support. This combination will strengthen our presence and operations in South Texas and surrounding areas and enhance our presence in Central Texas, including in San Antonio, a highly desirable high growth area.
David Salman: Thank you, Charlotte. I would like to welcome and thank everyone, listening to our second quarter. 20125 conference call. I'm proud to announce that we entered into a definitive agreement, with the American Bank holding company in Corpus Christi to merge.
We have followed American Bank closely for more than 2 decades and have tremendous respect for the bank and for the people that have contributed to its success.
David Salman: Our banks have a complimentary footprint and we are familiar with and remain committed to the communities that American Banks serves including with both Financial products and Community Support.
David Zalman: With regard to earnings, our net income was $135 million for the three months ending June 30, 2025, compared with $111 million for the same period in 2024, an increase of $23 million, or 21%. The net income per diluted common share was $1.42 for the 3 months ending June 30, 2025 compared with $1.17 for the same period in 2024, an increase of 21%. Net income for three months ending June 30, 2024 included the impact of a merger-related credit loss provision and merger-related expenses from the Loan Star Transaction, the FDIC Special Assessment, a net gain on the Visa Stock Exchange, and the Sullivan Investment Securities.
This combination was strengthened our presence and operations in South Texas, and surrounding areas and enhance our presence in Central Texas, including in San Antonio. I highly desirable high growth area,
David Salman: With regard to earnings our net. Income was 135. Million for the 3 months, ending June 30th 20225 compared with the 1111 million for the same period in 2024 an increase of 23 million or 21%,
David Salman: The net income per diluted. Common share was a 142 cents for the 3 months, ending June 30, 2025 compared with the dollar 17 cents for the same period in 2024, an increase of 21%.
David Salman: From The Lone Star transaction.
David Zalman: Excluding these one-time items for the three months ending in June 30, 2024, the net income was $116 million and earnings per share was $1.22. When comparing these results with the quarter ended June 30, 2025, net income increased $18 million to $135 million, or 16%, and our earnings per share increased $0.20, or 16.4%. Our annualized return on average assets and average tangible common equity for the quarter ending June 30 2025, compared with the same period in 2024 were a 1.41% return on average tangible on average, average assets. It compared with 1.17% and 13.44% return on average tangible common equity compared to 12.34%.
David Salman: The FDIC special assessment a net gain on the Visa stock exchange and the Sullivan investment Securities. Excluding these 1-time items for the 3 months ending in June 3224, the net income was 116 million and earnings per share was a122 cents. When comparing these results with the quarter ended, June 30 2025 net income increased 18 million to 135 million or 16% and our earnings per share increased 20 cents or 16.4%.
Our annualized return on average assets and average tangible common equity for the quarter ending June 30th 2025 compared with the same period in 2024, where a 1.41% return on average tangible. Uh, on average, uh, average assets,
David Zalman: The net interest margin on a tax equivalent basis was 3.18% for the three months ending June 30, 2025, compared with 2.94% for the same period in 2024, and with 3.14% for the three months ending March 30, 2025. As mentioned on prior calls, these are the results we expected, and we anticipate these tailwinds should continue to be positive for the near future. Loans were $22.1 billion at June 30, 2025, a decrease of $123 million compared with $22.3 billion at June 30, 2024. Our linked quarter loans increased to $219 million or 1% 4% annualized from $21.9 billion at March 31, 2025.
David Salman: And compared with 1.17% and 13.44% return on average tangible common Equity compared to 12.34%.
David Salman: The net interest margin on a tax equivalent basis. Was 3.18% for the 3 months ending, June 3225 compared with 2.94% for the same period in 20124. And with 3.14% for the 3 months, ending march 3225,
As mentioned on prior calls. These are the results we expected. And we anticipate these Tailwinds should continue to be positive for the near future.
Loans were 22.1 billion at June 3225. A decrease of 123 million compared with 22.3 billion at June 3224.
David Zalman: Overall, the bank grew loans by $220 million in the second quarter of 2025 or 4% on an annualized basis. With most of the growth attributable to the seasonal strength of the mortgage warehouse business. However, we remain positive on our ability to grow loans in the second half of the year. We saw consistently higher monthly new production numbers in the second quarter, and core commercial loans, excluding mortgage warehouse loans, were up 73 million, or 2.4% annualized. We have been focused on using our liquidity to fund commercial loan growth, and we are starting to see progress. Deposits were $27.4 billion at June 30, 2025, a decrease of $459 million, or 1.6% when compared with $27.9 billion at June 30, 2024.
David Salman: Our linked Court loans increased, 2119 million or 1% 4% annualized from 21.9 billion at March 31st 2025 overall, the bank grew loans by 220 million and the second quarter of 2025 or 4% on an annualized basis. With most of the growth attributable to the seasonal strength of the mortgage Warehouse business. However, we remained positive on our ability to grow loans, in the second half of the year. We saw consistently higher monthly, new production numbers in the second quarter and core commercial loans.
Excluding mortgage Warehouse loans were up 73 million or 2.4% annualized. We have been focused on using our liquidity to fund commercial loan growth and we are starting to see progress.
David Zalman: The linked quarter deposits decreased $553 million, or 2% from $28 billion at March 31, 2025, primarily due to decreases in public fund deposits, higher cost deposits acquired in the recent acquisitions, and business deposits, and our disciplined deposit pricing. Prosperity generally experiences seasonality with its public fund deposits as public funds customers use the top tax dollars that they receive in December and January throughout the year, resulting in lower deposit balances in the second and third quarters of the year. Our bankers focus is on building core deposits, our non-interest bearing deposits represented 34.3% of our total deposits at June 30, 2025.
David Salman: Deposits for 27.4 billion at June 3225, a decrease of 459 million or 1.6% when comparing to that compared with 27.9 billion at June 3020 2024, the link for the deposits decreased, 553 million, or 2% from 28 billion at March, 31st 2025 primarily due to decreases in public fund, deposits, higher cost, deposits, acquired in the recent acquisitions and business deposits. And our dis, our discipline deposit pricing Prosperity, generally experiences, seasonality with its public fund deposits as public funds, customers use to talk tax dollars that they receive in December and January throughout the year, resulting in lower deposit. Balances in the second and third quarters of the year,
David Salman: Our Bankers focus is on building core deposits. Our non-interest-bearing deposits represented, 34.3% of our total deposits at June 3225.
David Zalman: With regard to asset quality, our non-performing assets totaled $110 million or 33 basis points of quarterly average interest earning assets at June 30, 2025, compared with $89 million or 25 basis points of quarterly average interest earning assets at June 30, 2024, and $81 million or 24 basis points of quarterly average interest earning assets at March 31, 2025, with a significant portion of the balance for each period attributable to the acquired loan. At June 30, 2025, the allowance for credit losses and loans was $346 million, and the allowance for credit losses on loans and off-balance sheet credit exposure was $383 million.
David Salman: Our with regard to asset quality, our non-performing assets total, 110 million or 33, basis points of quarterly average interest earning assets at June 30, 2025 compared with 89 million or 25. Basis points of quarterly average interest earning assets at June, 30, 2024, and 81 million, or 24 basis points accordingly, average interest earning assets in March, 31st 2010. March 31st 2025 with a significant portion of the balance for each period. A treatable to the acquired loans.
David Zalman: The allowance for credit losses on loans was 3.47 times the amount of non-performing assets.
David Salman: Land loans was 346 million and the allowance for credit losses on loans and off-balance sheet. Credit exposure was 383 million.
The allowance for credit losses on loans was 3.47 times the amount of non-performing assets.
David Zalman: We are very excited about our pending merger with American Bank Holding Company and American Banking Corpus Christi. We also continue to have conversations with other bankers considering strategic opportunities. We believe that higher technology and staffing costs, funding costs, staffing costs and 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 increase shareholder value.
David Zalman: Texas was rated as the second best state for business in 2025 by CNBC. However, we believe it should have been number one. That's just a little humor, guys. Texas continues to shine as more people and companies move to the state because of the business friendly political structure and those state income tax. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank in an efficient manner while investing in ever changing technology and product distribution channels.
Speaker Change: We were very excited about our pending merger with American Bank holding company and American banking Corpus Christie. We also continue to have conversations with other Bankers considering strategic opportunities we believe that higher techn technology and Staffing costs, uh funding cost, uh a staffing cost and 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 companies, long-term future and increase shareholder value.
Speaker Change: Texas was rated as a second best state for business in 2025, by CNBC. However, we believe it should have been number 1. That's just a little humor guys. And if you're going 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, poor customer relationships, maintaining sound asset quality and operating the bank. And
David Zalman: We intend to continue 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 it has become. Thanks again for your support of our company.
Asylbek Osmonov: Let me turn over our discussion to Asylbek Osmonov, our chief financial officer, to discuss some of the specific financial results we achieved. Asylbek? Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended June 30, 2025 was $267.7 million, an increase of $8.9 million compared to $258.8 million for the same period in 2024. An increase of $2.3 million compared to $265.4 million for the quarter ended March 31, 2025. Fair Value Loan Income for the second quarter 2025 was $3.1 million compared to $3.3 million for the first quarter 2025.
Speaker Change: Efficient manner while investing in everchanging, technology and product distribution channels, we intend to continue to grow the company, both organically and through mergers and Acquisitions. I want to thank everyone involved in our company for helping to make it. The success that has become. Thanks again for your support of our company. Let me turn over our discussion to also back OS monich, our Chief Financial Officer to discuss some of the specific Financial results. We achieved also back.
Olsback Osmonich: Thank you, Mr. Zolman good morning, everyone
Olsback Osmonich: Net interest income before provision for credit, losses for the 3-month and the June 30th 2025 was 267.77 million and the increase of 8.9 million compared to 258.8 million. For the same period in 2024 and increase of 2.3 million compared to 265.4 million for the quarter ended March, 31st 2025
Asylbek Osmonov: The Fair Value Loan Income for the third quarter 2025 is expected to be in the range of $2 to $3 million. The net interest margin on a tax equivalent basis was 3.18% for the three-month end of June 30, 2025, an increase of 24 basis points compared to 2.94% for the same period in 2024, an increase of 4 basis points compared to 3.14% for the quarter end of March 31, 2025. Excluding purchasing accounting adjustments, the net interest margin for the three months ended June 30, 2025 was 3.14% compared to 2.86% for the same period in 2024 and 3.1% for the quarter ended March 31, 2025.
Fair Value, Loan income for the second quarter of 2025 was 3.1 million compared to 3.3 million for the first quarter of 2025.
Olsback Osmonich: The fair value loan income for the third quarter 2025 is expected to be in the range of 2 to 3 million.
Olsback Osmonich: The net interest margin on a tax equivalent basis was 3.18% for the 3-month and the June 30th 2025.
Olsback Osmonich: An increase of 24 basis points compared to 2.94% for the same period in 2024 and the increase of 4 basis points compared to 3.14% for the quarter ended March. 31st 2025
Asylbek Osmonov: Non-interest income was $43 million for the three months ended June 30, 2025, compared to $41.3 million for the quarter ended March 31, 2025, and $46 million for the same period in 2024. The prior year non-interest income included $10.7 million in net gain on sale of security. Non-interest expense for the three months ended June 30, 2025 was $138.6 million compared to $140.3 million for the quarter ended March 31, 2025 and $152.8 million for the same period in 2024. The prior non-interest expense included $4.4 million in merger-related expenses and $3.6 million in FDIC Specialist. For the third quarter of 2025, we expect non-interest expense to be in the range of $141 to $144 million.
Olsback Osmonich: excluding purchased the county adjustments, the net interest margin for the 3 months and the June 30th 2025 was 3.14% compared to 2.86% for the same period in 2024 and 3.1% for the quarter ended March, 31st 2025
Olsback Osmonich: non-interest income was 43 million for the 3 months, and the June 30th 2025 compared to 41.334% in 2024
Olsback Osmonich: The prior year, non-interest income included. 10.7 million in net, gain on sale of securities.
Olsback Osmonich: Non-interest expense for the 3 months and that June 30th 2025 was 138.6 Million compared to 140.3 million for the quarter ended, March, 31st, 2025 and 152.8 million for the same period in 2024.
Olsback Osmonich: The prior non-interest expense included, 4.4 million in merger related expenses and 3.6 million in FDIC special assessment.
Asylbek Osmonov: The efficiency ratio was 44.8% for the three months ended June 30th, 2025, compared to 45.7% for the quarter ended March 31st, 2025, and 51.8% for the same period in 2025.
Olsback Osmonich: for the third quarter of 2025, we expect non-interest expense to be in the range of 141 to 144 million,
Asylbek Osmonov: The bond portfolio metrics at $630,025 have a modified duration of 3.8 and projected annual cash flows of approximately $1.9 billion.
The efficiency ratio was 44.8% for the 3 months and the June 30th 20125. Compared to 45.7% for the quarter ended March 31st, 2025, and 51.8% for the same period in 2024.
Tim Tomanish: And with that, let me turn over the presentation to Tim Timanis for some details on loan and asset equality. Thank you, Asylbek. Non-performing assets at quarter end June 30, 2025. totaled $110,487,000. are 50 basis points of loans and other real estate. compared to $81,419,000 or 37 basis points at March 31, 2025. This is an increase of $29,068,000 on a length quarter basis. Since June 30th, 2025. $1,138,000 of non-performing assets have been put under contract for sale. The June 30, 2025, non-performing asset total was made up of $102,607,000 in loans. $6,000 in repossessed assets. and $7,874,000 in other real estate.
Olsback Osmonich: 3.8 and projected annual cash flows of approximately 1.9 billion. And with that, let me turn over the presentation to Tim to manage for some details on loan and asking quality.
Speaker Change: Thank you. Also back.
Speaker Change: Non-performing assets at quarter, in June 30th 2025.
Speaker Change: Totaled, 110 million 487,000.
Speaker Change: Or 50 basis points of loans, and other real estate.
Speaker Change: compared to 81,419,000 or 37 basis points at March 31st 2025
Speaker Change: This is an increase of 29,068,000 on a length quarter basis.
Speaker Change: Since June 30th 2025.
Speaker Change: 1,138,000 of non-performing assets have been put under contract for sale.
Speaker Change: The June 30th 2025.
Speaker Change: Non-performing asset total was made up of 102,677,000 in loans.
Speaker Change: 000 and repossessed assets.
Speaker Change: And 7,874,000.
Speaker Change: And other real estate.
Tim Tomanish: Net charge offs for the three months ended June 30, 2025 were $3,017,000. compared to net charge-offs of $2,704,000 for the quarter ended March 31, 2025. This is an increase of $313,000 on a linked quarter basis.
Speaker Change: net charge offs for the 3 months, ended June 30th, 2025 where 3,017,000
Speaker Change: compared to net charge offs of 2,704,000 for the quarter ended March, 31st 2025
Tim Tomanish: There was no addition to the allowance for credit losses during the quarter ended June 30th, 2025. No dollars were taken into income from the allowance during the quarter ended June 30, 2025. The Average Monthly New Loan Production for the quarter ended June 30, 2025 was $353 million. compared to $317 million for the quarter ended March 31, 2025. This is a $36 million increase on a Link Water Basin. Loans outstanding at June 30, 2025 were approximately $22.197 billion. compared to $21.978 billion at March 31, 2025. The June 30, 2025 loan total is made up of 36% fixed rate loans.
Speaker Change: This is an increase of 313,000 on a length quarter basis.
Speaker Change: There was no addition to the allowance for credit losses during the quarter ended June 30th 2025.
No dollars were taken into income from the allowance during the quarter ended. June 30th 2025.
Speaker Change: The average monthly new Loan Production for the quarter ended, June 30th, 2025 was 353 million.
Speaker Change: Compared to 317 million for the quarter ended March, 31st 2025.
Speaker Change: This is a 36 million increase on a link water basis.
Speaker Change: Loans outstanding at June 30th 20125 or approximately 22.197 billion dollars.
Compared to 21.978 billion at March, 31st 2025.
Tim Tomanish: 34% floating rate loans. 30% Variable Rate Low.
Speaker Change: The June 30th 2025 loan total is made up of 36% fixed rate loans.
Speaker Change: 34% floating rate loans.
Charlotte Rasche: I will now turn it over to Charlotte Rasche. Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2.
Speaker Change: And 30% variable rate loans.
I will now turn it over to Charlotte rashy. Thank you. Tim at this time, we are prepared to answer your questions or 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 telephone keypad,
Speaker Change: If you are using a speaker-phone, please pick up your handset before pressing the keys.
Unknown Executive: At this time, we will pause momentarily to assemble our roster.
Speaker Change: To withdraw your question. Please. Press star. Then 2
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Michael Rose: Our first question comes from Michael Rose with Raymond James, please go ahead. Hey, good morning, everyone. Thanks for taking my questions. Good morning.
Speaker Change: Our first question comes from Michael rose with Raymond James, please go ahead.
Michael Rose: Just wanted to get some color, you know, looks like there was some purchase loan decline this quarter, but can we just get an update on any sort of revised expectations for LoanGrowth X warehouse? Seems like the industry is starting to pick up a little bit here. I assume you had some paydowns as well that were kind of impacting this quarter's growth. I did sense some optimism at the front of the call. So just trying to get an update there.
David Zalman: And then if Kevin's there, we'd love the update on the warehouse. Just looks like it did a little bit better on average than what he talked about last quarter. Thanks. Yeah, thanks, Michael.
David Zalman: I'll try to tackle both and see if anybody wants to add on. I think in terms of loan growth, the quarter has started off a little better than the prior quarters. We do have some loan growth, not a ton, call it $40 million worth so far for the quarter. Pipeline looks pretty good. So I think low single-digit growth for the rest of the year is probably achievable. Just as an aside, we've also had some okay core deposit growth, I think almost maybe $90 million so far for the quarter. So both of those seems to have stabilized a bit.
Speaker Change: Hey, good morning everyone. Thanks for uh, taking my questions. Um, just wanted to get some good morning, um, just wanted to get some color, um, you know, looks like there was some purchase loan decline this quarter, but can we just get an update on on any sort of revised expectations for for for loan growth? X Warehouse seems like, uh, the industry is just starting to pick up a little bit here. I assume you had some pay Downs as well, that were kind of impacting this quarter's growth. I did send some some optimism at the front of the call. So just trying to get an update there and then if Kevin's there would love the the update on the warehouse, just looks like it did a little bit better on average than what he talked about last quarter. Thanks.
Yeah, thanks Michael. I'll try to tackle both and see if anybody wants to add on. I think in terms of loan growth.
Uh, the quarter has started off a little better than the prior quarters. We do have some loan growth, not not a ton, call it 40 million dollars worth. So far for the quarter pipeline, looks pretty good. So
David Zalman: Loan demand is okay. If there's been another point of weakness, it's been usage on corporate or middle market kind of revolvers. Usage is down. Quite a bit from where it had been with people taking excess cash and paying down debt rather than growing their balance sheets and, you know, we'll see whether that shifts around or not. I think a lot of that was tariff related.
Speaker Change: Achievable. Um, just as a side, we've also had some okay core deposit growth. I think almost maybe 90 million so far for the quarter. So so both of those seems to have stabilized a bit, um, loan demands. Okay. If there's a, if there's been another point of weakness, it's been usage on, uh, corporate or Middle Market kind of revolvers usage is down.
Kevin Hanigan: On the warehouse, just by way of background, we averaged for the last quarter $1.179 billion. We thought it would be about $1.150 billion, so we were just slightly ahead of what we were thinking. So far for this quarter, Michael, through last night, we have averaged $1.307 billion to be exact, and last night we closed out a little lower than normal at $1.226 billion. That's not unusual for this time of the month. We get a lot of Ginnie Mae settlements in the 20th, 21st, 22nd of every month. On balance, I think we will probably average a little better this quarter than last at $1.25 billion.
Speaker Change: Uh, quite a bit from where it had been uh with people taking excess cash and paying down debt rather than uh growing their balance sheets and and uh you know, we'll we'll see whether that shifts around or not. I think a lot of that was tariff related.
Speaker Change: Uh, on the warehouse uh, just by way of background, we we average for the last quarter of a billion 179.
We thought it'd be about a billion 1 fifty so we were just slightly ahead of where we were thinking.
Speaker Change: uh, so far for this quarter, Michael through last night, uh, we have averaged a billion 307,
Uh, to be exact and uh the last night we closed out a little lower than normal at a billion 2226.
Um, that's not unusual for this time of the month. We get a lot of Jimmy May settlements in the
Speaker Change: 202 20th 21st, 22nd of every month.
David Zalman: Typically, our third quarter is our best quarter in normal times, and these are more kind of normal times. So I do expect it to be a little bit better, close to $100 million better on average than Q2. Yeah, I think the thing that we liked about it too, rightly or wrongly, we really saw commercial or commercial loans pick up and mortgage loans went down. Again, we have so many mortgage loans that we've seen that the $73 million more in commercial loans would increase that. I think that was good. And we do seem we do seem to see a lot of I don't know, I wouldn't call it a production, but there's a lot of stuff going through the Loan Committee now, so things look pretty good.
Speaker Change: Uh, on balance, I think we will, we will probably averaged a little better this quarter than, than last at a, at a billion. 250.
Speaker Change: Um typically our third quarter is our best quarter in in normal times and and these are more kind of normal times. So uh I do expect it to be a little bit better, you know close to 100 million dollar better on average than than Q2.
Tim Tomanish: Michael, this is Tim. Yes, with regard to what David just said, and and I do see coming up the next handful of months basically the same way that that Kevin does, so I think he's spot-on. Very helpful.
Speaker Change: Yeah I think the the thing that we like about it too rightly or wrongly, we really saw a commercial, our commercial loans pick up and uh mortgage loans went down. But again, we have so many more mortgage loans that we the the scene that the uh, there were 73 million dollars more in commercial loans, uh, will increase that I think that was good and and we do seem we do seem to see, uh, a lot of, I don't know, I wouldn't call it a production, but there's a lot of stuff going on with the loan committee now, so things look pretty good, I think.
Uh, Michael, this is Tim. Uh, yes, with regard to what David just said. And and I do see uh coming up the next handful of months, basically the same way that that Kevin does. So I think he's spot on
Michael Rose: And then maybe one for Asylbek, just on the on the margin, you know, not as much momentum there, I think, as we would have thought. You have the range that you talked about, 325 to 330. I noticed that, you know, interest bearing deposit costs were flat.
Asylbek Osmonov: So maybe just walk us through some of the puts and takes as we think about the next couple quarters, you know, you know, bond portfolio repricing, pickup, further ability to lower deposit costs, CDs maturing, you know, kind of etc. And just how we should think about the trend relative to what you talked about earlier this year. Thanks.
Asylbek Osmonov: Michael, let me just start. I have kind of the model in front of me and just to kind of give you some color. I mean, our net interest margin continues, it might, it continues to go grow. I think we're showing with no change in interest rates at 335, 3.35% net interest margin in six months. If interest rates go down 100 basis points in that six months, it's at 3.3%. On a 12 month timeframe, with no change in interest rates, we get to 3.48%. And with 100 basis points down in 12 months, we're at 3.40. 24 months, and I won't go past that.
Speaker Change: Uh, very helpful. Um, and then maybe 1 for, for also back, um, just on the, on the margin, you know, um, not as much, uh, momentum there. I think is, is we would have thought, um, you have the range that you talked about 325 to 330. I noticed that, uh, you know, interest bearing deposit costs were were flat. So maybe just walk us through some of the, the puts and takes as we think about the next couple quarters. You know, uh, you know, Bond portfolio of pricing pickup, uh further ability to lower deposit cost CDs maturing you know, kind of Etc. And just how how we should think about the the trend relative to which you talked about earlier this year. Thanks Michael. Let me just start. I I have kind of the model in front of me and just to kind of give you some color. I mean what we're our net interest margin continues, at my it continues to go grow. I think we're showing with no change in interest rates at 3:35 3.35 percent in that interest margin in 6 months. If interest rates go down 100 basis points.
Speaker Change: In that 6 months, it's at 3.3% on a 12-month time frame, with no changing interest rates. We get to 3.48%
And with the 100 basis points down in 12 months, for a 3.40.
Asylbek Osmonov: We're at 3.76% with no change in net interest margin, and 3.61 with 100 basis points down. So our models still continue to show great expansion in the net interest margin over a period of time.
Asylbek Osmonov: Sorry to jump in on you. No, that's absolutely right. And just give you a little bit of a color on the question, why we're achieving these numbers. If you look at our model, our cost of deposit model shows it's going to continue to stay as is, you know, there's no much downward decrease on the cost of deposit. But what we see is the repricing of two things, right? First of all, it's our bond portfolio. As we mentioned, we have about $1.9 billion of cash flowing each year, and the rate on that is about 2.15% even take.
Asylbek Osmonov: So that's going to be repricing at least, you know, depending on if you put it on the loans, repricing at 300 plus basis points, but if you were going to put it in securities, it's still more than 2.5%. On the loan side, we have about $5 billion cash flow coming in. So out of that, with about 60% or $3 billion, it's more like fixed variable rate, that's going to reprice higher than what we're putting currently on the loans. So those drivers showing in our model that it will help us to continue to increase the margin and net interest income.
Speaker Change: 24 months uh and I won't go past that we're at 3.76% with no change and that interest margin and 3.61 with 100 basis points down. So our models still continue to show great expansion in the net interest margin over a period of time, sorry to jump in on, you know, that's the opposite of the right and just give a little bit of a color on the question. Why we're achieving this numbers? If you look at our model, our on the cost of deposit model shows that's going to continue the stairs is, you know, there's no much, uh, downward, uh, decrease on the cost of deposit. But what we see is the repricing of 2 things, right? First of all, it's our bond portfolio. As we mentioned, we have about 1.9 billion dollars of cash flowing each year. And right on, that is about 2.15% of you, take give and take. So that's going to be pre pricing, at least, you know, depending on if you put it on the loans.
Asylbek Osmonov: So I think our model still continues to show that we should be on average for the year to be the range will provide to on the 3.25 to 3.3 name for the year.
Speaker Change: Bone side, we have about 5 billion dollar, cash flow coming in. So out of that, we about 60% or 3 billion dollars, it's more like fixed variable rate that's going to reprise higher than what we put in currently on the loans. So those drivers showing in our model that it will help us to continue to increase the margin and net interest income. So I think we are our model. Still continue to show that we should be on average for the year to be as a range. We provide to I mean 3.25 to 3.3 name for the year,
Michael Rose: Okay, I appreciate all the call, everyone. I'll step back.
Speaker Change: Okay, I appreciate all the call everyone. I'll step back thanks.
Catherine Mealor: The next question is from Catherine Mealor with KBW, please go ahead. Thanks. Good morning.
Speaker Change: The next question is from Katherine Mueller with KBW, please go ahead.
Catherine Mealor: I would like to follow up on the margin. Hey, good morning. I just want to follow up on the margin with just the size of the balance sheet to kind of think about, you know, I saw that cash and average earning assets kind of came down, just your, what, how do you, how should we be thinking about just the size of the bond book and the size of cash in the next couple quarters? Well, again, I'll start off. I mean, I think the balance sheet size, if you look year over year, we were down 1.6% in the deposit side.
Speaker Change: Thanks, good morning, how are you? Good to follow up on the margin. Hey, good morning. I just want to follow up on the margin was just the size of the balance sheets, we kind of think about, um, yeah, I saw that the cash and the average earning assets and I came down. Just your what, what how do you how should we be thinking about? Just the size of the bond book and the size of cash in the next couple quarters?
Asylbek Osmonov: And then you look at this quarter, as mentioned earlier, this is seasonally, a time when we do lose deposits. So we think that that the deposits probably are have stabilized. And so I think that you'll probably see, and probably the third quarter still kind of, I guess, just, I guess, where we're at kind of right now, but should start picking up in the fourth quarter for sure. So we should see fourth and first quarter pickup in that. And I think that a lot of it depends on interest rates, I think, in general. I mean, if we really wanted to build a balance sheet, I mean, and we weren't as disciplined as we were, it, you could easily, I mean, we don't have any broker deposits, we could easily bring in a bigger balance sheet if you're willing to pay, you know, the 5%, 4.5%, 4.5%, 5% interest rate.
Well, I can get an off, start off. I mean, I think, the, the balance sheet size. If you looked year-over-year, we were down 1.6% in the deposit side, and, uh, then you look at this quarter as mentioned earlier. This is seasonally a time when we do lose deposits. So we, we think that that the, the positives probably are have stabilized. And so I think that you'll
Speaker Change: we see uh, yeah, probably the third quarter still kind of
Speaker Change: I guess just I guess where we're at kind of right now, but you should start picking up in the fourth quarter for sure. So we should support in first quarter pickup in, in, in that. And I think that a lot of it depends on interest rates. I think, in general, I mean,
Asylbek Osmonov: So you can build a balance sheet, but you can't build a balance sheet. But we've been trying to be very disciplined and really manage our net interest margin. That's kind of where we're at right now.
Asylbek Osmonov: But overall, to answer your question, I think that we have stabilized, and I think you will see growth going forward. Not tremendous growth. I agree. That's exactly right.
Asylbek Osmonov: And I would just say on the model, fundamentally, nothing changed from us. It just was the deposit dropoff we saw in the second quarter impacted NII as we saw it. But fundamentally, our model is still showing that continued expansion in the margin and net interest income. You also have reduced your borrowing from the federal home loan bank compared to last year, where we were at 3.9 last year. Yeah, in the beginning of 3.9, and we reduced to 2.9 this year. And again, that was a big drop in the asset price.
Speaker Change: If we really want it to build the balance sheet, I mean, uh and we we weren't as disciplined as we were it. It, you could easily. I mean, we don't have any broker deposits. We could easily bring in a bigger balance sheet if you're willing to pay, you know, the the 5% 4 and a half percent 4 and a half 5% interest rates. So you you you can build the balance sheet but we, we've been trying to be very disciplined and, uh, and, and really manage our net interest margin. That's, that's kind of where we're at right now. But overall, to answer your question, I think that I think that we have stabilized and I think you will see growth going forward. I'm not tremendous growth. Yeah, growth. Yeah, I agree. That's exactly right. And I'll just say on the model fundamentals, nothing changed from us. It just was the uh, you know, deposit drop off. We saw in the second quarter impact that knee as we saw it. But fundamentally our model is still showing that the continued expansion in the margin and net interest income. You also have reduced your borrowing from the federal Home Loan Bank compared to last year where we were.
Asylbek Osmonov: shouldn't affect the net interest income, but just a big drop in Okay, that's helpful.
Asylbek Osmonov: And then on loan yields, also, I feel like mixed shifts just within your balance sheet is what's driving the margin expansion, but I'm curious if you see some more upward momentum in loan yields as maybe growth improves into the back half of the year as well. I'd say, yes, a couple of things is mixed. Less mortgage, more commercial. So I think we'll pick it up there. As Asylbek said, a shift out of bonds and into loans also improves. And, you know, as we looked at it, you know, you probably, someone mentioned early in the early reports this morning that loans help for investment.
3.9 last year. Yeah, the beginning of 3.9 and we've reduced to 2.9 this year. And and again we uh again that was a big drop in the assets. Uh, they shouldn't affect in that interest income but but just a big drop in the assets. Uh, correct. Got it. Okay, that's helpful. And and then the long yields, um also I feel like makes shift just within your balance sheet is what's driving the margin expansion. But um you know, curious if you see some more upward momentum and Loan yields as maybe growth improves it into the back half of the year as well.
Speaker Change: I'd say yes, a couple of things is is mixed, less less um mortgage more commercial.
uh, so I I think we'll we'll pick it up there as, as Abe said, stripped out of bonds and into loans,
Also improves. Um,
David Zalman: The yield was down a basis point. And that's really just in terms of inside baseball, we always have, not always, but typically have some non-accrual pickup income in a quarter. We had more than usual last quarter, maybe 2.3, 2.4 million, and we had 400 or we had 400,000 this quarter. And that, but believe it or not, on the overall loan yields, that changed loan yields in minus one basis point versus up two or three. So that's just a small inside baseball piece of it. So this quarter, maybe last quarter wasn't quite as good as it was advertised or written.
Speaker Change: And, you know, as we looked at it, you know, you probably someone mentioned earlier in in the early reports this morning that that loans held for investment. The the yield was down at basis point and that that's really just in terms of inside baseball, we always have not always but typically have some non-accrual pickup income in a quarter. We had more than usual last quarter. Maybe 2.3 2.4 million and we had 400 or we had 400,000 this quarter uh and that but believe it or not on on the overall um loan yields that that changed loan yields to minus 1 basis point versus
Catherine Mealor: And this quarter is not as bad, just a couple of basis point difference. But we don't see that number being down this quarter. It's an aberration, not a trend. Okay, that's very helpful. So still upward momentum and low pricing as expected. That's great. Okay, great.
Speaker Change: Is up 2 or 3. So um, that that's just a small inside baseball piece of it. So this this quarter maybe last quarter wasn't quite as good as it it was advertised or, or written. And this quarter is not, not as bad, just a couple of basis point difference but uh, we we don't see that number being down this quarter is it's an aberration not not a trend.
Speaker Change: Okay, that that's very helpful so it's still upward momentum in 1 pricing as as expected. Yeah, that's great. Okay, great, thank you.
Manan Gosalia: The next question is from Manan Gosalia with Morgan Stanley. Please go ahead. Hey, good morning, all. Good morning. I wanted to focus on the acquisition and specifically on the NII accretion from the acquisition. Can you comment on, I guess, what sort of NII you think you can get from the acquisition? Are there any revenue synergies that you're building in? Is there any benefit on the runoff after completing the acquisition?
The next question is from monango, selia with Morgan Stanley. Please go ahead.
Speaker Change: Morning.
Asylbek Osmonov: Okay, I'll take that one. And I'll start off with deposit. And what we noticed in American West has really good deposit base and very similar to ours. That's what attracted us to American Bank. And if you look at their cost of deposit, it was 1.66%, very close to ours, you know, compare if you look just overall industry, very low. That was, they have very strong deposit base. On the loans, they yielded higher than ours. I think their loan yielded about 6.43. So both of them taking those is very going to be accretive to our margin.
Uh, I wanted to focus on, uh, on the acquisition and specifically on the, on the knee accretion from the acquisition. Um, can you comment on, um, you know, I guess what sort of knee? Um, you think you can get from the acquisition? Are there any Revenue synergies? Um, that you're building in, um, you know, is, is there any benefit on the deposit cost side and, um, if there's any loans that you might, uh, want to run off after completing the acquisition?
Asylbek Osmonov: If you look overall, on dollar wise, I think on annual basis, it's going to bring if you just take the run rate, it's about 85 to $90 million on NII on by themselves. But in addition, we're going to be having some markups on those loans to the fair value. And also we're going to have AOCI adjustment on their bond, which kind of generate additional $15 million per year, 15 to 16 million. So combining those we know it's going to be pretty strong expansion on our net interest income. If you look at on margin wise, if we calculated it gives about mid single digit on the margin increase overall.
Speaker Change: Okay, I'll take that 1 and, uh, I'll start off with deposit. Uh, and what we noticed in American West has really good deposit, based, and very similar to ours that What attracted us to American Bank. And if you look at their cost of deposit, this was 1.66% very close to ours. You know compare if you would just overall industry, very low. That's was have very strong uh deposit base on the loans they yielding higher than ours. I think they're um the loan yield about 6.43. So both of them taking those is very going to be accredited to our margin if you look overall, um, on Dollar Wise I think you know on an annual basis, it's going to bring. If you just take the Run rate it's about 85 to 90 million dollars on nii on by themselves. But in addition we're going to be having some markups on those loans to the fair value. And also, we're going to have aoci adjustment on their
Asylbek Osmonov: I think you could say also back also that American Bank is very similar to us. If you look at our cost of deposits, their cost of deposits were very close. And again, I don't think you're going to see with some banks that join us, we know going in that there's going to be a Pretty good loan runoff and a pretty good deposit runoff. We don't see that in an American bank. We feel comfortable. They're very much like we are, and I don't see, I don't, I just, I think it's just a good core bank.
On which kind of generate additional 15 million dollars per year 15 to 16 million. So combining those with we know it's going to be pretty strong uh um expansion on our net interest income. If you look at on margin ones, if we calculated, it gives about Miss single digit, on the margin increase. Uh overall,
Speaker Change: I think you could say also back also that American Bank is very similar to us. If you look at our cost of deposits, their cost of deposits were very close. And again, I don't think you're going to see a with some banks that join us. We we know going in that there's going to be a
Manan Gosalia: Really, it's a piece.
Speaker Change: A pretty good loan loan, runoff in a pretty good deposit. Runoff, we don't see that in in American Bank, we feel comfortable. They're very much like we are. And I don't see, I don't I just I think it's just a good core Bank, really? It's it's a, it's a peach.
Manan Gosalia: That's helpful.
Manan Gosalia: And then maybe on capital deployment priorities from here, I mean, I think you mentioned in your opening comments that you continue to have conversations. It looks like you're open to more M&A. But this is also an all stock acquisition.
Manan Gosalia: Is there any ability to maybe buy back some of the stock you've issued in the open market once the acquisition closes? Right now, there's a lot of activity in M&A. And again, I suspect that we'll be using some of that that that capital that we have going forward, probably in M&A. Got it.
That's helpful. Um and then uh maybe on a capital deployment priorities from here. Um you know I think you you you mentioned in your opening comments that you continue to have conversations. Just it looks like you're uh open to more m&a. Uh but this is also an all-stock acquisition is there? Um is there any ability to maybe buy back? Some of this docu issued in the open market, once the acquisition closes,
Speaker Change: Right now. Uh, there's a lot of activity in m&a. And, uh, again, I suspect that we'll be using some of that, that, uh, that Capital that we have going forward, probably in m&a.
Speaker Change: Got it. Thank you.
Peter Winter: The next question is from Peter Winter with D.A. Davidson. Please go ahead.
Peter Winter: Good morning. I wanted to ask about the Loanstar portfolio. Loans were down about $180 million year-over-year and deposits were down about $250 million year-over-year. So are you nearing a bottom? And then maybe if you can talk about the quality of American banks' loans and deposits, would you expect some runoff once you close that deal?
Speaker Change: The next question is from Peter winter. With da Davidson, please go ahead.
Peter Winter: Uh, good morning. Hey, I wanted to ask
Peter Winter: Morning. I wanted to ask about the uh Lone Star portfolio. Uh, loans were down about 180 million over a year and deposits were down.
David Zalman: I'll start.
Peter Winter: About 250 million year-over-year so are you nearing a bottom? And then maybe if you can talk about the quality of American Banks loans and deposits, would you expect some runoff, um, once you close that deal?
David Zalman: The Lone Star deal, Lone Star Bank did have a lot of higher cost deposits, so we're not rattled by that amount of deposits, and they were extremely high cost, sometimes 100 basis points more than what we were paying, so we suspected that.
David Zalman: As far as the loan side, somebody may be able to help me with the loan side. I know that we, I think overall the loan quality was really pretty good. We have one large loan that got thrown into the non-performing assets that was $13 or $14 million, but again, it's well securitized. I don't think that we see any loss in that. Their underwriting at Lone Star Bank was very good, I think. I mean, with the exception of this one credit that we have, I think they were very good. Going forward with American Bank, again, a little bit different in some underwriting, but I think if anybody came and looked at us from another bank, they would think we're different than them.
Peter Winter: I'll I'll start the the Lone Star deal Lone Star Bank did have a lot of higher cost deposits. So we're not we're not rattled by that by that. Uh, amount of the the the deposits and they they were extremely high cost sometimes a 100 basis points more than what we were paying. So but we suspected that uh as far as the loan side, somebody may be able to help me with the loan side. Uh I know that we we I think overall the loan quality was really pretty good, we have 1 large loan that got thrown into the nonprofit
David Zalman: I think overall I don't see the deposit loss or the – and there will always be some, but I don't see the deposit loss or the loan loss in the American deal. I think it's just a really good core bank. It's hard to find real good core banks like this, and this is really a good core bank. And David, one thing I would mention, I do think that Lone Star has stabilized. In day one, they have worked very closely and very well with us. to address those issues and deal with them. We knew that even going in, so it wasn't anything none of us expected, let me say that.
Peter Winter: There's always be some but I don't see the deposit loss for the or the loan loss in in the American deal. I think it's it's just a really good core bank. There's it's hard to find the real good core Banks like this and it, this is really a good core Bank.
Peter Winter: And David 1 thing I would would mention, uh, I do think that Lone Star has uh stabilized.
Peter Winter: In terms of loans and deposits both. Right? Yeah, the future will tell us but uh, I I do feel like they're stabilized. We knew going in, they, they were the certain portion they were about 100%. There were some 5% CDs that were going to go, you know, like that, that that's correct. And from day 1, they have worked very closely and very well with us.
David Zalman: That's correct.
David Zalman: Yeah, by recap, I think we're done, or near done with Loan Stars shrinking, and I think American Bank is just, it's a different animal. It's been around 50 plus years. Right. Really, really solid deposit franchise. I mean, very, very solid. Credit quality, good. Maybe underwriting a little different than us, but the credit quality, very good. Does that mean there'll be zero runoff? No, though, you know, but it's going to be very mild, very, very mild. This is not a big shift in terms of what they're paying them deposits versus versus us. It's a it's a high quality franchise.
Peter Winter: To address those issues and and deal with them, we knew that even going in. So it wasn't, it wasn't anything, none of us, expected. Let me say that. That's correct. Yeah, bye. Bye recap. I think we're done or near done with Lone Star shrinking and I think
Speaker Change: American Bank is just it's a different animal. It's been around 50 plus years, right? Really, really solid deposit franchise. I mean, very, very solid. Uh, credit quality good maybe underwriting a little different than us but the credit quality, very good.
David Zalman: We're lucky to get it.
Speaker Change: Does that mean? There'll be zero runoff know the, you know, but it's going to be very mild. Very, very mild. This is not a big shift in in terms of what they're paying on. Deposits versus versus us. It's a
David Zalman: Yeah, I think the American bank deal makes you know, we're we have a big strong position in the in the Houston market. We have a strong position in the Dallas market and a good position in the Austin market. But again, along the along the Gulf of America, we have Victoria. And again, it's been it was such a great merger with us. I mean, we they joined us and they we became the number one market share in that whole second tier market. Or right down the road is Corpus Christi. And this gives us the number one market share in Corpus Christi.
David Zalman: And I mean, so we're we really have become number one market share or major market shares in the second tier markets like like Victoria, like Corpus Christi, like Odessa, Lubbock, Midland, Bryan College Station, and those are really great markets. And this just fits in just perfectly with that, not to mention that it gives us we really needed some locations in the in the San Antonio market where we only had one. And I think this gives us what four more locations in the San Antonio market. So it really helps us get a jump in the San Antonio market as well.
Speaker Change: It's a high quality franchise, we're lucky to get it. Yeah, I think the American Bank deal makes, you know, we have a big strong position in the in the Houston Market, we have a strong position in the Dallas Market and a good position in the Austin Market. But, uh, and again along the along the Gulf of America we have Victoria and, uh, again it it's been, it was such a great merger with us. I mean, we, they joined us and they, we became the number 1 market share in that. So, second, tier Market, but right down the road, it's Corpus Christi. And this gives us the number 1 market share in Corpus Christie. And I mean, so we're, we really have become number 1 market. Share our major market shares in these second tier markets like uh like Victoria, like Corpus Christi like odesza. Love at Midland, Brian College Station. And and those are really great markets and this just fits in just perfectly with that, not to mention that it gives us.
David Zalman: So we're really excited about that.
Speaker Change: We really needed some locations in the in the San Antonio Market where we only had 1. And I think this gives us what 4 more locations in the San Antonio market. So it really helps us get a jump in the San Antonio Market as well. So we're really excited about that.
Tim Tomanish: I could ask, on credit, I'm certainly not worried about credit with you guys, but just curious about the, what drove the increase, $29 million increase in non-performing assets? And then, you know, just what's the outlook for non-performing assets going forward? Just given the comment, most of it is acquired loans, which you have reserves against, but I'm just wondering when those should start to decline?
Speaker Change: Got it. Thank you for all that detail. Um,
Speaker Change: I could ask on credit. I'm certainly not worried about credit uh with you guys but just curious about the
Tim Tomanish: I think I can address that for you. The increase is really made up of Three buckets, so to speak. One is a. $13 million dollar loan. that David referred to a minute ago from Lone Star State Bank. It's real estate secured. We think we're probably not going to lose any money. from that loan. Time will tell, but that's our forecast right now. So that's $13 million. There's another one, $19 million, that's from the Legacy Texas portfolio. It's secured by notes on used vehicles. We do think there's a bit of a loss there, but it's fully reserved, so we don't see any negative impact from that standpoint.
Speaker Change: What drove the increase? Uh, 29 million increase in non-performing assets and then, you know, just what's the outlook for non-performing assets going forward, just given the comment most of it is acquired loans uh which you have reserves against but I'm just wondering when when those starts should start to decline.
Speaker Change: I think I can address that for you. Um,
Speaker Change: the increase is really made up of
Speaker Change: 3 buckets, so to speak.
Speaker Change: 1 is a u.
Speaker Change: 13 million loan.
David: That David referred to a minute ago from Lone Star State Bank,
Speaker Change: um,
Speaker Change: It's uh, real estate secured. We think we're probably not going to lose any money.
Speaker Change: From that loan.
Speaker Change: Uh, time will tell. But that's that's our forecast right now. So that's 13 million.
Uh there's another 1 uh 19 million uh that's from the Legacy, Texas portfolio.
Speaker Change: Um, it's secured by uh notes.
Speaker Change: Uh, on, uh, used vehicles. Uh, we do think there's a bit of a loss there, but it's fully reserved.
Tim Tomanish: Um The biggest change is we've got about $51 million in single-family homes. Included in the non-performance We made efforts starting a couple of years ago to increase our minority home loans. And the result is we've taken several homes back. The good news is, as we are able to foreclose on them, we've been able to sell them all relatively quickly. So we think this is something that we're going to work through over the course of the next year. But if you look at those three buckets, one is 51 million, one is 13 million, and one is 19 million.
Speaker Change: So we don't see any negative impact from that standpoint.
Speaker Change: Um,
Speaker Change: the biggest change is we've got about 51 million in single family homes.
Speaker Change: Uh, included in the non-performing.
Speaker Change: Um,
Speaker Change: We made efforts uh starting a couple of years ago to increase our minority home loans.
Tim Tomanish: That's a huge percentage of the total non-performing assets. So we think we're dealing with all those effects.
Um but if you look at those 3 buckets, 1 is 51 million 1 is 13 million and 1 is 19 million. Uh that's a huge percentage of of the total non-performing assets.
Tim Tomanish: Yeah, and just to add to the, you know, what we see in the future, you never know what's going to happen in the future, but we don't see anything in our commercial loan system that's particularly worrisome at this stage of the game. I would say that there is a chance, maybe even a likelihood, that we continue to tick up just a little bit on the single family mortgage portfolio from that $51 million that it's at today. Fortunately, that asset class is a very low loss given default. And I think the bottom line is, as we sit here today, obviously, we went through all of this in our reserve analysis at the end of the quarter for quarter end and concluded we didn't need to add the reserves.
Speaker Change: Uh, so we think we're, we're dealing with all those effectively.
Speaker Change: yeah, and just to add to the, you know what, we see in the future, you never know what's going to happen in the future but we don't see any
Anything in our commercial loan system, that's particularly worrisome at this stage of the game.
Uh, I would say that there is a chance, maybe even the likelihood that we continue to tick up just a little bit on the single family, mortgage portfolio. Uh, from that 51 million of its at today.
Tim Tomanish: And I don't, you know, we'll see where we are next quarter, but I don't see anything on the horizon that's going to change that. We also cut the product off that this was a product that was designed just for minority lending, low income lending, that, again, there's not much money down and you even get some walking around money when you go. And this was to help with fair lending. And, again, it's kind of a catch-22. If you don't produce a certain amount of this kind of production, then if you really want to expand and grow, you're out of the game also.
Fortunately, that, that asset class is a very low loss given default. Um, and I think the bottom line is this. We sit here today, we obviously, we went through all of this in, in uh, our Reserve analysis. At the end of the quarter for quarter end and and concluded, we didn't need to add the reserves and I don't, you know, we'll see where our next quarter, but I don't see anything on the horizon. That's going to change that. We also, we also cut the product off that this was a product that was designed just for minority lending. Low-income lending that again that you, they're not much money down and even get some walking around money with you. When you go, and this was to help with Fair lending. And again, it it's kind of a catch 22. If you don't produce a certain amount of this kind of production, then,
Tim Tomanish: So it is part of the deal. But, again, I think that we've got it all under control. And the good news is that as we've repossessed this stuff, we've gotten out of it pretty quick with very little effort. That's right. And we we did discontinue that that type of loan, actually, over a year ago, right over a year ago.
If you really want to expand and grow, you're out of the game also. So uh, so it's just part of the deal. But again, I think that we've got all under control and the good news is that as we've repossessed this stuff. We've gotten out of it pretty quick with very little loss. That's right. And we, we did discontinue that, that type of loan.
Speaker Change: Uh, actually over a year ago, right? Over a year ago.
Unknown Executive: Thanks for taking the questions. I appreciate it.
Speaker Change: Got it.
Speaker Change: Thanks for taking the questions. I appreciate it.
Stephen Scouten: The next question is from Stephen Scouten with Piper Sandler. Please go ahead. Yeah, thanks, everyone. Appreciate it. Just going back to American Bank and David, you noted the four additional branches in San Antonio.
Speaker Change: The next question is from, Stephen scouten with Piper Sandler. Please go ahead.
Stephen Scouten: Given that that's, I think you guys said the third largest MSA in Texas, do you look to deepen that franchise further in San Antonio beyond this acquisition? Could you look at new hires or could incremental M&A in that market be in the cards? I guess I should just say stay tuned, I guess. Okay, fair enough.
Stephen Scouten: Yeah, thanks everyone. Appreciate it. Um, just going back to American Bank and and David you noted the 4 additional branches in San Antonio. Um, given that that's I think you guys said the third largest MSA in Texas. Do do you look to deepen that um, franchise further in San Antonio, Beyond this acquisition? Could you look at new hires or could incremental m&a in that market, be be in the cards.
Stephen Scouten: I guess I should just say, stay tuned I guess.
Stephen Scouten: And then maybe on pricing around the deal, I mean, the three year earn back feels like maybe towards the longer end of what we've seen from you guys, but would you say that that was kind of pushing the limits of what you would want to do from an earn back perspective on a deal? Does that three-year, Cullen, help me, does that three-year include the, you know, the way it was priced, it looked like it was priced higher than some of the other deals at 2.2 times. A little over two times. But again, when we looked at the bank and you added back the AOCI, the price was like 1.8 times, which for a bank like that, we thought was a very, very good deal.
Stephen Scouten: Okay, fair enough. And then maybe on um pricing around the deal. I mean the 3 year earned back feels like maybe towards the longer end of of what we've seen from you guys. Would would you say that that was kind of pushing the limits of what you would want to do from an urn back perspective on a deal?
Stephen Scouten: So that three-year, was that based on the... It does include that, yeah. It does include that. But again, I think for a bank that's a quality bank like this, that three years is not unreasonable at all and I'd do it again tomorrow if we get another bank like that. It's really a sweet deal. Okay, great.
Stephen Scouten: And then just as you think about future targets, I mean, I know the last three deals have been maybe towards the smaller end more digestible into the spectrum. Do you think about you know, maybe a more meaningfully sized deal. And additionally, would you look at anything outside of Texas and Oklahoma today, or do you want to continue to deepen that footprint in the strength of those markets? I guess I'd just say stay tuned. I mean, there's a lot of activity going on right now, you know, and hard to give. Again, I can repeat what we've said in the past that we always like Texas and it's always a fill in.
Is that 3 year calling helped me was that 3 year include the uh the you know the way it was priced. It looks like it was priced higher than some of the other deals at 2 point 2 times 2 times. But again, when we looked at the bank and you added back, the aoci the price was like 1.8 times which, which for a bank like that we thought was a very, very good deal. Uh so that 3 year was that based on the it does include that? Yeah, it does include that. So but again I think for a bank that's a quality Bank like this it's that that 3 years is not unreasonable at all and I I do it again tomorrow. If we get another bank like that it's really a sweet Bank.
Okay, great. And then just as you think about future targets. I mean, I know, the last 3 deals have been maybe towards the smaller end, more digestible into the Spectrum. Do you think about, um,
Stephen Scouten: You know, maybe a more meaningless size deal and additionally, would you look at anything outside of Texas and Oklahoma today? Or do you want to continue to to deepen that footprint in the in the strength of those markets?
Stephen Scouten: And because we're, if you're in a car and you drive 30 minutes anywhere, you're gonna see one of our banks. And so when we can fill in, I don't think we're in the Valley. That may be the first part of the Valley and probably El Paso, anywhere else you go to Texas, you're gonna see us wherever you go. So I think that our first and foremost is always in Texas and we're in Oklahoma too if something developed there. But again, of a certain. We've been asked that we're outside the state. Again, we're not going to go outside the state for a two and a half billion dollar deal.
Stephen Scouten: I guess that just a stay tuned. I mean there's a lot of activity going on right now, you know, and hard to give again. I I can repeat what we've said in the past that we always like Texas and it's always a fill in and you because we're where, if you get in a car and you drive 30 minutes anywhere you're going to see 1 of our banks and so when we can fill in, I don't think we're in the valley. That may be the first part of the valley and probably the El Paso. Anywhere else you go to Texas.
Stephen Scouten: You're going to see us wherever you go. So I think that our first and foremost is always in Texas and we're in Oklahoma too if something developed there, but again of a of a certain
Stephen Scouten: But again, if it's if it's a deal that really has true market share and that we can, it's really helpful and it helps us from a strategic point of view from where we're going and where we're going to be with the answer that would be yes. Great.
Stephen Scouten: And maybe one last point of clarification on the NIM trajectory you talked about, David, I think you said $335,000 could happen in six months, $348,000 over 12 months, etc. Does that include the mid-single-digit impact to the margin from American Bank, or is that kind of on your existing balance sheet? No, this is just our existing balance sheet, so that should help. Perfect. Thanks for the clarification. Thanks for the time today.
of an asset, we're outside the state. Again, we're not going to go outside the state for a 2 and a half billion dollar deal. Uh, but again, if it's if it's a deal that really has true market share and that we can it it's really helpful and it helps us from a strategic point of view from where we're going and where we're going to be with the answer to that would be yes.
Stephen Scouten: 335 could happen in 6 months 348 over 12 months Etc. Does that include the the mid single digit impact to the margin from American bank, or is that kind of on your existing balance sheet? Know this is just our existing balance sheet so that should help no question. Yeah, perfect. Thanks for the clarification. Thanks for the time today.
Ebrahim Poonawala: The next question is from Ebrahim Poonawala with Bank of America. Please go ahead. Hey everyone, this is Eric on for EB. Just had one on the fee income line. It has been running above and previously talked about 36 to 38 million as kind of the run rate that you view, but it's been above that for several quarters now. Is the run rate in your mind higher now? Like, how should we think about that kind of moving forward? Yeah, Eric, I agree. I think the I would probably update our run rate to 38 to 40 million now, because what we've seen where a strong, you know, our service fees and debit card fees overall has increased because of the volume.
The next question is from Ibrahim poonawalla with Bank of America. Please go ahead.
Speaker Change: Hey everyone. This is Eric on for Ev just had 1 on the fee income line, it has been running above. And then, previously you've talked about 36 to 38 million as kind of the Run rate that you view, but it's been above that for several quarters now,
Stephen Scouten: Is is the Run rate in your mind higher. Now like how should we think about that kind of moving forward?
Ebrahim Poonawala: So yes, we see increase on overall managers income. So I would say I would update range to 38 to 40 million. Okay, that's helpful.
Stephen Scouten: Yeah, Eric I agree. I think the I would probably update our run rate to 38 to 40 million now because what, we've seen very strong, you know, our service fees and debit card fees overall has increased because of the volume. So yes, we see, um, um, increase on overall, uh, managers income. So I would say, I would update range to 38 to 40 million,
Ebrahim Poonawala: And then maybe one more on on M&A, David, based on everything you've said, I have a guess of what you'll say. But does the American deal limit the ability to complete any other deals until that closes? Or are you still very active? No, we're still very active. Got it. Okay. That was it for me. Thank you.
Stephen Scouten: Okay that's helpful. And then maybe 1 more on on m&a. David based on everything you've said I I have a guest of what you'll say, but does the American deal limit the ability to complete? Uh, any other deals until that closes or are you still very active?
Speaker Change: No, we're still very active.
Jon Arfstrom: The next question is from Jon Arfstrom with RBC Capital Markets. Please go ahead. Hey, thanks. Good morning. Hey, just to follow up on that, I know you guys had a tough time with the last deal getting to closed on time. Any evidence of less regulatory pressures, David? I mean, I don't think you're going to get into that situation again, but any evidence of that? I hope so. You saw the Catons deal close in just a few months. But again, we understand that that bank, the industry bank, they wanted to get that off of their books before something else happened.
Speaker Change: Got it. Okay, that was it for me. Thank you.
Speaker Change: The next question is from John Armstrong. With RBC Capital markets, please go ahead.
John Armstrong: Hey, thanks. Good morning.
Speaker Change: Morning. Hey uh, just a follow up on that. Um, I know you guys had a tough time with the last deal. Getting a closed on time. Um, any evidence of less regulatory pressures David, I mean, I don't think you're going to get into that.
John Armstrong: situation again but um, any evidence of that
David Zalman: But everybody else that we've talked to so far, it looks, you know, historically, we used to get a bank deal done in three months. And I'm hoping that Charlotte may jump in, but I'm still thinking that, you know, we're going to go back to those three to four months. I think that's what we're looking at. You know, that last deal, it started off with the DOJ in a town of 10,000 people that we were a big bank. And I mean, there were so many miles from Tyler or something. I don't want to get into all the details.
Speaker Change: I hope so. Uh, you saw the Cadence feel closing, just a few months. But again, that we understand that that, that bank industry bank, they wanted to get that off of their books before or something else happened. So but everybody else that we've talked to so far it looks, you know, historically, we used to get a bank deal done in 3 months and uh, I'm hoping that uh, Charlotte May jump in but I'm still thinking that, you know, we're going to go back to those 3 to 4 months. I think that, I think that's what we're looking at. Uh you know, that that last field started off with the doj in a town of 10,000 people that that we that we were a big bank and I mean, there were so many mobs.
David Zalman: And then it was another deal after that. From what everybody tells me, they're more focused on substance instead of form right now. And that, you know, unless something changes in the administration, which I don't see happening right now, I think, you know, it seems to be a lot much cleaner and clearer path where we're going. And I think everybody kind of knows where they're going.
David Zalman: Okay. And then you kind of alluded to this, two more questions here, but you kind of alluded to this, but you feel like you have enough branch density in some of your larger markets. and then also curious about Some of the faster growing outer. Suburbs of the big cities in Texas. Do you feel like you have density there or is that a target for you? Well, that's what we're building right now. I mean, I do think if you look at Houston, Dallas, Austin, probably the only place that we don't have enough, enough stores or locations is probably the San Antonio markets, which we would much like be much bigger there.
From Tyler or something. I don't want to get into all the details and then it was another deal after that. I from what everybody tells me, they're they're they're more focused on substance instead of form right now and that, you know, unless something changes in the administration, which I don't see happening right now. I think I, you know, it seems to be a lot, much cleaner and clearer path where we're going. And I think everybody kind of knows where they're going right now.
Speaker Change: Okay. Okay. Um and then you kind of alluded to this like 2 more questions here, but you kind of alluded to this but
Speaker Change: You feel like you have enough Branch density in some of your larger markets.
Speaker Change: And then also curious about
Speaker Change: some of the faster growing outer.
Suburbs of the big cities in Texas. Do you feel like you have density there? Or is that a target for you?
Speaker Change: Well, that's what we're building right now. I mean, I I, I do think if you look at Houston Dallas,
David Zalman: And anytime we can move into a market and be a number one market share in the second tier, like, like Corpus Christi, that's, that's just stuff we love. And I mean, we've done that Victoria, Corpus, Midland, Odessa, Lubbock area, Bryan College Station. So whenever we can do that, that that's really a sweet spot for us, really.
Kevin Hanigan: Okay, and then Kevin, one for you, follow up from very early, you talked about revolvers being down a bit and you thought it was maybe just, you know, maybe from some of the uncertainty last quarter, but anything else in your mind driving that change and do you expect that to stabilize? I do. We spent the better part of a couple of days digging into it here last week and this week and talking to clients, and I think it's not only going to stabilize, it's probably going to go the other way. and you feel like that's it's starting to turn now?
Speaker Change: Austin, that probably the only the place that we don't have enough. Uh, enough stores or locations is probably the San Antonio markets, which we would much like be much bigger there and anytime we can move into a market and be a number 1 market share in the second tier like like Corpus Christi. That's that's just stuff we love and I mean we've done that. Victoria, Corpus, Midland, Odessa love, it, Gary Brian College Station. So whenever we can do that, that that's really a sweet spot for us, really?
Okay. Um and then Kevin 1 for you, follow up from very early, you talked about revolvers being down a bit.
Speaker Change: And you thought it was maybe just um, you know, maybe from some of the uncertainty last quarter but anything else in your mind driving that change and you do you expect that to stabilize?
Speaker Change: I do I do uh we spent the better part of a couple of days digging into it here. Um last week and this week and and talking to the clients and I think it's not only going to stabilize. It's probably going to go the other way.
Kevin Hanigan: It is. Yeah, okay.
Speaker Change: Okay? And and you feel like that's it's starting to turn now.
Charlotte Rasche: Okay, thank you very much. This concludes our question and answer session.
Speaker Change: It is. Yeah. Okay.
Speaker Change: Okay, okay. Thank you very much.
Thank you. Thank you.
Charlotte Rasche: I would like to turn the conference back over to Charlotte Rasche for any closing remarks. Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.
Rashi for any closing, remarks.
Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today, we appreciate your support of our company, and we will continue to work on building, shareholder value.
Unknown Executive: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect