Operator: Good day and welcome to the Prosperity Bancshares Q3 2026 Earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing 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 one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the comments over to Charlotte Rasche. Please go ahead.
Charlotte Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Q3 2026 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I am Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tim Timanus Jr., Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Safady, Senior Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Robert Franklin, Vice Chairman, Randy Hester, Chief Lending Officer, Mays Davenport, Director of Corporate Strategy, Bob Dowdell, Executive Vice President, and Ray Vitulli, Houston Area Chairman. David Zalman will lead off with a review of the highlights for the recent quarter.
Charlotte Rasche: He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements.
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 our filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.
David Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our Q3 2026 conference call. I am pleased to announce that the board of directors approved increasing the Q4 2026 dividend to $0.64 per share from $0.60 per share that was paid in the prior four quarters, an increase of 6.7%. The increase reflects the continued confidence the board has in our company and our markets. The compound annual growth rate in dividends declared from 2003 to 2026 was 10.4%. We continue to share our success with our shareholders through the payment of dividends and opportunistic stock repurchases while also continuing to grow our capital. We are proud of this year's growth and would like to highlight the following results. Prosperity's total assets reached $54.1 billion at 30 September 2026, up $15.8 billion or 41% compared with $38 billion at 30 September 2025.
David Zalman: Our loans totaled $32 billion at 30 September 2026, an increase of $10 billion or 45% compared with $22 billion at 30 September 2025. Our deposits were $41 billion at 30 September 2026, up $13 billion or 48% compared with the $27.8 billion at 30 September 2025. These increases primarily reflect our three recent mergers. We are highlighting their magnitude because they demonstrate the expertise of our associates, who have extensive experience executing acquisitions and integrating the acquired institutions. Our greater scale strengthens our competitiveness, improves efficiency, and enables technology investments that would be difficult for a smaller bank. We completed the operational integration of American Bank in September. All American Bank locations are now branded Prosperity Bank, and we welcome the American Bank customers and associates to our family.
David Zalman: We remain focused on completing the operational integrations of Texas Partners Bank in November and Stellar Bank in March of 2027 and delivering the outcomes we believe are possible. The Texas Partners and Stellar Bank teams are already an integral part of our organization and operations. We are excited about our future as a larger bank, including the potential growth in earnings. Excluding the one-time expenses listed in the press release, net income was $200 million, and earnings per diluted common share was $1.67 for the three months ending 30 September 2026. Annualized returns on average assets and average tangible common equity were 1.5% and 15.81% on average tangible common equity for the same period. Excluding the merger-related expenses, the efficiency ratio was 48%. We are proud of these earnings and expect them to improve after all merger-related cost savings are realized.
David Zalman: The net interest margin on a tax equivalent basis was 3.73% for the three months ending 30 September 2026, up from 3.47% for the three months ending 30 June 2026, and 3.24% for the three months ending 30 September 2025. This 49 basis points year-over-year increase reflects the strong net interest margin improvement we expected. Loans total $32 billion at 30 September 2026, compared with $22 billion at 30 September 2025. We have seen an increase in our average monthly loan production numbers over the past two quarters. This should help bolster our pipelines next year. in Q3 2026, average monthly new loan production increased approximately $180 million compared to Q2 2026, and approximately $320 million compared to Q1 2026. The overall deposits totaled $41 billion at 30 September, compared with $27.8 billion at 30 September 2025.
David Zalman: Our linked core deposits, excluding Stellar Bank, increased 2% annualized during Q3 2026. Our non-interest-bearing deposits of $13.8 billion at 30 September 2026, represented 33.6% of total deposits. The level of non-interest-bearing deposits as a percentage of total deposits continues to remain strong in light of our recent acquisition activity. Looking forward, we believe core deposits will continue to grow in line with our historical run rate of 2% to 4% growth, and we remain conservative with our loan growth projections for 2027, projecting flat to slightly increasing loan balances due to the recent acquisitions. We believe that the combination of our growth outlook with our loan pipelines, assets repricing, net interest margin expansion, and the realization of our cost savings will drive meaningful earnings per share growth in 2027.
David Zalman: Our non-performing assets totaled $193 million, or 41 basis points of quarterly average interest-earning assets at 30 September 2026, compared with $119 million, or 36 basis points of quarterly average interest-earning assets at 30 September 2025, and $130 million, or 34 basis points of quarterly average interest-earning assets at 30 June 2026. The amount at 30 September 2026, and 30 June 2026, was impacted by non-performing assets acquired in the mergers. The allowance for credit losses on loans and off-balance-sheet credit exposures was $629 million at 30 September 2026. The allowance for credit losses on loans was three times the amount of non-performing assets. We are excited about the synergy we have with our new partners, Stellar Bank, Texas Partners Bank, and American Bank. Our top priority is the operational integrations of the remaining two banks, and our combined teams are working very hard to ensure they are successful.
David Zalman: We also continue to have conversations with other bankers considering strategic opportunities and are open to transactions that will be beneficial to our company's long-term future and will increase shareholder value. The Texas and Oklahoma economies continued to expand in late 2026, despite labor supply constraints and headwinds from inflation and energy prices. Texas has a growing population of 31.7 million and continues to attract people and businesses with its business-friendly state government and lack of a state income tax. Major construction projects across Texas include new data centers, factories producing various products from chips to new drugs, and SpaceX and Tesla projects. Both states remain attractive places to live and do business. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss the specific financial results we achieved.
Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. The Q3 represents the first full quarter that includes Stellar Bank, and our results reflect both the increased scale of combined company and ongoing integration activity for all three merged banks. Net interest income before provision for credit losses for three months ended 30 September 2026, was $443 million, an increase of $169.5 million compared to $273.4 million for the same period in 2025, an increase of $112.4 million compared to $330.6 million for the quarter ended 30 June 2026. The net interest margin on a tax-equivalent basis was 3.73% for the three months ended 30 September 2026, an increase of 49 basis points compared to 3.24% for the same period in 2025, an increase of 26 basis points compared to 3.47% for the quarter ended 30 June 2026.
Asylbek Osmonov: The linked quarter increase was primarily due to additional Stellar Bank and higher investment yields. Excluding purchase accounting adjustments, the net interest margin for the three months ended 30 September 2026, was 3.59% compared to 3.19% for the same period in 2025, and 3.41% for the quarter ended 30 June 2026. Fair value loan income for the Q3 of 2026 was $11.6 million, compared to $4 million for the Q2 of 2026. Fair value loan income for the Q4 of 2026 is expected to be in the range of $7 to $10 million. Non-interest income was $52.7 million for the three months ended 30 September 2026, compared to $60.7 million for the quarter ended 30 June 2026, and $41.2 million for the same period in 2025.
Asylbek Osmonov: The Q2 of 2026 included a net gain of $8.2 million resulting from the conversion of Visa stock, partially offset by the loss on the sale of investment securities. The non-interest income for the Q3 of 2026 was reduced by $2.6 million net loss due to write-down of assets. Non-interest expense was $308.6 million for the three months ended 30 September 2026, compared to $176.2 million for the quarter ended 30 June 2026, and $138.6 million for the same period in 2025. The Q3 of 2026 included $69.7 million of merger-related expenses. Excluding these merger-related expenses, non-interest expense was $238.9 million. This amount includes the operating expenses of Stellar Bank. During the Q3, we continued to realize cost savings from the acquired banks, with additional savings expected as we complete the remaining two system conversions.
Asylbek Osmonov: For Q4 2026, we expect non-interest expense to be in the range of $235 million to $238 million, excluding remaining one-time merger-related expenses. The efficiency ratio was 62.1% for the three months ended 30 September 2026, compared to 46% for the quarter ended 30 June 2026, and 44.1% for the same period in 2025. Excluding merger-related expenses, the efficiency ratio was 48% for Q3 2026. The provision for income taxes for Q3 2026 included approximately $5 million related to out-of-state tax settlement. This one-time tax expense reduced diluted earnings per share by approximately $0.04 and resulted in higher than normal effective tax rate of 24.4%. The bond portfolio metrics at 30 September 2026, have a modified duration of 3.9 and projected annual cash flows of approximately $2.2 billion.
Asylbek Osmonov: With that, let me turn the presentation over to Tim Timanus for some additional loans and asset quality.
Tim Timanus: Thank you, Asylbek. Our non-performing assets at quarter end 30 September 2026, totaled $193,872,000, or 60 basis points of loans and other real estate, compared to $130,576,000, or 52 basis points at 30 June 2026. Since 30 September 2026, $4,289,000 of non-performing assets have been removed or put under contract for sale. The 30 September 2026, non-performing asset total was comprised of $171,031,000 in loans, $57,000 in repossessed assets, and $22,784,000 in other real estate. Net charge-offs for the three months ended 30 September 2026, were $4,437,000 compared to net charge-offs of $2,183,000 for the quarter ended 30 June 2026. There was no provision to the allowance for credit losses during the quarter ended 30 September 2026. No dollars were taken into income from the allowance during the quarter ended 30 September 2026.
Tim Timanus: The average monthly new loan production for the quarter ended 30 September 2026, was $635 million, compared to $454 million for the quarter ended 30 June 2026. Loans outstanding at 30 September 2026, were approximately $32.06 billion compared to $25.028 billion at 30 June 2026. The 30 September 2026, loan total is made up of 38% fixed rate loans, 30% floating rate loans, and 32% variable rate loans. I will now turn it over to Charlotte Rasche.
Charlotte Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator, Megan, will assist us with questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Dave Rochester with Cantor. Please go ahead.
Dave Rochester: Hey, good morning, guys.
Asylbek Osmonov: Morning.
David Zalman: Good morning, Dave.
Dave Rochester: Wanted to start on the margin outlook for the quarter. Appreciate the accretion on the loans of $7 to $10 million. Maybe just to wrap up on the accretion side, I think you had some on the securities book as well. I would imagine some of that might continue, and then the CDs might be more short-lived, but was just curious if there are any expectations for that as well, so that accretion number might be a little bit bigger in Q4.
Asylbek Osmonov: For the fourth quarter, we are excited to see the continued repricing of our bond portfolio. As I mentioned, we still have $2.2 billion on annualized cash flow from bond portfolio. We have a 292 average rate on the bond, and we have been recently buying 550 to 575, so repricing. So that is going to continue to reprice on the bond portfolio side. On the loan side, we have, what, 38% on the fixed loans. They are going to continue to reprice. If you look at our average rate on loans without fair value, it is 593. So we are putting higher loans on our production, so that is going to benefit from that. But one thing I want to note that we did increase our deposit rates in the end of the third quarter due to the Fed increase rate.
Asylbek Osmonov: So it has not fully baked in in our third quarter, but we will see that baked in in the fourth quarter. So I think if you are looking on margin, I think it is going to be flat to slightly up because it takes little time for our assets to reprice. But in long term, our model shows we are going to continue to expand on the margin significantly as the bond portfolio and the loan kind of reprice. And if you look for 2012 and 2024, it is looking really good. And the assumption we provided that exit rate on the fourth quarter margin being 370 or 375 stands as is. So we are comfortable with that, and the guidance we provided for next year also stands as for average for the quarter, like 380 to 385 right now. So we are seeing expansion of the margin.
David Zalman: Yeah, I think he is looking for some help on accretion.
Asylbek Osmonov: The accretion on the loans, like I said, $7 to $10 million. On the CD accretion, we had what? $2.5 million. I think it is going to reduce a little bit to $1.3 million for Q4 and kind of burns off Q1 and Q2 of next year.
Dave Rochester: Okay. Accretion comes down in Q4, but the underlying margin is expanding, and so that is what kind of keeps it flat to maybe up a little bit, just on a reported basis?
Asylbek Osmonov: That is correct. That is right.
Dave Rochester: Okay. That is great. It is good to hear that you guys are still thinking positively about the margin. You have a lot of opportunities there to expand that, it sounds like. Maybe just switching to expenses real quick. That result was solid. The guide certainly shows you have got more cost savings coming. Where do you think that expense range, that $235 to $238 goes as you head into next year? I know you will get a lot more of the cost savings from Stellar on the integration, so maybe those flow through more fully into Q2, and that is normally when you have got your merit coming through on a full quarter basis. So I was just curious how you think that trends to the extent that you have got projections through the year.
Asylbek Osmonov: Yeah, that's a good question. We did see some cost savings already baking in. It's not just from American, but some cost savings from Stellar and Texas Partners Bank. We're going to continue to see that. I think based on our estimates, we have additional $65 million to $70 million pre-tax of cost savings coming in, if you compare to our Q3 expenses. If you look at our expectation when we all settled in more starting Q2 and Q3, when we have quarterly clean expense run rate, I would say, we are looking at about $220 million to $225 million per quarter. That's a pre-tax number. That's going to be our run rate once everything is settled.
Dave Rochester: All right, great. Maybe just one last one on credit. Through the deal accounting and whatnot, that allowance ratio went up pretty decently this quarter. It seems like you're pretty well positioned to have a zero provision for 2027. I know you don't have a crystal ball, but is that kind of what it feels like at this point?
David Zalman: I think so. Really at $193 million in total non-performing assets and having over $600 million in provision or allowance, I think we're covered pretty good.
Dave Rochester: When you said '27, I wasn't sure if you meant next year 2027 or 27 years' worth. It's probably 27 years' worth. We'll stick to next year for now. All right, thanks guys. Appreciate it. It's a great call.
David Zalman: Thanks.
Operator: The next question comes from Brett Rabatin with StoneX Group. Please go ahead.
Brett Rabatin: Hey, good morning, everybody. Thanks for the questions. I wanted to just go back, I know last quarter you had mentioned that you were going to probably have to increase deposit rates a little bit, and then you just alluded to it. I was just curious, your money market rate average was up 9 basis points linked quarter, but your core funding is really low cost, great core deposit funding base. Asylbek, how much have you increased the rate, and then how much should we be thinking about the cost of funds from here and how you guys are thinking about the margin with potential rate hikes?
Asylbek Osmonov: Yeah. It was not one rate for everything. We kind of looked at it, different buckets of the deposit and did different rate increases. But I will tell you this, if you are looking for Q4 specifically, we calculated what would be average cost of deposit would be. It is going to go up by 6 or 7 basis points from the Q3, so we are shooting maybe cost average will be 145, 146 on the cost of deposit. But if you look at cost of fund total, I think going to goes up from 150 to 157 to 58, so 8 basis points with our deposit increase we did end of the quarter, on the Q3.
David Zalman: And our primary focus, Brett, again, it is not that we do not focus on them, it is just that they are not as rate driven as your checking accounts and all that. Our main focus really on the increase was really on the money market accounts and really focused on balances that were $1 million or more. We actually raised our money market rates about a quarter of a point from 2.75% to 3%.
David Zalman: Again, we're still offering the special rates. We have a couple of special CD rates that are What are they right now?
Asylbek Osmonov: So it was like seven-month CD is like 375.
David Zalman: We're offering a couple of special promotional deals like that. That's really where we're focused on, and that's where the rates have increased. I would say going forward, if interest rates increase again, that's probably the focus where we'll be in at those two products, primarily. The majority of the rest of the bank is just core funding, and I think the rate-driven stuff is probably more in that, and even that is not rate-driven like a lot of other banks, really.
Brett Rabatin: Okay. That is helpful. The other question I wanted to ask was just around loans. With the monthly production up to $635 million, it sounds like the outlook is still for maybe modest growth from here. Does the production give you guys any confidence that growth might improve from here? Then just any color on either the payoffs from the legacy Prosperity or the deals that you have had, how much that might have impacted Q3?
Kevin Hanigan: Yeah. Brett, David is nodding at me. This is Kevin. So I will take that one. Bear with me as I walk you through a couple of things and what may seemingly get off topic and end up back on topic, if you will. The monthly production, we have looked back as if all the acquisitions were done last year. So we looked at the production by bank, American Partners, Stellar, ourselves, going back to January, and those numbers have picked up from Q1 to Q2 to Q3. It went up about $180 million in total between Q1 and Q2, and a little over $200 million. So it is not only going up, but it is increasing its path upward. It is worth noting the major driver of that upward trajectory is in the legacy Prosperity portfolio. Stellar dipped down a little bit in Q2 and Q3.
Kevin Hanigan: We believe that to be largely related to the acquisition and getting to know each other and lenders getting to know each other. What we have seen there is a rebound in their pipeline. So I think as that pipeline improves, we pick back up to where Stellar was and see further improvement. That is all the tailwinds for loan growth. The headwind is our history and what happens when we make acquisitions. I think you all know it, but I will say it. It is not unusual, in fact, it is more typical, that loans at those institutions tend to shrink for six months to a year after an acquisition. So that to me, that ties in where David said he thinks loans for next year are probably flat and maybe up a little bit. It is the headwind of integrating Stellar, and it is the tailwind of this production improving.
Kevin Hanigan: I would say for the good side of next year, and before I get into what I think 2028 is going to be, and I know it is way too early to be talking about 2028, but I will briefly. I think the good side for 2027, from our perspective, is now The Street is seeing a new run rate with Stellar on board, and that run rate is pretty strong. Depending upon what you add back, it was $1.67 to $1.69. So I think from an earnings perspective, we have got this nice new run rate, nice new margin. We have the continued margin expansion from repricing, and we got another $70 million worth of pre-tax cost saves. So I think that delivers in spite of what is likely to be a flat kind of loan growth year.
Kevin Hanigan: That is going to deliver double-digit, in fact, low to mid-teen double-digit EPS growth for 2027, even with flat. If I take that and say we go through the Stellar transition through 2027, and we rebound off of this new production that we are currently seeing and look into 2028, and let us face it, a lot of things can happen between now and then, so this gets squishier.
Kevin Hanigan: But that leads us to believe in 2028, we can get to low-mid, I am going to say 3% to 5% loan growth kind of numbers in 2028, post dealing with all the potential runoff from the acquisition. So what that means is another year of double-digit EPS growth. So I think we are really set up for two consecutive years of really nice EPS growth. Maybe a little disappointing to you that we cannot eke out more growth next year, but we are being realistic and just trying to offset this nice production increase with our history and knowing what happened.
Kevin Hanigan: So long-winded, but I think we are really in a great position from an EPS growth standpoint for the next two years.
Brett Rabatin: That is great, Kevin. I appreciate the narrative there. That helps explain quite a bit. Thanks for all the color, guys.
Operator: The next question comes from Janet Lee with TD Cowen. Please go ahead.
Janet Lee: Good morning.
David Zalman: Good morning.
Janet Lee: Back to your net interest margin, 380% to 385% for 2027. That is great. Strong core NIM expansion. Just given the belly of the curve moving up significantly more since we last spoke, why not it could be higher? I feel like this rate environment is actually pretty good for you, for your NIM.
Asylbek Osmonov: Yeah. If you look at our balance sheet, we are neutral to moderately asset sensitive. If you look at our model, increased rate environment does help, benefits us. When we run the model, we kept it flat rate. There is expectation Fed going to increase rates, but for our model, we kept it flat. There might be a possibility to do better. Us being conservative, we just going to stick to our guidance that we provided.
David Zalman: Yeah. I think, Janet, our models, again, may be trying to underpromise and overperform, but our models look really good for 2028 and 2029, quite frankly. As Kevin mentioned earlier, we really are looking at some double-digit earnings increases over the next couple of years.
Janet Lee: Right. Makes sense. Just to make sure I am interpreting correctly, your core deposits growing 2% to 4% and loans being flat to slightly increasing in 2027, is that excluding the runoffs, or is that inclusive?
David Zalman: No. When I refer to core deposits, that is all deposits excluding public funds and government agencies and stuff like that. We have a lot of what do we have in public funds right now?
Asylbek Osmonov: Close to 20.
David Zalman: 2 or 3 billion.
Asylbek Osmonov: 2 or 3 billion, about 3.
David Zalman: Those are real seasonal in nature. Like right now, they are probably lower than they are all year right now. Next quarter, you could see our public funds increase $500 million to $800 million, probably. It is very possible. That will stay in the bank through and start running out at the end of Q1 and Q2 again. When I refer to the core deposits, it is our checking accounts, our money market accounts and stuff like that, just our core. Again, we do not have any wholesale deposits. We do not have any broker deposits or anything like that.
Janet Lee: Right. On the loan side, on the flat to slightly up, that is inclusive of the potential any.
David Zalman: Inclusive
Janet Lee: runoffs?
David Zalman: We do because I think that. Again, gosh, I hope I am not overly optimistic. I think Stellar Bank and our bank are very similar in nature, and I am in loan committee, and I do not see a whole lot of difference in what they would have done and what we will do. So I really think that Stellar Bank and us are very much alike, and I do not see a lot of change. Again, as Kevin mentioned, no matter what we do and how hard we try, sometimes we do go backwards in acquisitions. But I think with Stellar, and American Bank too, and Texas Partners Bank, all of us are very similar in the way we lend money. So I do not see a whole lot of changes in what we do. So I am hoping for the best. Yeah.
Janet Lee: Right. Thank you. If I can squeeze in one more. Maybe I missed it. Could you talk about your appetite around buybacks from here?
David Zalman: Well, at $60 something, it has a huge appetite. We have the money to do it with. We are projecting earnings of how much next year, Asylbek? What do we have projected earnings, or what do the analysts have us total earnings? It is $850 million to $880 million, something like that. In 2029, it is even really high. You take the $0.64 a quarter dividend, and that is about $300 million?
Asylbek Osmonov: Yeah, $310 million or so.
David Zalman: We have a lot of gunpowder to do something with.
Janet Lee: Okay. Thank you.
Operator: The next question comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Just following up on loan growth. I ask this a lot, but Kevin, if you can give some updates on mortgage lending in the warehouse, just given the higher for longer backdrop. Obviously, saw you were fairly close, I think, to your average guide for the quarter. But just given where mortgage rates are now, if you can just discuss the near-term outlook and into next year. Thanks.
Kevin Hanigan: Yeah. Thanks, Michael. For the quarter, we averaged $1,229,000,000, I think, and our estimate going into the quarter on the high side was $1,225,000,000. So we were spot on that one. Since quarter end, it has been a downward trend. At the end of the quarter, we were at $1,132,000,000. Last night, we ended up at $1,110,000,000. And we are basically at a $1.1 billion average for quarter to date, and I expect that to go down further. A, because of rates, and B, because of the typical seasonal decline in warehouse in Q4. So Michael, I am thinking, on the low side, $850 million to maybe on the high side, $900 million average for the quarter.
Michael Rose: All right. That's helpful. I appreciate it, Kevin. Maybe David, you talked about ongoing conversations with bankers for M&A opportunities, but clearly you're integrating a bunch of deals right now. Do you expect that we could see a little bit of a pause here, or if you just find the right opportunity, you guys are just open for business and you're going to make the decision based on what's out there at this point? Thanks.
David Zalman: I think we're always in the market, but let's face it, our focus is truly the combination of Stellar Bank and Texas Partners Bank. That's our primary focus. For us to really jump into something, it has to make a whole lot of sense and maybe increase our Texas franchise or something like that would be significant. But that's really our main focus right now is to really put these banks together for the most part.
Kevin Hanigan: Yeah. I'd say in the near term, buyback's way more likely than acquisition.
David Zalman: Yeah. At the stock price that it's at, and when we're trading less than 10 times earnings, we'd probably make more money buying our stock back than really buying somebody else, really.
Michael Rose: Makes sense. I appreciate all the color. Thanks, guys.
Operator: The next question comes from David Chiaverini with Jefferies. Please go ahead.
Brooks Dutton: Hey, guys. This is Brooks Dutton on for David Chiaverini. Quick question here. On fee growth, now that you guys are a $54 billion bank, where does fee growth come from going forward? Is treasury management for Stellar's commercial clients the main lever here? I know last quarter you guys had mentioned a treasury management build-out that included additional hires from Texas Partners. Could you just speak on that going forward?
Asylbek Osmonov: So yeah, I think there is a lot of opportunity especially with merger with Stellar. I think we really like our trust business and brokerage business, so we would love to continue. If you look at past few years, we have grown very well in that two areas. Now with the addition of Stellar and having partners at Stellar with the lenders referring the business, that is a focus for ours. I think that is going to be main focus for next few years on the brokerage and the trust.
David Zalman: Yeah, I think our trust looks good. We are growing there, but I think treasury management, I think that plays a bigger and bigger piece because it offers so many different products to our customers.
David Zalman: Again, I think that is what we are focused on right there. I think sometimes you try to sell. I saw where we try to sell treasury management sometimes to smaller businesses that really do not necessarily need the complete treasury management. So we need to rethink who we are really pushing it to and who we do not on these automatic consolidations. But for the most part, I think we have a lot of good products and we are really looking forward to all the customers and the growth that we can do.
Brooks Dutton: Great. Thank you. Appreciate the color.
Operator: The next question comes from Will Jones with KBW. Please go ahead.
Will Jones: Yeah. Hey, great. Thanks for the questions, guys.
David Zalman: Hey, Will.
Will Jones: Hey. Just another one on the buyback. Just follow it up here, David, it sounds like you are very constructive here at this price level. If I go back and look, kind of pre some of these merger announcements, looking back to the latter half of 2025, in Q4 last year, you purchased 2% of the company. Is that kind of order of magnitude on the table here at these price levels in this valuation?
David Zalman: I think it is really based on how opportunistic it is. Again, when we are trading below 10 times earnings, it is pretty opportunistic. It seems like our stock price is pretty seasonal. It looks like your September, October prices really go down, and then about the time that our stock vests at the 1st of the year, our stock price goes to sky high. I guess that is because we have to pay the taxes on that accelerated price. Again, it is real seasonal, but again, we will be opportunistic, and again, trading less than 10 times earnings will be definitely opportunistic.
Will Jones: Yeah. Okay. That is fair enough. Another quick follow-up just on the core deposit growth, 2% to 4%. Should we think about the balance sheet growing at that same level, that same capacity in 2027, that 2% to 4%? Or within that, knowing we might have more flattish year for loans, is there a chance to optimize some of your funding and balance sheet growth is also a little flat? Just how do you think about those dynamics?
David Zalman: No, I think historically, again, when we look at our bank and we look at the acquisitions, our core deposits have always grown 2% to 4%, excluding some of the people that join us. I do not see that anything different. We do see ups and downs, but again, just in the last three days, I saw our core deposits go up $300 million just in the last few days. And again, our public funds are down a little bit, which is seasonal. That is in nature. But I think 2% to 4% is very realistic for us. We have always done that since the beginning and having that kind of growth, and I still think that you will see that. And balance sheet growth. Yeah.
Asylbek Osmonov: Yeah. If you look at on total assets, you just have to look at period to period. As we mentioned, our public funds goes down in Q2 and Q3. So if you look at Q4 to Q2, it might not give clear picture because we have a seasonality on public funds. As we stated, if we see the 2% to 4% on core deposit growth over time, our balance should continue to grow.
David Zalman: I think that's why I feel so confident in our earnings numbers and our earnings model, because when you have core deposit growth, I know analysts push, push, push, push loan growth. But the bottom line is when you have deposit growth, and you have core deposit growth, not growth that you're going out and paying 4% for money, but core deposit growth, you can take those same funds and you can get 5.7% in a security with about a four-year duration. We make really good money, and that's what it all boils down to. Sometimes they say you don't have the growth, but we really have a 77% loan-to-deposit ratio. I think our policy allows us to go to 85%, so we have room for growth.
David Zalman: But the real value in any bank is really the core deposit relationships, and that's really what we focus on.
Will Jones: Yeah. Understood. I certainly appreciate the confidence around the ultimate earnings power here. Maybe lastly from me, just maybe a cleanup question. It looks like the Stellar credit mark was maybe a decent bit higher than where you guys had thought it might be when this deal was announced. I guess, A, is that true? Is that fair? B, what were the drivers behind that?
Asylbek Osmonov: Yeah, it was a little bit higher, what we projected. But what we do when we put a projection, we look at high level. But when we go inside and dig in and being our conservative nature, what we have, we put up a little bit more of the marks than we anticipated.
Will Jones: Well, Artie, thanks for the questions, guys. I appreciate it.
Operator: The next question comes from Ryan Kenny with Morgan Stanley. Please go ahead.
Ryan Kenny: Hi, thanks for taking my questions. So we talked about capital use for buybacks, and I am wondering, any appetite to use capital on repositioning the securities portfolio given the movement we have seen in the belly of the curve, and you have been historically pretty active on mortgage-backed securities. MBS rates are above 6% right now. Any appetite to do more there?
David Zalman: I do not see any. Over the years I have been in banking, the banks that use financial engineering to make their numbers look better never turns out well. You sell and reposition and put a new market value, and then next week the market value changes again. We will never be able to control rates, really determine what interest rates are going to be up or down. We never extend the portfolio to something that we cannot live with. I think if you looked at the previous two to three years before this year, you saw our earnings really down, and that is because we never try to call the markets. We try to have something that we are going to be able to survive with interest rates going very up or very down. That is just not something we do, and I do not see that.
David Zalman: Several banks that we bought were banks that really just continued buying and selling and re-engineering the balance sheet. For us, that just does not work. The answer to the question is simply no, I do not see that really.
Ryan Kenny: All right. Very clear. Then shifting to competition, we have heard from you guys a lot in the past about loan competition in your market, not necessarily meeting your standards. Can you just give us an update on what you are seeing today, any change versus last quarter on the competitive side?
David Zalman: Probably in the last month or so, I don't see them being as crazy as they were. But again, when we talk about the out-of-state competition, we are really talking about a couple of banks, really. And those are the banks that I think they are smaller, trying to grow. I think there will always be competition, but the bottom line, look, we are one of the largest Texas banks right now with 350 locations.
David Zalman: And people in Texas, I don't care who you are, they are going to want to do business with Texas people. And they can say whatever they want, they can pay whoever they want, they can try to take all the people they want, and you can underprice all you want and do all that stuff you want, but when it is all said and done, they are still going to want to deal with the Texas bank.
Ryan Kenny: Thank you.
Operator: The next question comes from Stephen Scouten with Piper Sandler. Please go ahead.
Stephen Scouten: Yeah. Good morning, everyone. Thanks. Just on all this conversation about the potential for organic growth, the competition versus y'all's successful track record on M&A. From a strategic standpoint, do you like the idea of continuing to grow loans via M&A using the legacy bank for good core deposit growth versus trying to push the envelope on the organic side? Is that a fair way to think about it strategically?
David Zalman: Say that again. I want to try to really understand what you're saying. I don't know if I caught that.
Stephen Scouten: Yeah. Do you like growing loans via M&A, just given your successful track record there versus pushing the envelope to grow loans organically right now?
David Zalman: I think we've been successful with the M&A growth deal. It makes it easier because you get to really analyze the portfolio that you have and what you like and don't like, and you really know what your potential losses are. The thing that we don't like, I think, is to say, you're going to have double-digit loan growth every year. We're just not going to do that. I don't see that, and we're not going to really go out and try to buy wholesale deposits just to make that happen. I think that you'll see reasonable growth with our 2% to 4%, our deposit growth, and we do have about, like I mentioned earlier, we have a 77% loan-to-deposit ratio. We can go up to about 85 in our policy, so we have room to grow there. I think it will continue to grow.
David Zalman: I think the answer to your question exactly is, I like what we've been doing. I've been doing this a little while, about 30 or 40 years, and I've probably gone through a lot of analysts and I've been through a lot of these meetings, and a lot of the same stuff that people come up with and say, "Well, you can't do this, and you can't do that." Well, I remember being 300 million, them saying that you can't do that and you can't do this, and today we're $54 billion and making a lot of money. So I think the strategy that we have and the model that we have and the asset quality that we have and the growth that we have, and organically and through M&A, it's just been a winning formula, and I think that that's what we'll stick with probably.
David Zalman: It's really a balanced approach.
Kevin Hanigan: I was going to say, we really want both. But on the loan growth side, we're not going to be somebody that's going to grow at double the rate of GDP. If we can do acquisitions and grow loans at GDP rate, we are just fine with that. If the market is all growing at 10 because we think they're doing crazier things, in those cases, let them grow at 10, and we'll grow slower, and if we need to grow more than that. Growing through acquisitions, the way we do it, and I think you've all seen the way we do it, there's enough marks put on these loan books that we buy that credit's never an issue. And we do it with the ability to increase our reserves. We sit here today in a really strong credit position, no matter what the market does.
Kevin Hanigan: The simple answer is we want both, but we're not going to go overboard chasing growth above GDP rates.
David Zalman: I think basically it's a model if you're a long-term investor. If you're a long-term investor, you're going to love our model. If you're a short-term investor, you probably wouldn't.
Stephen Scouten: Yeah. That's probably a very fair point. That's helpful. And then now at $54 billion in assets, does the idea of indexing these regulatory thresholds, does that change your outlook for the ultimate size or scale of the bank or anything strategically that would open up for you all if those policies come through?
David Zalman: I don't know that I saw the indexing thresholds that you're referring to. I guess you're referring to the $100 billion in size threshold would be our next threshold. But right now, when you're a $50 billion bank, you could be $150 billion bank, all the stuff that is required from enterprise risk management to BSA to all the regulatory burden they put on you right now, you could be that bigger size. Again, we probably didn't talk about it enough, in addition to the mergers that we've done with Texas Partners and Stellar and American, we also spent three years in-house on our own IT infrastructure, and we put in a new data processing that really allows us, again, I'm not saying we're going to build up to this size, but it allows us to go up to about $500 billion in size.
David Zalman: Just to give you an idea, we were running out of capacity on a holiday weekend. We were running batch with our checks, and basically, we'd start on Friday, and it may be caught up by Monday morning, it may not, our servers. But today, we can run through all of that, and it catches up within an hour's time. We can run the whole process within an hour's time. So we spent a lot of time on our infrastructure, IT infrastructure, a lot of money on technology. So we have a great team with internal audit, enterprise risk management, now AI, everything. So I feel good where we're at. I think we're in a good position.
Stephen Scouten: Got it. Really appreciate it, Carl. Thank you.
Operator: The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Jon Arfstrom: Hey, thanks. Good morning, everyone.
David Zalman: Good morning.
Jon Arfstrom: Just a few cleanup questions here at the end, I guess. On credit, obviously not a big deal, but the 60 basis points in NPAs, David, that probably drives you nuts.
David Zalman: It does.
Jon Arfstrom: Yeah. What is the plan to work that down? Is there anything bigger in there or how do you expect it to trend over the next few quarters?
David Zalman: Our directors, I talked to our directors about this at the last meeting. It is a good question. At the size that we are at, I do not ever see us really getting below $100 million in non-performing. We are at about $200 million right now, and we will probably realistically settle when it is all said and done a year from now or 2 years from now. Again, with everything else being stable, we will probably settle about 125 to 150 is where we will probably end up in non-performing on a run rate.
Jon Arfstrom: Okay. Energy lending, any comments there? Do you have an increased appetite? Is there more activity in your West Texas markets? Anything to note there?
David Zalman: In our West Texas markets, I wish they would borrow more. Those guys, when they borrow, they sign personally, and they usually have about $100 million in their checking account, and they are borrowing $100 million, but they just have not borrowed a whole lot. We do have some really great customers. We will continue to bank the customers that we banked for the last 20 and 30 years. I think probably the middle market, we are not as big in anymore. Kevin may be able to talk to that.
Kevin Hanigan: Yeah. Our underwriting is a little different when it comes to revolvers and borrowing base reviews. It is good in a conservative way. It is not that long ago, and we all remember the potential smarting of 2014 through 2017, or whenever that period was. I do not look for that category to grow into a 5% of total loan kind of category. We are comfortable with where we are. The bank has got a tremendous list of great oil and gas and oil field services customers who have really great balance sheets that rarely need to borrow. Every now and then, we get one of them pop up that is doing an acquisition, and they allow us to loan them some money, as David said. I can think of one client who routinely has $100-plus million, and if he is making a $50 or $60 million acquisition, he allows us
Jon Arfstrom: Right
Kevin Hanigan: to make him a loan. He usually does not keep it out very long, but rather than just paying cash, that is great for us, guys like that. Everybody in this room knows who I am talking about. We got a couple of people like that. John, do not look for that to be a category that takes off.
David Zalman: Yeah. I think over my years of experience, especially in the lending to oil service industries, when prices got really high, everybody would jump into the market, your bankers and lawyers, they wanted to be oil and gas guys, and that is when you would lose all the money. So I think we have learned our lessons. Any new company that is just jumping in the business, we are really not looking at that. What we are really looking at are existing companies, and we have a lot of them, so we are still taking care of them. It does not mean we will not look at something new. It would have to be extraordinarily appetizing to do it, really.
Jon Arfstrom: Yeah. Okay. Just last one here. In Houston, and maybe even Ray can comment, I do not know, but you have a larger market share, and you have a larger branch count, with almost $12 billion in deposits. How is it gone so far, and is there anything you want to do differently or need to do differently with the larger density you have in Houston?
Ray Vitulli: Yeah. This is Ray. It is going very well. I think as far as the question of do differently, I would actually say more of how we are going to leverage the synergies that we are getting as part of the merger. For example, I think Asylbek mentioned on the wealth side, we are starting to see referrals on the wealth side and just using the bigger offering with the merger to our advantage, and we are already seeing that. So super excited about the footprint that we have, that we have expanded in Houston and East Texas, and we think that there is great runway there.
David Zalman: Bob, do you have any comments on Jesse?
Bob Dowdell: Yeah. I guess the comment I would make, David, is with the three acquisitions, you added about 20% to the balance sheet, all in great opportunity areas. So in support of loan growth, whether we get there or not, our opportunities have increased. So Dallas and Houston represent almost 60% of our loans today.
Bob Dowdell: Right.
Bob Dowdell: In great business opportunities. To me, I think it is a matter of us getting out there and getting that done. We have built on opportunity. We have increased the size in those markets, and I think it bodes well for the next several years.
David Zalman: I think we do have the opportunity, Bob, and I think that the only reason sometimes I hold back right now when you put these things together, it does take a lot of time, as you know, integrating and making sure the operational integrations are going right. But once you get past that, our opportunity is just almost endless with the amount of people we have on the ground and the amount of banks that we have in the Texas market and Oklahoma. I think the opportunity is just great, really.
Jon Arfstrom: Okay. Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Charlotte Rasche: Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue work on building shareholder value.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
