Good day and welcome to the Prosperity Bancshares third quarter 2026 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. 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 conference over to Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' third quarter 2026 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tim Timanus Jr., Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Safady, Senior Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Robert Franklin, Vice Chairman, 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. 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 bank shares 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 10Q and 10K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our third quarter 2026 conference call. I'm pleased to announce that the Board of Directors approved increasing the fourth quarter 2026 dividend to 64 cents per share from 60 cents 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 September 30, 2026, up $15.8 billion, or 41%, compared with $38 billion at September 30, 2025. Our loans totaled $32 billion at September 30, , and an increase of $10 billion, or 45%, compared with $22 billion at September 30, 2025. And our deposits were $41 billion at September 30, 2026, up $13 billion, or 48%, compared with the $27.8 billion at September 30, 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. 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 Stuller 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 September 30, 2026. Annualized returns on average assets and average tangible common equity were 1.5% and 15.81% on average tangible common equity were the same period. Excluding the merger-related expenses, the efficiency ratio was 48%. We are proud of these earnings and expect them to improve after all merger related cost savings are realized. The net interest margin on a tax equivalent basis was 3.73% for the three months ending September 30, 2026, up from 3.47% for the three months ending in June 30, 2026, and 3.24% for the three months ending September 30, 2025. This 49 basis points year-over-year increase reflects the strong net interest margin improvement we expected. Loans totaled $32 billion at September 30, 2026, compared with $22 billion at September 30, 2025. We've seen an increase in our average monthly loan production numbers over the past two quarters. This should help bolster our pipelines next year. In the third quarter of 2026, average monthly new loan production increased approximately $180 million compared to the second quarter of 2026 and approximately $320 million compared to the first quarter of 2026. The overall deposits totaled $41 billion at September 30 compared with $27.8 billion at September 30, 2025. Our linked quarter core deposits excluding Stellar Bank increased 2% annualized during the third quarter of 2026. Our non-interest bearing deposits of 13.8 billion at September 30, 2026 represented 33.6% of total deposits. The level of non-interest bearing deposits as a percentage of total deposits continues to remain strong 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 27, 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. Our non-performing assets total 193 million or 41 basis points of quarterly average interest earning assets at September 30, 2026 compared with 119 million or 36 basis points of quarterly average interest earning assets at September 30, 2025 and 130 million or 34 basis points of quarterly average interest earning assets at June 30, 2026. The amount at September 30, 2026 and June 30, 2026 was impacted by non-performing assets acquired in the mergers. The allowance for credit losses on loans and off-balance sheet credit exposure was $629 million at September 30, 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, Stuller 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. We also continue to have conversations with other bankers considering strategic opportunities and are open to transactions that will be beneficial to our company's long-term future and will increase shareholder value. The Texas and Oklahoma economies continue to expand in late 2026 despite labor supply constraints and headwinds from inflation 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 third quarter 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 September 30, 2026, was $443 million, an increase of $169.5 million compared to $273.4 million for the same period in 2025 and increase of 112.4 million compared to 330.6 million for the quarter ended June 30th, 2026. The net interest margin on a tax equivalent basis was 3.73% for the three months ended September 30th, 2026, an increase of 49 basis points compared to 3.24% for the same period in 2025 and increase of 26 basis points compared to 3.47% for the quarter ended June 30th, 2026. 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 September 30th, 2026 was 3.59% compared to 3.19% for the same period in 2025 and 3.41% for the quarter ended June 30, 2026. Fair Valley Loan Income for the third quarter of 2026 was $11.6 million compared to $4 million for the second quarter of 2026. Fair Valley Loan Income for the fourth quarter 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 September 30, 2026, compared to $60.7 million for the quarter ended June 30, 2026, and $41.2 million for the same period in 2025. The second quarter 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 third quarter 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 September 30, 2026 compared to $176.2 million for the quarter ended June 30, 2026 and $138.6 million for the same period in 2025. The third quarter 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 third quarter, we continued to realize cost savings from the acquired banks with additional savings expected as we complete the remaining two system conversions. For the fourth quarter of 2026, we expect non-interest expense to be in the range of $235 to $238 million, excluding remaining one-time murder-related expenses. The efficiency ratio was 62.1% for the three months ended September 30, 2026, compared to 46% for the quarter ended June 30, 2026, and 44.1% for the same period in 2025. Excluding merger-related expenses, the efficiency ratio was 48% for the third quarter of 2026. The provision for income taxes for the third quarter of 2026 included approximately $5 million related to out-of-state tax settlement. This one-time tax expense reduced diluted earnings per share by approximately 4 cents and resulted in higher than normal effective tax rate of 24.4%. The bond portfolio metrics at September 30th, 2026 have a modified duration of 3.9 and projected annual cash flows of approximately 2.2 billion. And with that, let me turn the presentation over to Tim Timanus for some additional loans and asset quality.

Tim Timanus Thank you, Asylbek. Our non-performing assets at quarter end September 30th, 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 June 30th, 2026. Since September 30, 2026, $4,289,000 of nonperforming assets have been removed or put under contract for sale. The September 30, 2026 nonperforming 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 September 30th, 2026 were $4,437,000 compared to net charge-offs of $2,183,000 for the quarter ended June 30th, 2026. There was no provision to the allowance for credit losses during the quarter ended September 30th, 2026. No dollars were taken into income from the allowance during the quarter ended September 30th, 2026. The average monthly new loan production for the quarter ended September 30th, 2026 was $635 million compared to 454 million dollars for the quarter ended June 30th, 2026. Loans outstanding at September 30th, 2026 were approximately 32.06 billion dollars compared to 25.028 billion dollars at June 30th, 2026. The September 30th, 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.

Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator, Megan, 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 were 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'll pause momentarily to assemble our roster. The first question comes from Dave Rochester with Cantor. Please go ahead.

Hey, good morning, guys. I 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 imagine some of that might continue, and then the CDs might be more short-lived, but we're just curious if there are any expectations for that as well, so that accretion number might be a little bit bigger in 4Q.

Yeah, for the fourth clue, I mean, we're excited, you know, 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 $2.92 rate, average rate on the bond, and we've been recently buying like $5.50 to $5.75, so repricing. So that's going to continue to reprice on the bond portfolio side. On the loan side, you know, we have, what, 38% on the fixed loans. They're going to continue to reprice. If you look at our average rate on loans without fair value, it's 593. So we are putting higher loans on our production. So that's 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. So it has not fully baked in in our third quarter, but we'll see that baked in in the fourth quarter. So I think if you're looking on margin, I think it's going to be flat to slightly up because it takes little time for assets to reprice. But in long term, our model shows we're going to continue to expand on the margin significantly as the bond portfolio and the loan kind of reprice. And if you look for 12 and 24, it's looking really good and, you know, the assumption we provided that exit rate on the fourth quarter margin being 370, 375 stands as is. So, we're comfortable with that and the guidance we provided for next year also stands as a, for average for the quarter, like 380 to 385 right now. So, we are seeing expansion of the margin. Yeah, I think he's looking for some help on accretion. So, the accretion on the loans, like I said, 7 to 10 million dollars On the CD accretion, we had 2.5 million. I think it's going to reduce a little bit to 1.3 million for the fourth quarter and kind of burns off first and second quarter of next year.

Okay, so accretion comes down in 4Q, but the underlying margin is expanding, and so that's what kind of keeps it flat and maybe up a little bit just on a reported basis?

That's correct. That's right.

Okay, that's great. It's good to hear that you guys are still thinking positively about the margin. You have a lot of opportunities here to expand that, it sounds like. Maybe just switching to expenses real quick. That result was solid. The guide certainly shows you've 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'll get a lot more of the cost savings from Stellar on the integration. So maybe those flow through more fully into 2Q, and that's normally when you've 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've got projections through the year.

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 Stell and Texas Partners. So we're going to continue to see that. I think based on our estimates, We have additional 65 to 70 million pre-tax of cost savings coming in if you compare to our third quarter expenses. If you look at our expectation when we all settled in more like starting second quarter and third quarter, when we have quarterly clean expense run rate, I would say, we're looking at about $220 to $225 million per quarter. That's a pre-tax number. So that's going to be our run rate when everything is settled.

All right, great. Maybe we'll 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 27. Maybe you don't have a crystal ball, but is that kind of what it feels like at this point?

I think so. I mean, really at $193 million in total non-performing assets and having over $600 million in provisional allowance, I think we're covered pretty good.

Yeah, when he said 27, I wasn't sure if he meant next year 27 or 27 years worth, but 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.

Thank you. The next question comes from Brett Rabaton with Stone X Group. Please go ahead.

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

Yeah, I think we, I mean, it wasn't one rate for everything. We kind of looked at it, you know, different buckets of the deposit and did different rate increases. But I'll tell you this, if you're looking for fourth quarter specifically, we calculated what would be average cost of deposit would be It's going to go up by like six or seven basis points from the Q3. So we're shooting maybe cost average will be 146, 145, 146 on the cost of deposit. But if you look at cost of fund total, I think it's going to go up from 150 to 157 to 58, so eight basis points with our deposit increase that we did end of the quarter, on the third quarter.

In our primary focus, Brent, again, we really don't, It's not that we don't focus on them. It's just that they're not as rate-driven in 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 a million dollars or more. We actually raised our money market rates about a quarter of a point from 2.75 to 3%. And again, we're still offering the special rates. We have a couple of special CD rates that are What are they right now? So it's like seven-month series, like 375. And so we're offering a couple of special promotional deals like that. But that's really what we're focused on, and that's where the rates have increased. And 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, you know, I think the rate-driven stuff is probably more in that. And even that, is not rate-driven like a lot of other banks, really. Okay, that's helpful.

And then the other question I wanted to ask was just around loans. And with the monthly production up to $635 million, it sounds like the outlook is still for maybe modest growth from here. Does the production give you guys any confidence that growth might improve from here? And then just any color on the payoffs from legacy loans? Prosperity, or the deals that you've had, how much that might have impacted 3Q.

Yeah, Brent, David's nodding at me. This is Kevin, so I'll take that one. And bear with me as I walk you through a couple of things and what may seemingly be get off topic and end up back on topic, if you will. So the monthly production, we have looked back as if all the acquisitions were done last year. 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's not only going up, but it's increasing its path upward. It's 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. We believe that to be largely related to the acquisition and getting to know each other and lenders getting to know each other. And what we have seen there is a rebound in their pipeline. So I think as that pipeline improves, we pick back up to where Stellar was and see further improvement. That's 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'll say it. It is not unusual. In fact, it's more typical that loans at those institutions tend to shrink for six months to a year after an acquisition. So to me, that ties in where David said he thinks loans for next year are probably flat and maybe up a little bit. It's the headwind of integrating Stellar, and it's the tailwind of this production improving. So I would say for the good side of next year, and before I get into what I think and I know it's way too early to be talking about 28, 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's pretty strong. Depending upon what you add back it was $1.67 to $1.69. I think from an earnings perspective, we've 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 long growth year, that's going to deliver a double digit, in fact, and a load of 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're currently seeing and look into 2028, and let's face it, a lot of things can happen between now and then, so this gets squishier, but that leads us to believe in 2028 we can get to low, mid, I'm going to say three to five percent 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're really set up for two consecutive years of really nice EPS growth. Maybe a little disappointing to you that we can't eke out more growth next year, but we're being realistic and just trying to offset this nice production increase with with our history and knowing what happened. So long-winded, but I think we're really in a great position from an EPS growth standpoint for the next two years.

That's great, Kevin. I appreciate the narrative there. That helps explain quite a bit. Thanks for all the color guys.

The next question comes from Janet Lee with TD Cohen. Please go ahead. Good morning.

Good morning.

Back to your net interest margin, 380 to 385% for 27. That's great. Strong core NIM expansion. I'm 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.

Yeah, we are, you know, if you look at our balance sheet, we're neutral to modestly asset sensitive. So if you look at our model, yeah, increased rate environment does help, benefits us. But when we run the model, you know, we kept it flat rate, you know, there's expectation rate, Fed going to increase rates, but for our model, we kept it flat. So, I mean, there might be a possibility to do better, but, you know, us being conservative, we're just going to stick to our guidance that we're provided.

Yeah, I think, Jan, our models, again, maybe trying to under-promise and over-perform, but our models look really good for 28 and 29, quite frankly. So, I mean, we really, as Kevin mentioned earlier, we really are looking at some double-digit earnings increases over the next couple of years.

Right, makes sense. And just to make sure I'm interpreting correctly, your core deposits growing 2% to 4% and loans being flat to slightly increasing in 27, is that excluding the runoffs or is that inclusive?

No, when I refer to core deposits, that's 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? Close to $2 or $3 billion. And those are real seasonal in nature. Like right now, they're probably lower than they are all year right now. Next quarter, you can see our public funds increase $500 to $800 million probably. I mean, it's very possible. And then out of state, and the bank through and start running out at the end of the first quarter and second quarter again. So when I refer to the core deposits, it's our checking accounts, our money market accounts and stuff like that, just our core. And again, we don't have any wholesale deposits. We don't have any broker deposits or anything like that.

Right. And on the loan side, on the flat to slightly, that's inclusive of the potential any barn offs?

We do because I think that I think because again uh gosh I hope I'm not overly optimistic I I think Stellar Bank and our bank are very very similar in nature and I don't see and I'm in loan committee and I don't see a whole lot of difference in what they would have done what we will do so I you know I just I really think that Stellar Bank and us are very much alike and I don't 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, all of us are very similar in the way we lend money. And so I don't see a whole lot of changes in what we do. So I'm hoping for the best, Joe.

All right. Thank you. If I can squeeze in one more, maybe I missed it. Could you talk about your appetite around buybacks from here?

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

Okay, thank you.

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

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 kind of mortgage lending in the warehouse, just given the hire for longer backdrop, obviously saw you were fairly close, I think, to your, you know, average guide for the quarter, but just given where mortgage rates are now, if you can just discuss kind of the near term outlook and next year. Thanks.

Yeah, thanks, Michael. Yeah, for the quarter, we averaged $1.229 billion, I think, and our estimate going into the quarter on the high side was $1.225 billion, so we were spot on on that one. Since quarter end, it's been a downward trend. At the end of the quarter, we were at $1.132 billion. Last night, we ended up at $1.110 billion. and we're basically at a billion one 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'm thinking, you know, on the low side, 850 million to maybe on the high side, 900 million average for the quarter.

All right, that's helpful. I appreciate it, Kevin. And then maybe, David, just, you know, you talked about kind of ongoing conversations with bankers for M&A opportunities, but clearly 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, you know, what's out there at this point? Thanks.

You know, I think we're always in the market, but let's face it, I mean, Our focus is truly the combination of Stellar Bank and Texas Partners. 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. That would be significant. But that's really our main focus right now is to really put these banks together, really, for the most part. Yeah, I'd say in the near term, buyback's way more likely than acquisitions. Yeah, the stock price that it's at, when we're trading less than 10 times earnings, we probably make more money buying our stock back than really buying somebody else, really.

Makes sense. I appreciate all the callers. Thanks, guys.

The next question comes from David Chiaverini with Jefferies.

Please go ahead.

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? And is treasury management for Stellar's commercial clients the main lever here? I know last quarter you guys mentioned treasury management build out that included additional hires from Texas partners. Could you just speak on that going forward?

So, yeah, I think there's a lot of opportunity, you know, especially with merger with Stellar. You know, I think we really like our trust. Thank you very much. Thank you.

I think that's that that plays a bigger and bigger piece because it offers so many different products to our customers and again I think that's what we're focused on right there I think sometimes you know you try to sell us I saw where we try to sell treasury management sometimes to smaller businesses that really don't necessarily need to complete treasury management so we need to rethink who we're really pushing it to and who we don't on the automatic consolidations but for the most part I think we have a lot of good products and you know we're we're really looking forward to all the customers and the growth that we can we can do great thank you appreciate the color the next question comes from will jones with kbw please go ahead yeah hey great thanks for the questions guys hey will hey uh just another one uh on the buyback just

I think it's really based on how opportunistic it is.

Again, when we're trading below, you know, 10 times earnings, it's pretty opportunistic. It just, you know, it seems like our stock price is pretty seasonal also. It looks like your September, October prices really go down. And then about time that our stock invests at the first of the year, our stock price goes to sky high. I guess that's because we have to pay the taxes on that accelerated price. So Again, it's real seasonal, but again, we'll be opportunistic. And again, trading less than 10 times earnings will be definitely opportunistic.

Yeah, okay. That's 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 You know, within that, knowing we might have, you know, more flattish here for loans, is there a chance to optimize some of your funding and balance sheet growth is also a little flat? Just how do you kind of think about those dynamics?

No, I think historically, again, once when we look at our bank and we look at the acquisitions, our core deposits have always grown two to four percent, you know, excluding some of the people that join us. I don't see that anything different. I mean, 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's in nature. But I think 2% to 4% is very realistic for us. We've always done that this year. Since the beginning and having that kind of growth, and I still think that you will see that and balance sheet growth.

Yeah, but if you look at, you know, on total assets, you just have to look at period to period. As we mentioned, our public funds goes down in second quarter and third quarter. So if you look at, you know, Q4 to Q2, you might not get a clear picture because we have a seasonality on public funds. But as we stated, you know, if we see the 2% to 4% on quarter parts growth, Over time, our balance should continue to grow.

And I think that's why I feel so confident in our earnings numbers and our earnings model because when you have core deposit growth, and I know analysts push, push, push, 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. I mean, we have, you know, 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. But the real value in any bank is really the core deposit relationships, and that's really what we focus on.

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

Yeah, it was a little bit higher, you know, what we projected. But what we do, you know, when we've Put in projection, you know, we kind of look at high level, but when we go inside and dig in and being our, you know, conservative nature, what we have, we put up a little bit more of the marks than we anticipated.

Okay.

Well, Artie, thanks for the questions, guys. I appreciate it.

The next question comes from Ryan Kenney with Morgan Stanley.

Please go ahead.

Hi. Thanks for taking my question. So we've talked about capital use for buybacks and I'm wondering any appetite to use capital on repositioning the securities portfolio given the movement we've seen in the belly of the curve and you've been historically pretty active on mortgage-backed securities, MBS rates are above 6% right now, any appetite to do more there?

I don't see any, I mean, over the years I've 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 in the next week. The market value changes again. We'll 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 can't 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's because we never try to call the markets. We try to have something that's that we're going to be able to survive it up with interest rates going very up or very down. And, you know, I just that's just not something we do. And I don't I don't see that every several banks that we bought were banks that really just continued buying and selling and reengineering the balance sheet. And for us, that just doesn't work. The answer to the question is simply no, I don't see that really.

All right. Very clear. And then Shifting to competition, we've heard from you guys a lot in the past about loan competition in your market not necessarily meeting your standards. Just give us an update on what you're seeing today, any change versus last quarter on the competitive side.

You know, 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're really talking about a couple of banks really and those are the banks that, you know, I think they're smaller trying to grow. I think there will always be competition, but the bottom line, look, we're one of the largest Texas banks right now with 350 locations and people in Texas, I don't care who you are, they're going to want to do business with Texas people. And that's just, they can say whatever they want, they can pay whoever they want, they can try to take all the people they want You can underprice all you want and do all that stuff you want, but when it's all said and done, they're still going to want to deal with the Texas fine.

Thank you.

The next question comes from Steven Stoughton with Piper Sandler. Please go ahead.

Yeah. Good morning, everyone. Thanks. Just kind of on all this conversation about the potential for organic growth, the competition versus Y'all's successful track record on M&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?

Say that again. I want to try to really understand what you're saying. Yeah.

Do you like growing loans via M&A, just given your successful track record there, versus kind of pushing the envelope to grow loans organically right now?

I think we've been successful with the M&A growth deal. I mean, 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 kind of really know What your potential losses are. The thing that we don't like, I think, is to say, you know, you're going to have double-digit loan growth every year. We're just not going to do that. I mean, 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, you know, Like I mentioned earlier, we have a 77% loan-to-deposit ratio. We can go up to about 85% in our policy, so we have room to grow there. I think it will continue to grow, but 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 don't know. 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 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 organically and through M&A, it's just been a winning formula, and I think that that's what we'll stick with probably. It's really a balanced approach. Yeah, yeah.

I was going to say we really want both. Yeah. But on the loan growth side, we're not going to be somebody that's going to grow at double the rate of GDP. So if we can do acquisitions and grow loans at GDP rate, we are just fine with that. If the market is all growing at 10 because we think they're doing crazier things, well, 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. So we sit here today in a really strong credit position no matter what the market does. The simple answer is we want both, but we're not going to go overboard chasing growth above GDP rates.

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.

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?

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, we don't, again, the way, when you're a $50 billion bank, You could be a $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. And 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. Just to give you an idea, we were running out of capacity on a holiday weekend. We were running a 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 spend a lot of time on our infrastructure, IT infrastructure, a lot of money on technology. And so, you know, we have a great team with internal audit, enterprise risk management, now AI, everything. I feel good where we're at. I think we're in a good position.

Got it. Really appreciate the call. Thank you.

The next question comes from John Arfstrom with RBC Capital Markets. Please go ahead.

Hey, thanks. Good morning, everyone. 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. What is the plan to work that down? Is there anything bigger in there or how do you expect that to trend over the next few quarters?

I talked to our directors about this at the last meeting. It's a good question. At the size that we're at, I don't ever see us really getting below $100 million in non-performing. We're at about $200 million right now and we'll probably Realistically, settle when it's all said and done a year from now or two years from now. Again, with everything else being stable, we'll probably settle about 125 to 150 is where we'll probably end up in non-performing on a run rate.

Okay. Energy lending. Okay. Any comments there? Do you have an increased appetite? Is there more activity in your West Texas markets? Anything to note there?

You know, in our West Texas markets, I wish they would borrow more. Those guys, you know, when they borrow, they sign personally, and they usually have about $100 million in their checking account, and they're borrowing $100 million, but they just haven't borrowed a whole lot. So, yeah. You know, we do have some really great customers. We'll continue to bank the customers that we banked for the last 20 and 30 years. I think probably the middle market we're not as big in anymore. Kevin may be able to talk to that.

Yeah, we're not. Our underwriting is a little different when it comes to, you know, revolvers and borrowing-based reviews. And it's good in a conservative way. Not that long ago, and we all remember the potential smarting of 2014 through 2017 or whenever that period was. So I don't look for that category to grow into a 5% of total loan kind of category. We're comfortable with where we are. The bank's got a tremendous list of great oil and gas and oil field services customers who have Really great balance sheets that rarely need to borrow. Every now and then, we get one of them pop up that's 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's making a $50- or $60-million acquisition, he allows us to make him a loan. He usually doesn't keep it out very long, but rather than just paying cash... That's great for us. Guys like that, and everybody in this room knows who I'm talking about, but we've got a couple of people like that. John, I don't think it's going to, don't look for that to be a category that takes off.

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's when you lose all the money. So I think we've learned our lessons. We're not, you know, any new company that's just jumping into business, we're really not looking at that. What we're really looking at are existing companies, and we have a lot of them, and they're, you know, so we're still taking care of them. Doesn't mean we won't look at something new. It would have to be extraordinarily appetizing to do it, really.

Yeah, okay. Okay, just last one here. In Houston, and maybe even Ray can comment. I don't know, but you have a larger market share and you have a larger branch count with almost 12 billion in deposits. How's it gone so far and is there anything you want to do differently or need to do differently with the larger density you have in Houston?

Yeah, this is Ray. It's going very well. I think as far as the question of do differently, I'd actually say more of like how we're going to leverage the synergies that we're getting as part of the merger. For example, I think also like I mentioned on the wealth side, we're starting to see referrals on the wealth side and just using the bigger offering with the merger to our advantage. And we're already seeing that. So it's super excited about the footprint that we have that we've expanded in Houston and East Texas. And we just, we think that there's great runway there. Bob, do you have any comments?

Yeah, I mean, I guess the comment I'd make, David, is, you know, you added, with the three acquisitions, you added about 20% of 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. in great business opportunities. So to me, I think it's a matter of us getting out there and getting that done. So we've built on opportunity. We've increased the size in those markets. And I think it bodes well for the next several years.

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.

Okay, thank you.

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

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

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