Operator: Good day. And welcome to the Prosperity Bancshares Second Quarter Conference Call. All participants will be in listen-only mode. To ask a question, you may press star then one on a touchtone phone. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Charlotte Rasche: Thank you. Good morning, ladies and gentlemen. And welcome to Prosperity Bancshares' Second Quarter 2026 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I am Charlotte Rasche, executive vice president and general counsel of Prosperity Bancshares. And here with me today is David E. 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 R. Franklin, Jr., vice chairman and former CEO of Stellar Bancorp Randy Hester, chief lending officer; Mays Davenport, director of corporate strategy; Bob Dowdell, executive vice president; and Ramon Vitulli, Houston area chairman and former president of Stellar Bancorp. David E. Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws. And as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-Ks 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 E. Zalman.
David E. Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2026 conference call. I am excited to announce that on July 1, 2026, Prosperity Bancshares completed the merger of Stellar Bancorp its wholly owned subsidiary Stellar Bank. Headquartered in Houston, Texas. Stellar Bank operated 52 banking offices including its main office in Houston and banking offices the Houston, Beaumont and East Texas areas, and in Dallas, Texas. I am also pleased to announce that Robert R. Franklin, Jr., former CEO of Stellar Bancorp, and Joe B. Swinbank, a former Stellar director have joined the Prosperity Bancshares board of directors and that Ramon Vitulli former President of Stellar Bank, and Pat Parsons, a former Stellar Bank director have joined the Prosperity Bank Board of Directors. Pat was instrumental in building Stellar's Beaumont franchise over the years. With regard to earnings, excluding the gain on the Visa Class B-2 stock exchange, and net of investment security sale that we had and merger-related expenses, net income was $162 million and earnings per diluted common share was $1.62. For the three months ended June 30, 2026. compared with $135 million or $1.42 per diluted common share for the same period in 2025. This represents a 20.4% increase in net income and a 14.1% increase in diluted earnings per share. These earnings for the second quarter of 2026 do not reflect any contribution from Stellar. Excluding one-time merger-related expenses and charges related to security sales, Stellar had $42.1 million in pretax pre-provision core income. Assuming a 21% tax rate, Stellar's second quarter net income would have been approximately $33 million. Annualizing this amount, for Stellar's and Prosperity's second quarter core net income after excluding the nonrecurring items shows an annual run rate of about approximately $780 million. This does not reflect any cost savings that we expect to achieve after the operational integrations of American Bank in September Texas Partners Bank in November, and Stellar Bank in March 2027. As mentioned on prior calls, these are the results we expected, and we believe these tailwinds should continue to be positive for the near future. With regard to loans, loans were $25 billion at June 30, 2026. An increase of $2.8 billion or 12.8% compared with the $22.2 billion at June 30, 2025, and this was primarily due to the American Bank and Texas Partners Bank's mergers. Loans excluding warehouse purchase program loans were $23.7 billion at June 30, 2026 compared with $23.8 billion at March 31, 2026. A decrease of $117 million. We experienced paydowns this quarter with our one- to four-family residential portfolio decreasing $100 million-plus as well as other large pay downs. We also are focusing on the integration with our new partners. Our deposits were $32.6 billion at June 30, 2026, an increase of $5.1 billion or 18.7% compared with $27.4 billion at June 30, 2025. Primarily again due to the American Bank and Texas Partners merger. Our linked-quarter deposits decreased $33 million from $32.6 billion at March 31, 2026. However, our noninterest-bearing deposits increased $159 million during the second quarter of 2026. Excuse me. Our noninterest-bearing deposits of $10.7 billion at June 30, 2026 represent 32.9% of our total deposits. The net interest margin, on a tax equivalent basis was 3.47% for the three months ended June 30, 2026, compared with 3.18% for the same period in 2025 and 3.51% for the three months ended March 31, 2026. The net interest margin in the first quarter of 2026 was impacted by a one-time loan interest income of $4 million from a nonaccrual loan. The net interest margin continues to be positively impacted by the repricing of assets as we predicted and mentioned during previous calls, and also back we will give you a lot more We are really excited where our net interest margin is headed. Asset quality, our nonperforming assets totaled $130 million or 34 basis points of quarterly average interest earning assets at June 30, 2026. Compared with $122 million or 33 basis points of quarterly average interest earning assets at March 31, 2026 and $110 million, again, at 33 basis points of quarterly average interest earning assets at June 30, 2025. So you saw somewhat of an increase there, but based with the new banks that have come in and the amount of assets, we are still basically at the same ratio. The allowance for credit losses on loans and off-balance-sheet credit exposure was $420 million at June 30, 2026. The allowance for credit losses on loans was 2.9x the amount of nonperforming assets. With regard to acquisitions, we are excited about the synergy we have with our new partners, Stellar Bank, Texas Partners Bank, and American Bank. Our top priority is the operational integration of all three banks and our combined teams are working very hard to ensure they are successful. While we continue to have conversation with other bankers, regarding potential acquisition opportunities, We remain focused on the integration of our three transactions. Texas has one of the strongest and most diverse state economies in the U.S., ranking as the second largest by GDP after California and approximately the eighth largest economy in the world. Oklahoma has a smaller but stable economy, heavily influenced by oil and gas, with more modest growth. Texas continues to shine as more people and companies move to the state because of the business-friendly political structure and no state income tax. Prosperity continues to focus on building core relationships, maintain sound asset quality, and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels. We intend to continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone involved in our company for helping to make it the success of has become. Again for your support of our company. Let me turn over our discussion to Asylbek Osmonov our chief financial officer, to discuss some of the specific financial results we achieved. Asylbek.
Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended June 30, 2026 was $330.6 million, an increase of $62.8 million compared to $207.7 million for the same period in 2025. An increase of $9.4 million compared to $321.2 million for the quarter ended March 31, 2026. The net interest margin on a tax equivalent basis was 3.47% for the three months ended June 30, 2026 an increase of 29 basis points compared to 3.18% for the same period in 2025. And a decrease of 4 basis points compared to 3.51% for the quarter ended March 31, 2026. The linked-quarter margin decrease was primarily due to the previously mentioned one-time loan interest income of $4 million recorded during the first quarter of 2026. Excluding this one-time loan income, the net interest margin increased by 1 basis point on a linked-quarter basis. Excluding purchase accounting adjustments, the net interest margin for the three months ended June 30, 2026 was 3.41% compared to 3.14% for the same period in 2025 and 3.40% for the quarter ended March 31, 2026. The fair value loan income for the second quarter of 2026 was $4 million compared to $3.7 million for the first quarter of 2026. Fair value loan income for the third quarter of 2026 is expected to be in the range of $6 million to $8 million. Noninterest income was $60.7 million for the three months ended June 30, 2026, compared to $46.5 million for the quarter ended March 31, 2026 and $43 million for the same period in 2025. The higher noninterest income during the second quarter of 2026 includes a net gain of $8.2 million resulting from the conversion of Visa stock, partially offset by loss on the sale of the investment securities. The noninterest expense was $176.2 million for the three months ended June 30, 2026 compared to $217.3 million for the quarter ended March 31, 2026 and $138.6 million for the same period in 2025. The first quarter included merger related expenses of $42.5 million For the third quarter of 2026, we expect noninterest expense to be in the range of $244 million to $250 million. This includes the addition of Stellar Bank operations. However, this projection does not include any one-time merger related expenses associated with the Stellar merger. The efficiency ratio was 46.0% for the three months ended June 30, 2026 compared to 59.2% for the quarter ended March 31, 2026 and 44.8% for the same period in 2025. The bond portfolio metrics at June 30, 2026 have a modified duration of 3.7 projected annual cash flows of approximately $2.2 billion. I will now provide a high-level overview of Stellar financial performance for the second quarter of 2026. Stellar also delivered strong financial results during the quarter. Stellar's net interest income before provision for credit losses for the three months ended June 2026 was $106.4 million, an increase compared to $105.9 million for the quarter ended March 31, 2026. The second quarter results included one-time merger-related expenses and losses related to the sale of certain investment securities. Excluding these one-time charges, Stellar's adjusted pretax pre-provision net income was $42.1 million, an increase of $2.9 million compared to the first quarter of 2026. Now let me turn over the presentation to Tim Timanus for some additional detail on loan and asset quality. Timanus.
H.E. Tim Timanus, Jr.: Thank you, Asylbek. Our nonperforming assets at quarter-end June 30, 2026 totaled $131 million or 0.52 basis points of loans and other real estate. Compared to $122 million or 0.48 basis points at March 31, 2026. Since June 30, 2026, $5 million of nonperforming assets have been removed or put under contract for sale. The June 30, 2026 nonperforming asset total was comprised $119 million in loans, $9 thousand in repossessed assets, $11.3 million in other real estate. Net charge-offs for the three months ended June 30, 2026 were $2.18 million compared to net charge-offs of $41.3 million for the quarter ended March 31, 2026. There was no provision to the allowance for credit losses during the quarter ended June 30, 2026. $0 were taken into income from the allowance during the quarter ended June 30, 2026. The average monthly new loan production for the quarter ended June 30, 2026 was $454 million, compared to $312 million for the quarter ended March 31, 2026. Loans outstanding at June 30, 2026 were approximately $25.028 billion compared to $25.288 billion at March 31, 2026 The June 30, 2026 loan total is made up of 34% fixed-rate loans, 33% floating-rate loans and 33% variable-rate loans. I will now turn it over to Charlotte Rasche.
Charlotte Rasche: Thank you, Timanus. At this time, we are prepared to answer your questions. Our call operator, David, 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 touchtone phone. 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. Our first question comes from Janet Lee with TD Cowen. Please go ahead.
Janet Lee: Good morning.
David E. Zalman: Good morning.
Kevin Hanigan: Good morning.
Janet Lee: From the last call, you have talked about net interest margin reaching the 3.70 level as you exit 2026 and then getting in the 3.80 range in 2027. Do you still have a good line of sight into reaching that level, or is there any changes to the outlook versus before?
David E. Zalman: Janet, no. We our models are still showing as hitting I think, again, Asylbek, you wanna jump in on this, but we are still saying that we will end up with 3.75 at the end of the year, but our models are still showing 3.70 to 3.80.
Asylbek Osmonov: And Yeah.
David E. Zalman: So I would exit yes.
Asylbek Osmonov: It is. We provided guidance of 3.70.
David E. Zalman: I think we are going to increase to 3.70, 3.75.
Asylbek Osmonov: Because, you know, with the addition of Stellar, it is still very accretive to us. So guidance stays the same. And for 2027, we said 3.80. I think it is still for whole year, 3.80, 3.85, That will be updated guidance The only the only caution I would put as we start getting past 3.7% of net interest margin, You know, we are we still are very competitive.
David E. Zalman: We offer some of the competitive CD rates, but we have been a little bit lower on our money market accounts, so we may wanna raise our money market accounts rate just a little bit. So that may temper the net interest margin a little bit anyway. We may be again, maybe trying grow more organically at that point in time once we hit 3.7.
Janet Lee: Okay. Makes sense. But the 3.80-plus range still contemplates that you are raising rates on your deposits.
David E. Zalman: Some rate.
Asylbek Osmonov: Yes. We have increased some of them. So yes. But--
Janet Lee: Okay. Got it. I understand that the priority is on the integration part, but on the Stellar side, perhaps, or even on the legacy Prosperity side, what are you seeing in terms of loan growth and demand there? It looks like outside of the mortgage warehouse, it was fairly stable quarter-over-quarter. Just wanted to see what you are seeing on that front.
David E. Zalman: Yeah.
Kevin Hanigan: This is Kevin. I would say for the remainder of the year, companywide, still relatively flat for the remainder of the year. That does include Stellar has got a pretty robust pipeline of $1.2 billion-ish. Right? And so they feel as though they will grow their loans. They grow them about $200 million in the first half of the year. They will probably grow them another $200 million in the back half of the year. But overall for the company, I would call it flattish for the remainder of the year. Maybe on the better news front, as Timanus said, production has been picking up and we have several hundred million, probably closer to $400 million. Of construction deals, which we have approved so far this year that are booked. They are in our pipeline. They will not provide any fundings this year as all the equity has to go into those deals first. But beginning in the first quarter and more materially in the second quarter of next year, the pull through of those deals is going to start generating some positive overall company growth.
H.E. Tim Timanus, Jr.: And this is Timanus. Everything that Kevin said is accurate in my opinion. We do forecast stability going forward. We have a decent pipeline of loans. We see decent loan activity Out there in the marketplace. Really, the only thing we see that is a hindrance is some of the very, very aggressive structure and pricing that the competition is putting forth. We have to be cognizant of that and careful with it. But, basically, everything looks decent right now.
Kevin Hanigan: Yeah. As Tim said, and it is no news to all you on the call, but credit spreads are at 25- or 30-year lows across the risk spectrum. I mean, some things out there are just getting to the point of being ridiculous. We have looked at two meaningfully large transactions in the last two weeks priced at SOFR plus 125. You know, the math on that yields you an opening day coupon of, like 4.83%.
H.E. Tim Timanus, Jr.: Yeah.
Kevin Hanigan: Which is ridiculously low. And it is not like either one of those things came with massive amounts of demand deposits in a relationship. So just risk-reward across the spectrum right now is I think, slightly mispriced.
David E. Zalman: And I will give you a little bit more color because I think that no disrespect, but the analysts continue to want to show just the growth in the loans and growth all the time. But you know, I think you need to take profitability into consideration and just to give you a little color last week, we had a loan committee and it was a grade A company. there is no question about it. But they it was a $20 million credit and they it was priced at, you know, with especially some of the regional banks coming from outside the state trying to make a mark inside the state. They priced it at a seven-year fixed rate at 5.5%. With a 25-year amortization. And, of course, there is not many of any deposits with that. And so you have to-- you have to consider, okay, do I want to make a loan at 5.5%? Or can I go with a pretty high duration, or do I want to just go buy a money-- buy a mortgage-backed security with a 4.8-year duration and get 5.0%? So can we really operate on 50 basis points? And I would tell you, the difference is no. You cannot pay the lender the officer, reserve for loan loss and make it off of 50 basis points. So we are really I guess my point is we are really paying attention to profitability at the same time. it is not an excuse. But I think that you guys just need to know that too. We are just not gonna we are not going to just put loans on. Most of the, you know, most of the loans that come, the bigger loans that come, they are really more of a dry relationship. I mean, if you are if you are really bringing over a customer and you are bringing over the customer deposits total relationship, that is a completely different story. And even that rate may make some sense. But the bigger, dry relationships just to grow loans to grow loans at those kind of pricing in my opinion, does not make a lot of sense.
Janet Lee: Got it. Appreciate all the color. I will step back.
Operator: And the next question comes from Brett Rabatin with Stonex Group. Please go ahead.
Brett Rabatin: Hey. Good morning, everybody. Thanks for the questions. Wanted to start on the other income. I know there was some noise in 2Q with the gains and the securities. What would the would the increase in other was that related to anything in particular? And does that continue from here?
David E. Zalman: Yeah.
Asylbek Osmonov: On the other one, we had just about $2.5 million just I would say, annual income that we get that, but it is not going to be expected maybe next quarter. But there was an annual income, we would generate about $2.5 million. Other than every other than that, everything is a core except the, of course, gain on Visa stock. So if you are thinking going forward, I would say, you know, our range around $50 million Prosperity before Stellar, and Stellar has $5 million to $6 million. So I would say between $54 million to $56 million, that would be a good run rate on the noninterest income.
Brett Rabatin: Okay. that is great color. Appreciate that. Awesome.
Brett Rabatin: And then David, you were you were just talking about, you know, your kind of thesis on loans versus securities and with where the bond market has moved. I was just curious if there was any maybe increased appetite to actually grow the securities portfolio you know, from here and just thoughts on how you view the securities portfolio size kind of post Stellar integration?
David E. Zalman: Well, again, our first focus will always be loans. But on the other hand, when the price is getting to where it is right now, you really cannot. We are not going to put a bunch of stuff on the books. And just to grow loans and not be profitable and take the risk. So I would say, I think you will continue to see you know, we are we are focused on building loans first, but whatever we do not, we will continue to put into the into the bond market. And you know, we still grow organically. it is still hard for you guys to see, but when we strip out when we strip out the banks that have joined us, I think, Kelly, you did a deal showing yesterday that our deposits actually have grown organic about 3.2%. So once things always stabilize, we will start-- we will start 2% to 4% organic deposit growth all the time. it is just when you put all these things together and some customers come, some customers leave, it will take a year or so but we will always have organic growth, and that in itself always outproduces what we are able to put in loans. Sometimes. So I think you will have a combination of both growth in loans and deposits. As loans and securities really going forward.
Brett Rabatin: Okay. And then if I could just ask one, like, one quick last one just around you know, it sounds like you guys are still seeing some irrational stuff on the lending side but the monthly loan production was obviously stronger linked-quarter. Would you guys attribute that to just increased activity in the markets, you know, customer gains, anything in particular you would point to just kind of describe the linked-quarter improvement and loan production?
H.E. Tim Timanus, Jr.: Yes. Once again, we see things as being very stable. And maybe growing a bit. Our people are constantly out there trying to bring customers in and that obviously includes loan customers. As well as deposit customers. The problem with the pricing and the structure that we are seeing in the market those things historically come and go. And right now, they are here. We are we are having to deal with it. But how long it lasts? I guess, is anybody's guess. So I think there is reason to think that we can improve our loan growth and therefore improve our loans outstanding. You have to understand that quite often, the loans that we put on the books do not fund right away. They are construction loans. They are they are their different types of loans where equity has to come in and get funded first. So it can be a few months before we start funding those loans. So that is a normal time delay. that is a good thing, not a bad thing. So I see a lot of positive things out there. And not that many negative things other than the current structure that we are having to deal with on a competitive basis.
David E. Zalman: But the bottom line, Timanus, we are at Brent, we are again, Texas is still growing. You are still seeing businesses move into Texas. You are seeing population growth and business growth. So I think we are still gonna have opportunities to grow and build a portfolio. I mean, you know, you we saw a lot more we saw more production this time. You know, a lot of it was pay downs too. I mean, just the one- to four-families, if you look at it, it was over a $100 million decrease. And, again, we are getting paydowns in that in the housing market. People have not been willing with the higher interest rates to lock in and to buy the one- to four-family. So a lot of our pay downs were in that category right there, but Texas is still it is probably the best market out there.
H.E. Tim Timanus, Jr.: there is just no question about it. Because that is absolutely correct.
David E. Zalman: And Oklahoma is doing well also.
H.E. Tim Timanus, Jr.: So from a geographical standpoint, everywhere we operate, right now looks good.
David E. Zalman: And again, I again, we are probably more cautious. We are probably more focused on profitability than some of the other banks because we do not wanna just put loans on the books just to say that we have grown loans too at the same time. So we are trying we are trying to balance that out.
Brett Rabatin: Okay. that is great. Appreciate all the color, guys.
Operator: Mhmm. And the next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia: Hi. Good morning.
David E. Zalman: Good morning.
Manan Gosalia: You spoke about credit spreads being at multi decade lows. In the $20 million credit line. I guess the question is how widespread is that competition on structure and pricing? Is that happening for a specific loan segment like construction or a specific type of client where there might be a higher likelihood maybe of getting other business down the line. Or is it widespread across construction, CRE, middle market, C and I?
Kevin Hanigan: Yes. The SOFR 125s are outliers. that is that is two deals Both of them pretty recent, but I would say that is two deals. I think we go back all the way back into December, January time frame. it is two deals from then to now. So there is two recent deals, very large, prominent clientele, Asylbek can probably give you some a little bit of color on originations both at, and pricing on originations at both at Stellar and at Prosperity for the last quarter that might help you understand where what we are doing.
David E. Zalman: But I would also say, though, that the 1 that I described with the seven-year fixed rate with 25-year amortization, 5.5% is not unusual, and that is those are loans that everybody's bidding on. I mean, they are not deposit they are not bringing deposits to the bottom line. that is that is loans like on one- to four-family, one- to four-family. Multifamily units, retail centers, office buildings, and stuff like that. And it is just it is just it is just going to the lowest it is just going to the lowest bidder for the most part.
Kevin Hanigan: Yeah.
H.E. Tim Timanus, Jr.: And, also, Asylbek, if-- yes, let me mention before you start. That it is not across the board.
David E. Zalman: It is primarily the larger loans. And what we are seeing more often than not is the large banks or relatively large banks that have recently entered the Texas market or trying to enter the Texas market And they are focused on those larger loans.
H.E. Tim Timanus, Jr.: They make a bigger splash that way, and it is understandable. I think that is a good point, Timanus.
David E. Zalman: I mean, not everybody's doing this. it is not everybody. If you ask me can put them on one hand, and I do not even need all five fingers.
Kevin Hanigan: Yeah.
David E. Zalman: Mostly it is mostly the bigger loans. there is a couple of banks that have come in. More of the regionals the big regionals are trying to buy their way into the market. And I and I am not saying that they are wrong. We you know, when we go into a market before we did a lot of mergers and acquisitions, if we started to open up a banking center or something, we would give special deals to. And I guess that is what they are trying to do at the same time. But it is still not across the board, but these are all very large loans. it is just it is just rate driven and I think that is the way they can say that they are they are making a splash. that is just my opinion.
H.E. Tim Timanus, Jr.: Right.
Asylbek Osmonov: So I -- Asylbek, yeah. I am just gonna give the facts, you know, the average loan production monthly for the Q2 that Timanus mentioned, the $454 million, the average rate on that blended was around 6.5%. And I think when we talked to I looked at Stellar's number too. I think the new loans they are putting up also around 6.5%. So we are comparable at that point. So we know that our you know, fixed loans and some loans are going to reprice at a higher rate than at this rate. that is all very helpful color.
Manan Gosalia: I really appreciate it. You know, I guess when we talk to some of the other banks, they have been talking about at the all-in returns of their client relationships, not just the loans and deposits, but also I guess, cash management, investment banking, etcetera. I guess the question for you is, you know, as you do more acquisitions, as you grow the size of the balance sheet, is there anything that you need to invest in on the product side or on the fees side to capture more of the economics of the client?
David E. Zalman: Well, I think that is the good news. Is that over the last three years, we spent a lot of time, money, and energy on our new technology. If we would not have-- we would not have-- we had our own computer conversion that we had from we were on 5 Star from one platform to the DNA product. If we would not have done that and spent all that money and time there is no way that we could have done these three deals that we are doing right now. So I think that we are well positioned because we did spend the time, the money, and the energy to let us know that we did wanna be a bigger bank and to do that. We had to have the technology, and I think that you are seeing that growing. I think that we are even bringing in some really good people, especially at Texas Partners. It has a lot of experience and a lot of big bank experience with treasury management. And I see our treasury management really growing in our products. I think we are very, very good.
Manan Gosalia: Got it. Thank you.
Operator: And the next question comes from Peter Winter with D.A. Davidson. Please go ahead.
Peter Winter: Good afternoon. I was wondering, Kevin, if you can give an update on the mortgage warehouse business and just also, with this increase in mortgage rates, does that kind of virtually shut down refi activity?
Kevin Hanigan: Yeah. Refi activity is not all the way shut down. there is always been some, but it has been muted. And it is I just looked at the first 28 days of the quarter, so through last night. I think we are averaging right at a billion 250. In outstandings, which is off from the billion 16 or whatever it was, 16, I think. In Q2. So that is a little unusual for the third quarter. You usually, third quarter is pretty good, particularly in July and August with September being a little off. So it would not surprise me if we average a billion 200, maybe as good as a billion 225. In Q3, which is, you know, it is roughly $100 million off the average of Q2.
Peter Winter: Got it. Thank you. And then David, just how are you thinking about deposit growth in the second half of the year? And you mentioned you might get a little bit more competitive on money market rates, but just how you are thinking about deposit rates going forward, assuming the Fed is on hold?
David E. Zalman: I was wondering if you were going to ask me a question, Peter. Thank you. You are welcome. No. You know, it is hard to tell you that you are going to see a lot of growth because when you do these deals, there are some relationships that come and go. You know, the only thing I can tell you is and we are we really believe this. Our numbers show this. That on an organic basis, on legacy deposits, we always have continued to grow 2% to 4%. And where we do lose is when new banks join us, and, you know, they may have been paying a higher interest rate than we have been willing to pay. May have been some circumstances or the customer just does not like us to be part of that deal. But I think over time, if you ask me to make it a I guess, I first of all, I you know, the Fed a lot of people were talking about them raising rates because of inflation. I think the Trumpster put this new guy in, Walsh, and he is not gonna raise rates in my opinion. Having said that, I think our modeling guy our modeling guy has put in, what, a quarter of a point increase. End of the year. End of the year. And so I do not think they will. Our models really show really great net interest margin just where they are right now. I mean, it shows greater if interest rates go up. And it shows less if interest rates go down a little bit. But again, our customers have been very loyal to us. If you look at you know, if you look at the last you followed us, Peter, forever, and you just look take a look at a graph for the last 10 or 20 years. We have had increased earnings, increased earnings per share, increased assets, increased deposits every year. Until we get 2022. We start we have seen interest rates go up. You saw our net interest margin going down, and then we really got bombed in 2023 and 2024 with net interest margins going down to 2.75%. And, of course, now we have built it back up to 3.50, and we are going to 3.80. And our customers have stayed with us and they really did not have to. They could have gotten stuff better at some other place. And so when I commented earlier, that once we get up to 3.7, I would like to see us bump our customers up a little bit to We still wanna make good money, but I wanna reward them for staying with us at the same time too. And possibly start growing more organically in that phase.
Asylbek Osmonov: I have that thing on the deposit. it is kinda hard to see you when you see our balance sheet, our deposits have decreased. But if you kinda peel off, there is a public fund that has seasonality each time. It goes down second and third quarter. But if you strip out the public fund, our core deposits have increased in the second quarter.
David E. Zalman: Yeah. Mean, I was extremely excited this time because last year at this time, this is usually 1 of our worst quarters with public funds being down and we and quarterback being down, quarterback bills. So that I thought this was pretty good for usually a seasonal
Asylbek Osmonov: Pretty tough deposit quarter. Yeah.
Peter Winter: that is great. Thanks, David.
David E. Zalman: You are welcome.
Operator: And the next question comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose: Hey, good afternoon, everyone. Thanks for taking my questions. Wanted to start on the Stellar side. I think maybe Ray is there. Looks like the margin was up pretty meaningfully in the quarter, and it looks like maybe there might have been some restructuring, securities balances were down. And just trying to better understand how much of that benefit is driving the NIM guidance that Asylbek laid out?
Ramon Vitulli: Yeah, Michael. This is Ray. So we picked up 9 basis points on the NIM. There was about a $30 million paydown of the of sub debt in there. But it is really driven by as Asylbek said, we booked $525 million, plus we renewed another $600 million or $700 million. So that is about $1.1 billion, $1.2 billion in the quarter. At an average rate of 6.50 on the loan side. Deposit cost held in there, and that was really the driver-- most of the driver of that NIM expansion.
Asylbek Osmonov: And just to add on the sale of securities, it happened at the end of the quarter, so there was no impact on the margin. So the margin that they have 9 basis point increase, that was a core increase on the margin.
Michael Rose: Okay. Very, very helpful. And then maybe just 1 follow-up, just as it relates to the integration efforts and cost savings realizations of the two other deals, not Stellar, but where do you stand with those? And I understand you gave the outlook. Just trying to better understand the puts and takes. Thanks.
Asylbek Osmonov: Yeah. On American and Partners Bank, we realized some of them, but most of the cost savings is going to come in after the system Conversion, which we scheduled for September or November. But let's assuming that all the integration is done, we still expect from the-- I am sorry, from American and Texas Partners additional $20 million to $25 million cost savings coming in, So we should see the full impact of it in 2027. Before tax.
David E. Zalman: Right? Before tax.
Asylbek Osmonov: Yeah. Before tax.
David E. Zalman: 2025.
Asylbek Osmonov: Before tax. And on the Stellar, we are still on in line what we announced on the, you know, pre-merger, how much of savings we are gonna get. So we expect to get that savings. It might be a little bit pushed back on the timing of it because the system conversion does not happen till March of next year. Because of the, you know, the timing of everything going on with three acquisitions. So the timing might, but the cost savings that we project is still in line on Stellar as well.
Michael Rose: Okay. that is very helpful, Asylbek. Thanks for taking my I will step back.
Operator: And the next question comes from David Chiaverini with Jefferies.
David Chiaverini: So you mentioned a couple of times about your focus on profitability. Can you remind us how you are thinking about ROTCE targets once the conversions are done and the cost savings are fully baked in looking out to 2027?
David E. Zalman: What kind of targets? I did not catch that.
David Chiaverini: Your return on tangible common equity.
David E. Zalman: Common income. Well, I mean, we are right now we are, what, running even right now, we are running over 15% return on tangible capital, but really I am really hoping to get you might have these numbers in your model, but I am thinking if we hit the numbers we say we are gonna hit, we should be hitting 17%, 18%.
Asylbek Osmonov: Yeah. I think initially, we are gonna take a hit because of the conversion, but we build it up very quickly. So our project So it is become a tangible capital, not return on tangible Are you talking about return on tangible capital or where tangible is gonna be?
David Chiaverini: I think there are return on tangible capital.
David E. Zalman: The return on tangible capital. You answered it.
David Chiaverini: Yep.
David E. Zalman: Yeah. Basically, they wanna kinda know what you know, I do you have that in your model?
Asylbek Osmonov: But, I mean, if we are hitting the numbers that we are saying, you can do the math. Just add the extra money that he just told you on those cost savings to the $780 million and divide that by the share, you are going to get-- I think you are going to start hitting 17%, 18% return on tangible capital. that is right. Yeah. My that is correct.
David Chiaverini: Perfect. And a follow-up to that. On capital with your buyback, you reduced it in the second quarter. How should we think about the buyback going forward?
David E. Zalman: Whenever people are naughty and we have an opportunity to buy, we are gonna buy. And we are again, you can see the amount of money that we are making or proposed to make. Again, that is something there is no black swan. So we have a run rate of $780 million right now. We have a lot of cost savings that is gonna add to the bottom line. So I think our projections are $885 million to $880 million. We are paying how much in dividends? $200 million and-- yeah, 200 million. So the difference between that and what we are gonna make is or what we are making is a lot of money. So we have a we have a lot of gunpowder to do something with, and we will. I mean, if you know, that we see that there is real opportunity in the-- in the stock price falls and there is something out there in the market, we would definitely be buying our stock back. I mean, trading right now at 10x next year earnings or so. So you know, we are pretty cheap. Yeah.
Kevin Hanigan: And it was muted in Q2 largely for blackout purposes. Right. We would have loved to buy a lot more, particularly dirt and certain periods in Q2, but we just we were blacked out.
David E. Zalman: Right.
David Chiaverini: Got it. Very helpful. Thank you.
Operator: And the next question comes from Stephen Scouten with Piper Sandler. Please go ahead.
Stephen Kendall Scouten: Yes. Morning. Thanks. Going back to the Stellar legacy results a little bit, it seems like with $33 million in net income you mentioned, maybe that is a fair bit ahead of where consensus numbers had them at one point in time. I am wondering if results are kind of ahead of what you guys assumed when you first announced the deal, if it is going, you know, kind of tracking ahead of expectations, and just if there are any material changes to the marks kind of at closing versus what you were expecting.
Asylbek Osmonov: Yeah. On that, definitely running ahead. What we projected. I think when we put together expectation was about $126 million for 2027. On stellar net income. If you take the $33 million we are talking about $130 million. So it is ahead of it. But, on the mark side of it, I think it is maybe a little bit higher than what we projected, but we are still working on it right now, and we do not have we have not finalized the marks yet. But I think that preliminary number coming in a little bit higher than what we projected on the marks. Loan marks.
Stephen Kendall Scouten: Okay. And you said $6 million to $8 million in accretion in the third quarter estimate? Yes.
Asylbek Osmonov: That is including all Okay.
Stephen Kendall Scouten: And then 1 question.
Asylbek Osmonov: I am sorry? No. I just wanna say, it is always, you know, depends if there is some loan pays off with a or premium it could impact. But if you look at the model, it is $6 million to $8 million.
Stephen Kendall Scouten: Sure. Kinda scheduled versus accelerated. Yep. That makes sense. And then in terms of the pro forma loan loss reserve, do you know where that will go to pro forma with the close for Stellar? And then you guys have had a kind of a zero-provision for several years now. Do you think we will start to see provision be more in line with loan growth moving forward? Or is there still some excess that can be worked out over time?
Asylbek Osmonov: On the Stellar one, we are still working on it, so we do not have any number But I know it is gonna be addition to and maybe a pretty good healthy addition to that. But we are working through that.
David E. Zalman: there is 24 right now.
Asylbek Osmonov: Including that unfunded Prosperity Bank.
David E. Zalman: Prosperity. And so you know, you are stellar going with Stellar could take us up to $600 million.
Asylbek Osmonov: Yeah. We are we are still working on it, so we will we will could this so we will give you that more in the third quarter. But on the provision, it is kinda hard to say if we are going to provision or not. We just have to run the model and whatever the model tells us if we need to provision, we will do a provision. If it tells that we do not, we are not going to take provision.
David E. Zalman: it is hard to provision when you get 3x the amount in an allowance compared to your nonperforming, so I see that. You are asking me personally, unless there is something that I do not know and in the loan portfolio is gonna blow up. But we have 3x the amount of money we have in allowance for loan losses compared to what we have in nonperforming right now. Mhmm. So I do not I do not see in the next 12 months any provisioning. that is just me.
Stephen Kendall Scouten: Very good. Very helpful. Thank you guys for the time.
Operator: And the next question comes from Jon Arfstrom with RBC Capital Markets.
Jon Glenn Arfstrom: Hey. Thanks. Good morning, guys. Morning, Jon. Asylbek, can you just walk through the expense cadence again in terms of what you are expecting in the timeline? I am just trying to I know it is way out in the future, but just trying to get an understanding of what you think the run rate you know, looks like when everything is fully converted.
Asylbek Osmonov: I will give you the, well, you know, run rate I gave $244 million to $250 million. that is including Stellar and have some savings that we pull forward from American Bank. And Texas Partners Bank, but not all of it. So, we expect, as I mentioned earlier, from Partners and American, additional $20 million to $25 million cost savings is going to be coming in. And for the Stellar, I think we expect that is all pretax numbers is what I am talking. And for the Stellar, we expect additional probable cost savings around $85 million, $80 million to $85 million. And that is, you know, cost base that we announced. Plus additional of new FDI. So in combination, it is around $85 million additional cost savings on the Stellar side, which with all baked in and everything's, of course, the timing, as I mentioned. that is pretax.
David E. Zalman: Yeah. that is all pretax numbers. Yeah.
Asylbek Osmonov: So you have got $85 million and $25 million.
David E. Zalman: Yeah.
Asylbek Osmonov: $20 million to $25 million, you would And you got to tax rate on that.
David E. Zalman: Yeah.
Asylbek Osmonov: So between additional $100 million to $110 million But, again, we ought to be conservative on that.
David E. Zalman: I mean, these are numbers, and we like to give you a little bit less than Okay. In case we do screw up or we do not make it. But, you know, I think we leave a little room in there.
Asylbek Osmonov: And it is also I mean, we will kinda looking long term. Right? We do not know what the inflation is, so there the additional cost there might be in, but this is what we have it right now, what we expect, and that is what we are projecting.
David E. Zalman: You know, we feel very comfortable about the savings. We have looked at this up and down 2 and 3 times because I did not wanna we did not wanna just put something out there that we did not know it was gonna do it or not. But, I mean, we feel pretty good with these numbers. I mean, you guys have looked at it.
Asylbek Osmonov: Yep.
Jon Glenn Arfstrom: Okay. Yeah. You guys have definitely delivered on that in the past. David, you kind of alluded to this, but with your asset size, not that $50 billion is a big deal, but you are a much larger bank. Anything else you need to do at your asset size that maybe you were not thinking about or doing a year ago?
David E. Zalman: You did kinda reference some hiring in products, but in is there anything else to do that could cause some expense pressures, or do you feel like you have what you need? No. In fact, we needed to get to this size just to utilize the cost that we had, quite frankly. I mean, the way the way the regulators treated us, they were treating us like we were $50 billion and $100 billion. So we are geared up-- we were geared up to be a bigger bank. And so this really just utilizes all the additional cost that we took on to do that, really.
Jon Glenn Arfstrom: Okay. Alright. Thank you very much.
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 to work on building shareholder value.
Operator: The conference has now concluded. Thank you for attending today's presentation. May now disconnect.
