In the recent earnings call, Prosperity Bancshares Inc . (NYSE: NYSE:PB) announced a positive financial performance for the third quarter of 2024. The company reported a net income of $127 million, an increase from the previous year's $112 million. Prosperity Bancshares also declared a dividend increase to $0.58 per share for Q4 2024, up from $0.56, indicating confidence in the company's financial stability. The net interest margin saw improvement, and the company is anticipating continued growth, partly due to demographic trends in Texas and potential strategic mergers.
Key Takeaways
- Prosperity Bancshares reported a Q3 2024 net income of $127 million, up from $112 million in Q3 2023.
- Dividend increased to $0.58 per share for Q4 2024, reflecting confidence in the company's stability.
- Net interest margin improved to 2.95%, with loans totaling $22.3 billion and deposits reaching $28 billion.
- Non-performing assets remained low at $89.9 million.
- The company is open to potential mergers and acquisitions and expects non-interest expenses between $141 million and $143 million for Q4 2024.
Company Outlook
- Targeting a net interest margin of 3% by the end of 2024, with projections increasing to 3.27% for 2025 and 3.65% for 2026, assuming stable interest rates.
- Deposit costs are expected to decline, benefiting from the repricing of short-term CDs.
- The warehouse lending business is strong, with expectations of seasonal declines in the following months.
- The company remains open to potential mergers and acquisitions if advantageous.
Bearish Highlights
- Revenue decreased to $140.3 million from $152.8 million in the previous quarter.
- Non-interest expenses rose due to merger-related costs and FDIC assessments.
- Net charge-offs increased to $5.5 million from $4.4 million in the prior quarter.
Bullish Highlights
- Loan production averaged $259 million, with total loans outstanding at $22.381 billion.
- The efficiency ratio improved to 46.9% from 51.8% in the prior quarter.
- The company added one new customer, resulting in $140 million of new commitments.
Misses
- There were no specific misses reported in the earnings call.
Q&A Highlights
- Overnight liquidity position fluctuated between $1.5 billion and $2 billion, utilized to pay down borrowings.
- The First Capital runoff has reached $420 million, with expectations for low single-digit loan growth until after the elections.
- Future loan growth is expected to return to mid-single-digit growth, depending on the regulatory environment and interest rates.
- Focus on M&A is on acquiring quality banks that enhance the company's position, with careful consideration of asset quality.
Prosperity Bancshares Inc. continues to navigate a complex economic landscape with a strategy focused on organic growth, operational efficiency, and selective mergers and acquisitions. The company's improved financial metrics and stable outlook reflect its resilience and adaptability in the face of fluctuating market conditions.
InvestingPro Insights
Prosperity Bancshares Inc. (NYSE: PB) continues to demonstrate financial strength and stability, as evidenced by its recent earnings report and the insights provided by InvestingPro. The company's decision to increase its dividend aligns with an InvestingPro Tip, which notes that PB "has raised its dividend for 17 consecutive years." This consistent dividend growth underscores the bank's commitment to shareholder value and its confidence in future cash flows.
The company's profitability is further highlighted by another InvestingPro Tip, stating that PB has been "profitable over the last twelve months." This is reflected in the reported net income increase to $127 million in Q3 2024. The bank's price-to-earnings (P/E) ratio of 16.16, as per InvestingPro Data, suggests a reasonable valuation relative to its earnings, which may be attractive to value-oriented investors.
Prosperity Bancshares' focus on potential mergers and acquisitions is particularly interesting when considering its price-to-book (P/B) ratio of 0.96, according to InvestingPro Data. This indicates that the stock is trading slightly below its book value, potentially making it an attractive candidate for value creation through strategic acquisitions.
The bank's robust dividend yield of 3.2% and the recent increase in dividend payout align with its strategy to return value to shareholders. This is further supported by the InvestingPro Tip mentioning that PB "has maintained dividend payments for 26 consecutive years," showcasing a long-term commitment to dividend stability.
Investors seeking more comprehensive analysis can find additional insights on InvestingPro, which offers 7 more tips for Prosperity Bancshares, providing a deeper understanding of the company's financial health and market position.
Full transcript - Prosperity Bancshares Inc (PB) Q3 2024:
Operator: Good morning, and welcome to the Prosperity Bancshares' Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 third quarter 2024 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks. 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, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. 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-K and other reports and statements we have filed. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Zalman.
David Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our third quarter 2024 conference call. I'm pleased to announce that the Board of Directors approved increasing the fourth quarter 2024 dividend to $0.58 per share from the $0.56 per share that was paid in the prior four quarters. 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 2024 was 11%. 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. Our tangible capital increased $218 million from September 30, 2023 to September 30, 2024. This is the amount Prosperity retained after paying $212 million in dividends and repurchasing $75 million of our common stock during this period, reflecting Prosperity's stable earnings. Further, Prosperity's tangible book value per share has a compound annual growth rate of 11% for the last 21 years, or since 2003. Prosperity reported net income of $127 million for the quarter ended September 30, 2024, compared with $112 million for the same period in 2023. The net income per diluted common share was $1.34 for the quarter ended September 30, 2024, compared with $1.20 for the same period in 2023, an 11.7% increase. Prosperity earnings were primarily impacted by a higher net interest margin. The net interest margin on a tax equivalent basis was 2.95% for the three months ended September 30, 2024, compared to 2.72% for the same period, September 30, 2023. As mentioned in previous calls, our net interest margin should continue to improve to more normal levels as our assets reprice. Prosperity continues to exhibit solid operating metrics with annualized returns on tangible equity of 13.5% and return on assets of 1.28% for the third quarter of 2024. Loans were $22.3 billion at September 30, 2024, an increase of $948 million, or 4.4%, compared with $21.4 billion at September 30, 2023. Linked quarter loans increased $60 million. Excluding the loans acquired in the Lone Star merger and new production by the acquired lending operations since April 1, 2024, loans at September 30, 2024 decreased by $161 million, compared with September 30, 2023. The reduction in loans is not unusual for Prosperity as we are still working through loans acquired from the First Capital Bank. If the terms and conditions of any acquired loan does not meet certain standards, we exit the asset. Over the years, this process has resulted in lower non-performing and charged-off loans, and makes us a stronger bank that can withstand various banking cycles. Our shareholders have come to expect this. Our deposits were $28 billion at September 30, 2024, an increase of $774 million, or 2.8%, compared with $27.3 billion at September 30, 2023. Linked quarter deposits increased $154 million from $27.9 billion at June 30, 2024. Excluding deposits assumed in the Lone Star merger at September 30, 2024, deposits decreased by $361 million compared with September 30, 2023, and increased by $206 million compared with June 30, 2024. We're encouraged that the deposits are stabilizing and that core deposits have grown slightly compared with the previous quarter after the effects of the bank failures in 2023. Importantly, Prosperity has not purchased any broker deposits during this turbulent time. Our non-performing assets total 89.9 million or 25 basis points of quarterly average interest earning assets at September 30, 2024, compared with 69.5 million or 20 basis points of quarterly average interest earning assets at September 30, 2023 and 89.6 million or 25 basis points of quarterly average interest earning assets at June 30, 2024, with a significant portion of the balance for each period attributable to the acquired loans. The allowance for credit losses on loans and off-balance sheet credit exposure was $392 million at September 30, 2024, compared with 89.9 million in non-performing assets as of September 30, 2024. Our net charge-offs were 12 million for the nine months ended September 30, 2024, compared with 18.9 million for the nine months ended September 30, 2023. We continue to have conversations with other bankers considering strategic opportunities. We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns, and increased regulatory burden all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value. An estimated 1,000 to 1,300 people move to Texas every day based on the U.S. Census Bureau. In 2023, 473,000 people moved to Texas, which equates to approximately 40,000 per month or 1,300 per day. The Texas and Oklahoma economies continue to benefit from companies relocating from states with higher taxes and more regulation. This combined with people moving to the states requires additional housing and infrastructure, a driver for loans and increased business opportunities. We believe our bank is located in two of the best states we can be for future growth and continued prosperity. 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?
Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended September 30, 2024, was $261.7 million. An increase of $2.9 million compared to $258.8 million for the quarter ended June 30, 2024, and increase of $22.2 million compared to $239.5 million for the same period in 2023. Fair value loan income for the third quarter 2024 was $4.8 million compared to $7.2 million for the second quarter 2024. Excluding fair value loan income, the core net interest income for the three months ended September 30, 2024, increased $5.3 million compared to the quarter ended June 30, 2024. The net interest margin on a tax equivalent basis was 2.95% for the three months ended September 30, 2024, compared to 2.94% for the quarter ended June 30, 2024, and 2.72% for the same period in 2023. Excluding purchase accounting adjustments, the net interest margin for the three months ended September 30, 2024, was 2.89% compared to 2.86% for the quarter ended June 30, 2024, and 2.68% for the same period in 2023. Non-interest income was $41.1 million for the three months ended September 30, 2024, compared to $46 million for the quarter ended June 30, 2024, and $38.7 million for the same period in 2023. Higher non-interest income during the second quarter 2024 was due to a net gain of $10.7 million, resulting from the gain on Visa (NYSE:V) stock conversion, partially offset by the loss on sale on investment securities. Non-interest expense for the three months ended September 30, 2024 was $140.3 million, compared to $152.8 million for the quarter ended June 30, 2024 and $135.7 million for the same period in 2023. Higher non-interest expense during the second quarter 2024 was primarily due to merger related expenses of $4.4 million and FDIC special assessment of $3.6 million. For the fourth quarter 2024, we expect non-interest expense to be in the range of $141 million to $143 million. The efficiency ratio was 46.9% for the three months ended September 30, 2024, compared to 51.8% for the quarter ended June 30, 2024, and 48.7% for the same period in 2023. The bond portfolio metrics at 9/30/2024 have a modified duration of four, and projected annual cash flows of approximately $2 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality. Timanus?
Tim Timanus: Thank you, Asylbek. Our non-performing assets at quarter ended September 30, 2024, totaled $89,923,000 or 40 basis points of loans and other real estate compared to $89,570,000 or 40 basis points at June 30, 2024. Since September 30, 2024, $2,200,000 in non-performing assets have been removed or put under contract for sale. The September 30, 2024, non-performing asset total was made up of $83,989,000 in loans, $177,000 in repossessed assets and $5,757,000 in other real estate. Net charge-offs for the three months ended September 30, 2024 were $5,455,000 compared to net charge-offs of $4,368,000 for the quarter ended June 30, 2024. This is a $1,087,000 increase on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended September 30, 2024 compared to a $9,066,000 addition during the quarter ended June 30, 2024 that resulted from the Lone Star State Bank of West Texas acquisition. No dollars were taken into income from the allowance during the quarter ended September 30, 2024. The average monthly new loan production for the quarter ended September 30, 2024 was $259 million compared to $278 million for the quarter ended June 30, 2024. Loans outstanding at September 30, 2024 were approximately $22.381 billion compared to $22.321 billion at June 30, 2024. September 30, 2024 loan total is made up of 40% fixed rate loans, 31% floating rate loans and 29% variable rate loans. I will now turn it over to Charlotte Rasche.
Charlotte Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.
Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia: Hi, good morning.
Charlotte Rasche: Good morning.
David Zalman: Good morning.
Manan Gosalia: You noted that NIM should continue to improve to more normal levels as assets reprice. I was wondering how you feel about the NIM guidepost that you had previously given?
David Zalman: Again, I think we're sticking with what we said. We should exit our NIM at 3% at year-end. Again that there's a lot of things that go into that, that's if rates stay exactly where they are. If rates go down, of course, we'll have to lower our money market accounts by 25 basis points to exit at 3%, but we still plan on exiting the year at a 3% NIM. And then, for 12 months ending in 2025, our model is showing that we'll average 3.27% for the year, which means it can be lower in the beginning of the year and higher at the end of the year. And then, in '26, our model is still projecting 3.65%. I'll put a caveat on that, that looks a little strong to me, but just what the model is showing right now. And again, those are taking into consideration that the interest rates at the end of the year prime is 7.5%, and in '25, that will finish the prime at 6.5%, and in '26, the prime at 6%. So, that's the difference that's going into those.
Manan Gosalia: Got it. So, in terms of the rate environment, what is the best rate environment for you to achieve that NIM of 3.5% or 3.4% or so in the medium term? What are the puts and takes if the short end rates decline another 150 basis points from here, or if they don't decline as much, where does that put you in terms of that medium term NIM?
David Zalman: Really historically, and I'm just pulling out a sheet of paper just so I'm making sure what I tell you is accurate, but really it doesn't change a lot in over a 12-month period whether interest rates went up 200 basis points or went down 200 basis points. I don't see -- I think if interest rates were they stayed right now, we probably have a little bit higher net interest margin. If they went up, we'd have just a little bit higher net interest margin. If they go down, it's a little bit lower, but they really don't change a whole lot interest rates going up or down. I'd say that's up to 200 basis points. I think if they went down more than 200 basis points then it probably would start to affect us more.
Manan Gosalia: Got it. So, I guess, relative to the forward curve if rates were up or down 50 basis points, it sounds like you can still get some nice NIM expansion from here?
David Zalman: Our models are showing that everything that we've been saying for the last -- throughout the year is still going forward for the end of this year and also going forward for '25 and also going forward for '26 and even '27. So, what we're looking forward still looks very good for us.
Manan Gosalia: Great, thank you.
Operator: The next question is from Catherine Mealor with KBW. Please go ahead.
Catherine Mealor: Thanks. Good morning. To just follow-up on that on just deposit cost, what you're seeing so far, you've got such a low deposit base relative to others. Should we see -- you mentioned you might bring money markets down 20 basis points if we get another cut this quarter, but maybe just any kind of commentary you can give on what you've seen so far, and do we actually see deposit costs on the whole down in a couple of quarters, or is it more kind of stable, and then, more of this NIM lift is coming from the asset remix?
David Zalman: Again, gut feeling, but if interest rates go where they're at, we should get some repricing on the CDs. And we could have shown a lot of growth that we wanted to in deposits. If we would have came up with a product and said, we're going to pay 5.5% on a CD, and it would have been easy for us to raise -- you can raise $500 million or $1 billion if you wanted to, but again, we didn't want to do that. Our deposit, our CD ratio is only about 16% of our deposit, but again, we easily could have raised that up if we wanted to. We didn't. Our real focus is on this net interest margin, and that's kind of where we're focused. I think that our basis, and Asylbek can jump in anytime he wants on this deal, but again, for every 100 basis points down, our beta is a 22 basis points.
Asylbek Osmonov: For the interest bearing deposits and 13 based on total deposits and just to add the color what we're saying right now. So, when we had 50 basis cut initially in September, we didn't cut our general rate, but what we did, we cut their special rate we provide to our customers. We cut the rates on those. And as you remember, we introduced those special CDs and we cut the rates on those special CDs. And from the maturity wise on CDs, if you look at the total CDs, 75% of those CD will mature within six months and 91% going to mature within a year. So, duration of those CDs is short. So, as they reprice, we should get a benefit on the cost of deposit, cost of funding side, and we do expect cost of deposit going down next quarter.
David Zalman: It should go down, our net margins improve with the repricing of the $2 billion that rose off of our bonds and the repricing on our loans. All of that should be a real positive to make our net interest margin go where we wanted to go.
Asylbek Osmonov: And I think overall our exit deposit cost was at end of the September was already lower than average on the Q3. So, trajectory wise we're going down. So, that's what we continue to see as CD reprice.
David Zalman: Probably one caveat I would say that if interest rates, if they came down, kept coming down at 50 basis points at the shop that affects us. It takes us a little bit more time to adjust. I think coming down at 25 basis points were fine, but they come down at bigger increments. It takes us a little bit longer to adjust I think.
Catherine Mealor: Okay. That makes sense. And then, you saw nice growth in the warehouse as you guided to last quarter. Any outlook to what we should see out on that business for the back half of the year?
David Zalman: Sure. I'll take that one. You're right. We ended up the quarter on a high note at $1.229 billion. I think we averaged $1.115 billion for the quarter. So, both of those were a little higher than we were forecasting. Just as a data point, we closed last night at $1.243 billion, so it's remained pretty strong. The average for this quarter through last night is $1.201 billion. I would say it's likely and again rates play a factor in this whole equation. It's likely those numbers come down for seasonal weakness in November and December. And if I had to put a number on it, I'm going to say we would average for the quarter probably $1.050 billion to maybe a $1.1 billion. So, it's going to come off from the highs we're at today. But frankly, we've enjoyed these highs for a little longer than I've anticipated.
Catherine Mealor: Yes, for sure. Okay, great. Thank you.
David Zalman: Yes. And just as a follow-up on that, we have recently added one new customer to the warehouse. That's the first time in a while we have been letting some customers go. I think we've let seven or eight customers go over the course of the last year. This is now going back the other way. We added a customer and we have had some increases to a couple of other customers. So, net-net, I think, we've added $140 million worth of new commitments so far this month.
Catherine Mealor: Great, thank you.
Operator: The next question is from Ebrahim Poonawala with Bank of America. Please go ahead.
Ebrahim Poonawala: Good morning.
David Zalman: Good morning.
Charlotte Rasche: Good morning.
Ebrahim Poonawala: I just wanted to follow-up on the NIM guidance and outlook that David you mentioned. I think the 3.27 average for full-year implies exiting next year by 3.4 something around between 3.4, 3.5. And you mentioned some prime rate assumptions. Does that assume another 50, 100 basis points of rate cuts over the next 12 months to get to that 3.27 ish average for full-year '25?
David Zalman: For 2025, the prime rate we have ending at 6.5% and with average 3.27, I don't have what the exit is going to be, but it should be higher than the 3.27. Do you have that Asylbek? I don't have it in front of me.
Asylbek Osmonov: I don't have it, but I think it's going to be a little bit.
David Zalman: Your numbers are probably pretty close to what you're saying.
Ebrahim Poonawala: And if I heard you correctly, the only the biggest risk to that view is if we get rapid rate cuts, slow rate cuts, steeper curve, all of that should be neutral to positive to that kind of a model outcome?
David Zalman: I think so. That's right.
Ebrahim Poonawala: That's helpful. And just separately, I think you mentioned about M&A, like, yes, there needs to be more M&A, but it's been tough. Obviously, elections may have implications, but if we don't have a big change in the regulatory backdrop coming out of elections. Do you still see it as conceivable that Prosperity could do a deal or two in the next six to 12 months?
David Zalman: I do. I mean, I'm not saying we're out there. We're not again, we're not out there just jumping to do deals. We're not going to do that. But if it's a good deal for us and that we can get some good accretion on it and it makes sense and it makes us stronger, then we'll do it. But again, we're not out there just trying to go out there and buy banks. Our real focus right now is to grow our bank and really focus on our net interest margin. For us right now, our biggest focus is our net interest margin to get it towards more normalized level. But again, we do do M&A, I'll give you kind of -- I know I read somebody where they talked about our growth a little bit. So, I'll just -- when I started with the bank, it was we were $40 million in size and had about 15 employees. Now we went public. In 1998, we were about $300 million in size. And so, over the years, we've grown organically and through M&A growth. From an organic standpoint, we used to grow 2% to 4% a year on the deposits and 6% to 8% a year on the loans. Having said that, it's hard sometimes for an analyst to see that because they don't see the amount of loans when we go into a bank and that we get out of those loans and have to make up that difference, but the combination of the M&A and the organic growth together has given us double-digit growth over all these years. And so, we've really, we've grown from a $300 million out of bank when we went public in '98 to almost a $40 billion bank today. So, the thought that we don't grow would just be a misnomer. It's just we do grow and we'll continue to grow. We are going to focus on our net interest margin right now. Again, I think that that's our primary focus. And again, I think growth has been harder by, if you want to say growth has been harder this quarter that's probably something that's legitimate because you haven't seen the loan growth and we didn't go out and purchase a bunch of deposits just to raise the cost of money. But again, everybody has to remember that that's what the Fed wanted. They wanted to raise rates this high. They want to slow down the economy, and that's kind of where we're at right now. So, long answer, I'm sorry. I just wanted to give you some color on it.
Ebrahim Poonawala: That's helpful, and that's good perspective, David. Just one on the name, given the name focus, I think Asylbek mentioned 40% fixed rate, 29% variable rate. I think you mentioned $2 billion in securities cash flows over the next year. What's that equivalent number for loans and what's the pickup given the current yield curve of what's maturing and what you're picking up when these things are repricing?
Asylbek Osmonov: So, you're right, on security we have $2 billion. Let's assume that right now our yield is around 2% and we're going to reprice it at $4.75. That's a pickup of $2.75. That's going to be going toward positive on our net interest income. On the loan side, I think we have about $5 billion cash flow annually. So, on the fixed one, that was at 40% or $5 billion, about $2.3 billion. I think the fixed rate was less than 5%, so they're going to get repriced at 7.5% on the loans. And about 30% variable, that's still lower than our loans we're putting up right now, so there's going to be a pickup there. And floating is floating, so we're not going to get any benefit on that. So, those are items that kind of push-pull that would get us to the net interest income that we're quoting that will continue to increase combination of the securities and fixed loan and variable loans.
Ebrahim Poonawala: That's helpful. Thanks for taking my questions.
Operator: The next question is from Matt Oney with Stevens. Please go ahead.
Matt Oney: Yes, thanks for taking the question. I guess kind of along the lines of the last comment from Asylbek, I want to ask more about the borrowings. I think there's almost $3.9 billion of borrowings at the quarter-end through that bank term funding program. Just looking for more color on what we should expect there over the next few quarters, especially in the absence of any loan growth?
Asylbek Osmonov: Yes, on that one, I think we lost Q1 and Q2, and some of the Q3 were building our cash position, that kind of more regulatory requirement we had. But I think we feel in the position that we're getting there. So, right now, I think we'll be paying down on the sum of the borrowings. And I know we're a little making the spread, but even we pay down some of them, it'll be NII neutral, but it will be NIM positive. And if we expect another cut, definitely we'll be paying down more on the borrowing. So, essentially, now with the cash flow from the bond portfolio should be going toward the paying down borrowing, because of the -- and getting the same spread I was mentioning about going from 2.0 to 4.0 and 4.76 that --
David Zalman: We did pay down with 400 or 500.
Asylbek Osmonov: We pay down 500, yes, in the -- [multiple speakers]
David Zalman: $3.9 million to $3.4 million.
Asylbek Osmonov: Yes.
David Zalman: That should help our net interest margin as well.
Asylbek Osmonov: Yes, it is going toward positive debt. So, we are all working toward paying down on borrowing a little.
Matt Oney: Okay. I appreciate that. And then, I guess, within the margin commentary we discussed in the call, kind of exiting the year in 2025, what are you assuming as far as the borrowing position by late 2025?
David Zalman: I did not have that in the model.
Asylbek Osmonov: Yes, on the model I think we're paying down the borrowing because once we get to the position of the --
David Zalman: Is it paying down more, I guess what you're asking, is it paying down more than the $500 million?
Asylbek Osmonov: Yes, I think it's paying down more than the $500 million.
David Zalman: $3 billion.
Asylbek Osmonov: I don't know exactly, but I know in the model we build in the cash and then we start paying down the borrowing. I would say paying down another billion, billion and a half.
David Zalman: Well, let's make sure we don't know that for sure. That's a big number. So, that's what we are looking towards.
Matt Oney: And maybe just to clarify as far as the overnight liquidity position, the big bill we saw at the quarter-end over $2 billion, do you expect to maintain that for most of next year or could we see some of that overnight borrow -- overnight liquidity, could that come down a little bit from where it was at September 30th?
David Zalman: We were ready for all that down. That's what we used to pay down the $500 million in the borrowing.
Asylbek Osmonov: Yes, I think the range we gave of the billion and a half to 2 billion, so that's going to fluctuate. So, we're comfortable at $1.5 billion and we're comfortable at $2 billion. So, based on situationally, we'll be somewhere in that range.
Matt Oney: Okay, that's helpful. Thank you, guys.
Operator: The next question is from Peter Winter with D.A. Davidson. Please go ahead.
Peter Winter: Thanks. I wanted to ask about the loan portfolio. If you could just provide maybe an update on the loan outlook and pipelines, and where you think that inning do you think you are in terms of the First Capital runoff?
Asylbek Osmonov: Oh, man, I'll take that one, but I might need some help on First Capital. I think First Capital runoff has been to date $420 million. I'd say we're near the end of the First Capital runoff. But there'll be some dribs and drabs, but nothing like the 420 million we've already run off. Obviously, that's been a headwind to growth, Peter. That said, I think, for the end of the year, it's going to be low single digits until after the election and maybe some additional rate cuts. And low single digits may trail its way into the first quarter of next year. And then, thereafter, to the extent we've got a -- let's say, a pro-business environment without going too deep into the election and lower rates, I think we move ourselves back into the mid-single-digit range. Again, part of that is not having the runoff of acquisitions and we don't expect a lot of runoff from the Lone Star dealer. Their assets were right down the middle of the fairway for us, whereas First Capital was not, 420 is a big runoff for a bank of that size. So, I think we're going to get back into the positive zone here going into next year. And the reason I'm delayed a little bit in Q4 and Q1 of next year is to the extent some of this growth comes out of real estate, we need to get deals approved and equity, their equity put into those deals before we start funding. So, that's why I'm putting up to a six-month lag on something better than the low single-digit range.
David Zalman: And I really do think that the election is going to -- that will be all the difference in the world. If we have a good regulatory environment and your interest rates do come down, that could bump our loans too. But again, I think a lot of borrowing this year has been affected by customers not really knowing which direction things are going to go. I think they're hesitant about that. And I think higher interest rates. So, if those two things can -- that will help going forward.
Peter Winter: And just so I could follow up, Kevin, when you say low single-digit, are you talking quarter-to-quarter? Like, is your thinking loans held for investment are going to start to grow slightly you know, going into the fourth quarter now?
Kevin Hanigan: That's annualized numbers, Peter, in the next two quarters.
Peter Winter: Okay, got it. And then, David, if I could say --
Kevin Hanigan: While we would get back into the mid-single digit range, I would never think of us as a double-digit, kind of 10% to 12%, 15% kind of annualized loan growth company, unless the economy just was booming and taking off at levels like we haven't seen. We'll be a solid GDP to GDP-plus kind of grower.
Peter Winter: Got it. Thanks. And then, David, just a big picture question on M&A, I mean, obviously, the focus, and you've had a great track record with M&A creating shareholder value when doing deals, but the question is, is there a preference to small fill-in deals versus maybe looking at a larger deal and willingness to go into a contiguous market that might move the earnings needle more?
David Zalman: I wouldn't say that it depends on the size of the deal. I don't know that has anything to do with the decision. The real decision is, is it a good bank that really enhances our position and makes us a stronger bank, and can we have accretion, whether that's a $2 billion bank in Texas or a $20 billion bank somewhere else that really inspires it. It really depends on the people; the people are willing to stay with us, the quality of the assets. I will say this; on a bigger deal we can't take the risk of buying a bank that has more asset issues. We have to be more careful on that than we do a bank that maybe is $2 billion, not that you don't have to worry about that. But I think it really all depends down to the deal that we're looking at. I mean, the deal that we're looking at really depends on the people and where it's located? How it helps us? And so there's a lot of bunch of different things that goes into the equation, but I don't know that it really boils down to either a $2 billion deal or a $20 billion deal really.
Peter Winter: Okay. Thanks, David.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over 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. You may now disconnect.
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