Prosperity Bancshares Inc
NYSE:PB
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Prosperity Bancshares Inc
Earnings Call Analysis
Q3-2024 Analysis
Prosperity Bancshares Inc
In the third quarter of 2024, Prosperity Bancshares demonstrated resilience in a turbulent banking environment, reporting net income of $127 million, up from $112 million year-over-year. This translates to earnings of $1.34 per diluted share, reflecting an impressive increase of 11.7% compared to the prior year. The bank attributes this growth largely to an improved net interest margin, which rose to 2.95%, up from 2.72% a year earlier, signaling effective pricing strategies and management of interest rate risks.
Net interest income reached $261.7 million in Q3 2024, climbing from $258.8 million in the previous quarter and $239.5 million a year ago. The bank's efficiency ratio improved to 46.9%, down from 51.8% the preceding quarter, indicating enhanced operational efficiency. With a tangible capital increase of $218 million over the past year, shareholders can appreciate the bank's commitment to growth while maintaining financial stability.
While total loans grew to $22.3 billion, marking a 4.4% increase from the previous year, it's crucial to note that the bank is strategically managing its loan portfolio. Excluding loans from recent acquisitions, the bank experienced a slight decrease of $161 million year-over-year, reflecting a cautious approach to asset quality. The average new loan production for the quarter was $259 million, slightly below the previous quarter's $278 million, suggesting challenges in loan growth amidst a tighter lending environment.
As of September 30, 2024, deposits stood at $28 billion, showcasing an increase of $774 million or 2.8% from the previous year. Despite this growth, the bank has not engaged in purchasing broker deposits, focusing instead on stabilizing core deposits following the banking turmoil earlier in the year. The allowance for credit losses has been carefully calibrated at $392 million, indicating a prudent approach to potential loan defaults.
Looking ahead, Prosperity Bancshares is optimistic about the economic landscape, highlighted by the influx of new residents in Texas and Oklahoma, which is driving demand for housing and related financing products. The bank projects continued growth in deposits and loans in the range of 2% to 4% and 6% to 8% annually, respectively, aided by strategic mergers and acquisitions that align with its growth objectives.
Management provided guidance indicating a net interest margin improvement, with an expected exit at 3% for the current year and an average of 3.27% for 2025. They anticipate responding flexibly to interest rate movements, implying that continued successful repricing of assets could enhance profitability. These metrics set the stage for a recovery trajectory in profitability as market conditions evolve.
With ongoing discussions regarding strategic opportunities in the banking sector, Prosperity Bancshares is positioned to capitalize on consolidation trends. Management emphasized their readiness to proceed with transactions that would enhance shareholder value and improve operational efficiency, reinforcing their diligent focus on long-term strategic growth.
The Board's decision to raise the quarterly dividend from $0.56 to $0.58 per share further underscores their confidence in the bank's prospects. With a track record of consistent dividend growth at an annual compound rate of 11% since 2003, Prosperity Bancshares showcases a commitment to delivering value to its shareholders. The continuing focus on robust margins, manageable risks, and operational efficiencies positions them well for sustained long-term success.
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Good morning, and welcome to the Prosperity Bancshares Third Quarter 2024 Earnings Conference Call. [Operator Instructions] 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 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.
Thank you, Charlotte. I would like to welcome and thank everyone for 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 Day. If the terms and conditions of any acquired loans does not meet certain standards, we exit the asset. Over the years, this process has resulted in lower nonperforming and charged off loans and makes us a stronger bank that can withstand various banking cycles. Our shareholders have come to expect this.
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 nonperforming assets totaled $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 nonperforming 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?
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 an increase of $22.2 million compared to $239.5 million for the same period in 2023. Fair value loan income for the third quarter of 2024 was $4.8 million compared to $7.2 million for the second quarter of 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.
Noninterest 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 noninterest income during the second quarter of 2024 was due to a net gain of $10.7 million resulting from the gain on Visa stock conversion, partially offset by the loss on sale of investment securities.
Noninterest 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 noninterest expense during the second quarter 2024 was primarily due to merger-related expenses of $4.4 million and FDA's special assessment of $3.6 million.
For the fourth quarter 2024, we expect noninterest 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 September 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?
Thank you, Asylbek. Our nonperforming assets at quarter end 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, $2.2 million in nonperforming assets have been removed or put under contract for sale. September 30, 2024 nonperforming 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 million ] 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.
Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.
We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Manan Gosalia with Morgan Stanley.
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've previously given?
Again, I think we're sticking with what we said. We should exit our NIM at 3% at year-end. Again, there's a lot of things that go into that, that's [indiscernible] 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 will 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 that's just what the model is showing right now. And again, those are taken 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 is 6%. So that's the difference that's going into those.
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?
Really, historically, and I'm just pulling out a sheet of paper, just trying to making sure what I tell you is accurate. But really, it doesn't change a lot over a 12-month period where the interest rates went up 200 basis points or went down 200 basis points. I don't see -- I think of interest rates. If interest rates where 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 than the interest margin, 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 think 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.
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?
Our models are showing that everything that we've been saying throughout the year is still going forward for the end of this year and also going forward for '25 and also and even '27. So what we're looking forward still looks very good for us.
The next question is from Catherine Mealor with KBW.
Just follow-up on [ that on just ] deposit costs, 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 my 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 the next couple of quarters? Or is it more kind of stable and then more of this NIM lift is coming from the asset remix?
Again, gut feeling, but if interest rates go where they're at and 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 deposits. But again, we easily could have raised that up if we wanted to, we didn't. We wanted -- our real focus is on this net interest margin, and that's kind of where we're focused. I think that our bases, and Asylbek can jump in any time he wants on this deal. But again, for every 100 basis points down we -- our beta is 22 basis points.
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 the 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 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 deposits, cost of funding side. And we do expect cost of deposits going down next quarter.
It should go down. Our net margins improved with the repricing of the $2 billion that rolls off of our bonds and the repricing of our loans, all of that should be a real positive to make our net interest margin where we want it to go.
And I think overall, our exit deposit cost was at end of September was already lower than average on Q3. So we trajectory-wise, we're going down. So that's what continue to see us -- see the reprice.
Probably one caveat, I would say that if interest rates -- if they kept coming down at 50 basis points of the shop, that affects us, it takes us a little bit more time to adjust. I think coming down to 25 basis points, we're fine, but if they come down in bigger increments, it takes us a little bit longer to adjust, I think.
And then [indiscernible] growth in the warehouse as you guided to last quarter, any outlook to what we should see out of that business for the back half of the year?
Sure, I'll take that one. You're right. We ended up the quarter on a high note of $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 them, I'm going to say, we would average for the quarter probably $1.50 billion to maybe [ $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 have anticipated.
Yes. And just -- this is 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 let 7 or 8 customers go over the course of the last year. This is now going back the other way. We added the 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.
The next question is from Ebrahim Poonawala with Bank of America.
I just wanted to follow up on the NIM guidance and outlook. David, you mentioned, I think, the [ 3.27% ] average or 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 the [ 3.27-ish ] average for full year '25?
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.
I don't have it. [indiscernible]
Your numbers are probably pretty close to what you're saying.
And if I heard you correctly, the only -- the biggest risk to that view is if we get rapid rate cuts. Slower rate cuts, steeper curve, all of that should be neutral to positive to that kind of model outcome?
I think so. That's right.
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 you could do a deal or two in the next 6 to 12 months?
Dave, I mean, I'm not saying we're out -- 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 that we can get some good accretion on it and it makes sense, and it makes us stronger than 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 a more normalized level. But again, we 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, we were $40 million in size and had about 15 employees. And then we went public in 1998, we were about $300 million in size. And so over the years, we've grown organically [ through ] M&A growth. From an organic standpoint, we usually grow 2% to 4% a year on 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 grown from a $300 million 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 will continue to grow. We are going to focus on our net interest margin right now. Again, I think that's our primary focus. And again, I think growth has been harder, but 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 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 a long answer, I'm sorry, I just wanted to give you some color on it.
Just one on the NIM, given the NIM focus. I think Asylbek mentioned 40% fixed rate, 29% variable rate. Do you -- 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?
So you're right, on security, we have $2 billion that -- let's assume that right now, our yield is around 2% and going to reprice at 4.75%. [ Once we have that, that's ] a pickup of [ 2.75% ]. That's -- we're 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% of $5 billion about what around $2.2 billion, $2.3 billion on the -- I think the fixed rate was like 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.
The next question is from Matt Olney with Stephens.
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?
Yes. On that one, I think we -- last Q1 and Q2 and some of the Q3, we're building our cash position at 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 some of the borrowings. And I know it's a little making the spread, but even we pay down, some of them will 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 the cash flow from the bond portfolio should be going toward the paying down borrowing because of the -- and getting that same spread I was mentioning about going from 2% to 4.76% [ that, that cost ].
We did pay down, what, [ $400 million or $500 million ]?
We paid down [ $500 million ] in the [indiscernible].
3.9% to 3.4%. Yes, that should help our net interest margin as well.
Yes. It's gone toward positive that. So we are working towards paying down our borrowing a little.
Okay. I appreciate that. And then I guess, within the margin commentary, we discussed on the call kind of exiting the year in 2025, what are you assuming as far as the borrowings, the borrowing position by late 2025.
I didn't have that in the model.
Yes, on the model, I think we're paying down the borrowing because once we get to the position of the [indiscernible].
Is it paying down more? I guess what are you asking? Is it paying down more than the $500 million?
Yes, I think it's paying down more than the $500 million. I don't know exactly, but I know in the model, we built in the cash and then we'll start paying down the borrowing. I would say, pay down another $1 billion, $1.5 billion.
Well, let's make sure we don't know that for sure, that's a big number.
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 liquidity? Could that come down a little bit from where it was at September 30?
We've already brought that down. That's what we used to pay down the $500 million in the bar.
Yes. I think the range we gave at the $1.5 billion to $2 billion, so that's going to fluctuate. So we're comfortable at $1.5 billion, and we're comfortable $2 billion. So based on situationally, we'll be somewhere in that range.
The next question is from Peter Winter with D.A. Davidson.
I wanted to ask about the loan portfolio. If you could just provide maybe an update on the loan outlook and pipelines and where are you -- what inning you think you are in terms of the First Capital runoff?
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. So I'd say we're near the end of the first capital runoff. 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 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, 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 deal. Their assets were right down the middle of a fairway for us, whereas First Capital was not. [ $420 million ] 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 their equity put into those deals before we start funding. So that's why I'm putting up to a 6-month lag on something better than the low single-digit range.
And I really do think that the election is going to -- that will be all the difference in the world. We have a good regulatory environment and your interest rates do come down, that could bump our loans to -- 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 [indiscernible], that will help going forward.
And just if I could follow up. Just, 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 going into [ a fourth quarter mark ]?
That's annualized numbers, Peter, in the next two quarters. David, I would say while we would get back into that 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 unless the economy just was booming and taking off at levels like we haven't seen will be a solid GDP to GDP plus kind of grower.
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. 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?
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 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 as $2 billion, not that you don't have to worry about that. But I think it really all depends down to the deals 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 a 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.
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, 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.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.