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spk17: Good day and welcome to the Prosperity Bank Shares third quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
spk11: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' third quarter 2022 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay for the next few weeks. I'm Charlotte Rasche, General Counsel of Prosperity Bank Shares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tim Tamanis, Jr., Chairman, Osobek Osmanov, Chief Financial Officer, Eddie Saffody, Vice Chairman, Kevin Hannigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Merle Carnes, Chief Credit Officer, Maze Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. David Zolman will lead off with a review of the highlights for the recent quarter. He will be followed by Osobek Osmanov, who will review some of our recent financial statistics, and Tim Tomanis, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity Bank Shares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bank Shares filings with the Securities and Exchange Commission, including Forms 10Q 10K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.
spk06: Thank you, Charlotte. I'd like to welcome and thank everyone listening to our third quarter 2022 conference call. This is an exciting time for prosperity. On October 11th, we announced the signing of a definitive merger agreement with First Bank Shares of Texas, Inc., headquartered in Midland, Texas, and Lone Star State Bank Shares, Inc., headquartered in Lubbock, Texas. On a pro forma basis, we will have over $6 billion in assets located in our West Texas market. And the number one market share in the combined Midland and Odessa markets and the number three market share in Lubbock. We also recently announced that the board of directors voted to increase the fourth quarter 2022 dividend to 55 cents a share. This represents a 6% increase in dividends declared in 2022 compared with 2021. The increase reflects the confidence the board has in the continuing success of our company and in the communities we serve. Our earnings reported net income of 135.8 million for the quarter ended September 30, 2022, compared with 128.6 million for the same period in 21. On a lean quarter basis, third quarter net income increased 7.3 million or 5.7% compared with the second quarter of 2022. Our net income for diluted common share was $1.49 for the quarter ended September 30, 2022, compared with $1.39 for the same period in 2021, a 7.2% increase. Prosperity continues to exhibit solid operating metrics and return on tangible equity of 16.4% and return on assets of 1.45% for the third quarter of 2022. The net interest margin on a tax equivalent basis was 3.11% for the three months ending September 30, 2022, compared with 3.1% for the same period in 2021, and 2.97% for the three months ending June 30, 2022. Excluding warehouse purchase program and PPP loans, loans on September 30, 2022 were 17.6 billion compared to 16.6 billion on the September 30, 2021, an increase of 981 million or 5.9%. Our linked quarter loans, excluding warehouse purchase program and PPP loans increased 531 million or 3.1%, 12.5% annualized from 17 billion on June 30, 2022. We did not have a lot of loan growth. We did not have the loan growth we expected in the first quarter of 2022. However, the loan growth in the second and third quarters has been much stronger. Deposits on September 30, 2022 were $29.3 billion, a decrease of $151 million or one-half of 1% compared with $29.5 billion on September 30, 2021. Our linked quarter deposits decreased $565 million or 1.9% from $29.9 billion on June 30, 2022. Our linked quarter non-interest bearing deposits increased by 122 million. On a year-over-year and linked quarter basis, our core deposits are higher, but total deposits decreased slightly, primarily due to public fund seasonality. Prosperity generally experiences seasonality with its public fund deposits as public fund customers use the tax dollars they receive in December and January throughout the year, resulting in lower deposit balances in the second and third quarters of the year. In addition to their normal use of funds, public fund customers are moving their investment funds to higher yielding investments outside of the bank which are now available as interest rates have increased. With regard to asset quality, our non-performing assets total 19.9 million or six basis points of quarterly average interest earning assets on September 30, 2022, compared with 36 million or 11 basis points of quarterly average earning assets at September 30, 2021, and 22 million or seven basis points of quarterly average interest earning assets on June 30, 2022. The reduction in non-performing assets year-over-year is 45.6%. We are excited about our pending acquisitions of First Bank Shares of Texas and Lone Star State Bank Shares. First Bank Shares operates 16 banking offices in West, North, and Central Texas. including several new markets for prosperity, and Lone Star operates five banking offices in West Texas. We look forward to partnering with the First Bank shares and Lone Star teams. We continue to believe that due to increases in technology and staffing costs, additional government regulation, and succession planning concerns, there will be merger activity. We intend to remain active in M&A and we continue to have conversations with potential partners. The Texas and Oklahoma economies continue to benefit from companies relocating from states with higher taxes and more regulations. This increase, combined with people moving to the state, requires additional housing and infrastructure, a driver for loans and increased business opportunities. Thanks again for your support of our company. Let me turn over our discussion to Asilbek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
spk12: Asilbek. Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three-month end of September 30, 2022, was $260.7 million compared to $248.6 million for the same period in 2021, an increase of $12.1 million or 4.9%. The current quarter net interest income includes fair value loan income of $1.2 million compared to $5.4 million for the same period in 2021, a decrease of $4.1 million. Interest income on securities for the third quarter of 2022 increased $22.5 million, while interest expense increased $7.1 million compared to the same period in 2021. The net interest margin on a tax-equivalent basis was 3.11% for the three months ended September 30, 2022, compared to 3.10% for the same period in 2021 and 2.97% for the quarter ended June 30, 2022. Excluding purchase accounting adjustments, the net interest margin for the quarter ended September 30th, 2022 was 3.10% compared to 3.03% for the same period in 2021 and 2.97% for the quarter ended June 30th, 2022. Non-interest income was 34.7 million for the three months ended September 30th, 2022 compared to $34.6 million for the same period in 2021 and $37.6 million for the quarter ended June 30, 2022. Non-interest expense for the three months ended September 30, 2022 was $122.2 million compared to $119.8 million for the same period in 2021 and $122.9 million for the quarter ended June 30, 2022. For the fourth quarter of 2022, we expect non-interest expense to be in the range of $120 to $122 million. The efficiency ratio was 41.4% for the three months ended September 30, 2022, compared to 42.3% for the same period in 2021 and 43.1% for the three months ended June 30, 2022. During the third quarter of 2022, we recognized $1.2 million in fair value loan income. As of September 30, 2022, the remaining discount balance is $6.5 million. Due to the low remaining discount balance, we do not expect fair value income of any significance going forward. The bond portfolio metrics at 9-30-2022 showed a weighted average life of five years and projected annual cash flows of approximately $2.2 billion. And with that, let me turn over the presentation to Tim Timanis for some detail on loans and asset quality.
spk07: Thank you, Asilbek. Non-performing assets at quarter end September 30, 2022, totaled $19,878,000, or 11 basis points of loans and other real estate. compared to $22,187,000 or 12 basis points at June 30th, 2022. This represents approximately a 10% decrease in non-performing assets. The September 30th, 2022 non-performing assets total was comprised of $18,107,000 in loans, $13,000 in repossessed assets, and $1,758,000 in other real estate. Of the $19,878,000 in non-performing assets, only $388,000 are energy credits. Net charge-offs for the three months ended September 30, 2022, were $1,780,000 compared to $1,204,000 for the quarter ended June 30th, 2022. No dollars were added to the allowance for credit losses during the quarter ended September 30th, 2022, nor were any dollars taken into income from the allowance. The average monthly new loan production for the quarter ended September 30th, 2022 was $659 million. Loans outstanding at September 30th, 2022 were approximately $18.5 billion. The September 30th, 2022 loan total is made up of 42% fixed rate, 31% floating rate, and 27% variable rate. I will now turn it over to Charlotte Rasche.
spk11: Thank you, Tim. At this time, we are prepared to answer your questions. Matt, can you please assist us with questions?
spk17: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 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 2. At this time, we will pause momentarily to assemble our .
spk16: And our first question will come from Jennifer Demba with Truista Securities. Please go ahead.
spk10: Thank you. Good morning.
spk13: Good morning.
spk10: Question also back on the net interest margin outlook over the next few quarters. Do you think the beta is going to go up for prosperity, or do you think you could kind of continue to see net interest margin, some slower margin expansion over the next few quarters?
spk06: Jennifer, if you don't mind, I'm going to let Auspec talk about the betas, but I would like to just highlight the net interest margin. We saw a good net interest margin expansion this quarter, and we should see a net interest margin expansion over, say, the next six, 12, and 24-month period. We did raise rates recently to be more reflective of our competition's rates, so there could be a slight impact to net interest margin in the fourth quarter. However, in the long run, our bank historically has always run a minimum of 3.25% to 3.3% net interest margin in a normal rate market. So I think that we have a lot of room to run on the net interest margin expansion. However, the fourth quarter, maybe you might see a slight dip in that. Maybe not. I don't know. Just because of the higher interest rates, we try to be more competitive with some of the competitors. Now, if you want to talk... About the betas, I think that's fine.
spk12: Yeah, specific on betas. During the third quarter, our betas on interest-bearing deposits came in about 9, 10 base points. That's what we projected. And I think with the recent rate that Mr. Zalman just mentioned, our beta will increase a little bit. But if you're looking for the cycle since the rates have started, with a new rate sheet that we just disclosed, I think our beta on interest bearing deposit will be about 12 basis points. That's on the based on Fed increasing 300 basis points increase on their Fed increase. So it's going to accelerate in the fourth quarter. But again, it's what we should stabilize hopefully after that.
spk10: And your loan growth is, as you pointed out, has been really strong the second and third quarter. Are you expecting it to moderate? in the next couple of quarters?
spk06: I'll take that. I think that, you know, again, we had a good second quarter. We had a good third quarter. And just looking at where we're at right now, Jennifer, it looks like it's going to be a good fourth quarter. Again, everything being consistent. Having said that, next year, you know, depending I guess if, you know, how high interest rates go uh it's hard to say i know some some banks have said that they still see strong loan demand next year however i would still you you'd have to be just you'd be to be a little bit cautious with with it with interest rates going up as much as with as much as they are so it's hard to project for next year but i would tell you that the fourth quarter looks it looks very good again for us
spk16: Our next question will come from Brady Gailey with KBW. Please go ahead.
spk04: Hey, thanks. Good morning, guys. Good morning. I just wanted to start with expenses. I feel like expenses have been in that 120 to 122 range for at least the last year or so. So you really kind of buck the industry by keeping expenses relatively flat, despite seeing a lot of inflationary pressures, especially on wages. As we look to 2023, Do you think the expense base has to move a little bit more and has to feel a little more of the inflationary pressure? Or do you think that you can continue to keep expense creep to a minimum?
spk12: I think if you're looking for 2023, we have our merit increase in the second quarter of each year. So I expect there will be increase due to the merit increase like we did this year. If you, as we mentioned, you know, in the second quarter, it went up from our 120 to 122 and probably we're going to have the same increase. But I mean, we really do a good job of managing our costs. You know, I know that there's a lot of pressure on the cost side of it and we feel it as well, but we're trying to find an efficient way. So there might be some categories increasing, but we're trying to bring some efficiency on the other ones. So if you're looking big picture, yeah, it's gonna go up because of the merit increase and some inflationary pressure with it. But I think our efficiency ratio, if we continue to grow our revenue efficiency ratio should stay flat or around that we historically been at 42, 43%. All right.
spk03: And then I think as of the end of June, so last quarter,
spk04: the unrealized losses in your bonds were about 1.1 billion. I know you guys are held to maturity, not available for sale for most of them, so it's not really reflected in your tangible book value. But I'm just curious, where did that unrealized loss move to as of the end of this quarter?
spk12: For the end of the quarter, it went up to 1.3 net of tax. So we just increased a little bit. So it went from 1.1 to 1.3.
spk03: All right, and then my final question is just on M&A.
spk04: You know, I know you have these two acquisitions pending, but, you know, it just also feels like from talking to you all over the last couple of years, you know, you've been interested in doing kind of a larger, more transformational acquisition. You know, if the right additional M&A opportunity came along, you know, do you feel comfortable going ahead and progressing with that, or do you think with two pending acquisitions, You guys are kind of in a pause mode until you get those closed and integrated.
spk06: I'll answer that. These are the two that we're doing right now. They're great merger candidates with us, and I think they're fine. However, the combined assets of both of them are just a little over $3 billion. So the answer to your question would be yes, we would still be interested in more combinations or mergers and acquisitions if possible. Even with these two, yes.
spk03: Okay. All right, great. Thank you, guys.
spk16: Our next question will come from Dave Rochester with Compass Point. Please go ahead.
spk02: Hey, good morning, guys. Good morning. Good morning. On the deals, first, congrats on those. I was just curious, if you're thinking about running anything off in any of those loan books, sort of like what you did with Legacy and the structured CRE, any changes coming for either of those banks?
spk06: I don't think that we see anything big in either one of these. One's portfolio, we really didn't see anything, didn't even really have to have a a meeting afterwards. It was very clean. With the other bank, we saw some issues, but we discussed it. I don't think it'll be that big of a deal, really. Randy, do you see anything? No, there's just a nominal number of loans. There may be a little uptick in non-performing, but again, it won't be for longer periods of time.
spk15: It doesn't seem like it's an uptick because we're so low. If it moves $5 million, you see it a lot. It's a small deal.
spk06: But, you know, they do have more, probably will have more, a little bit more non-performing. But, again, it won't be significant.
spk07: I think it's safe to say there's no piece of what they do that doesn't fit. There may be a loan here and a loan there. Right. But in terms of any major aspect of their lending that doesn't fit, that's not the case.
spk02: Okay, great. And back on the deposit beta discussion, have you guys updated your thoughts on that cycle beta, given that acceleration coming up that you mentioned? I think previously you talked about like 36% for the interest-bearing deposit beta that's baked into your asset sensitivity assumptions, something like that. Any updates there?
spk12: Yeah, we did not update because with the rate changes, what we discussed earlier, if you're looking at the fourth quarter interest-bearing deposit, I think the beta coming up around 30 basis points. It's still below than our model running 36. So we feel comfortable at where we are on our model, that 36 beta for interest-bearing deposits. So we're not planning to change, but we just have to monitor how the competition is doing and what the environment is before we'll change the model.
spk02: Gotcha. Was that bump up at the end of 3Q or at the beginning of 4Q? I'm just wondering if you guys had the spot rate at the end of 3Q, if that would be helpful for... Yep.
spk12: That was a combination. You know, we did a little bit of end of the third quarter and a little bit in the beginning of the fourth quarter. So it's a combination.
spk02: Okay. And maybe just another one on the margin front. Where are you guys seeing new loan yields and securities yields at this point?
spk06: I think we talked about this yesterday. We're seeing probably new loan yields come in between 575 and 6.5%.
spk02: Great. And on the security side for any kind of replacement you're doing?
spk06: Yeah, the security, of course, the last day or two, it's been off a little bit, but, you know, probably our replacement rate on securities is anywhere between five and a quarter and five and a half percent right now.
spk02: Okay. Maybe just one last one.
spk06: I'm sorry, go ahead. I said it's a big difference between our 1.82% that we're yielding on 14 right now. So that's why I We talk about net interest margin. I don't want it to get out of perspective because we have so much money that reprices over the next couple years that we should be in very good shape despite raising interest rates in the short term slightly. Our 6, 12, and 24-month time horizons look really favorable for us.
spk07: And we have loans that continue to fund up that are at these higher interest rate levels.
spk06: Well, you also are... our loan portfolio, I think probably a third of it rose off every year. So, you know, we have a lot of, a lot of repricing.
spk07: There's repricing and additional funding up that run both that come into play in a favorable way, obviously. All right.
spk02: Yep. Appreciate that. Maybe just one last one on the buyback. I know you guys didn't do anything this quarter and you got the deals announced. I was just curious, you know, we have a downdraft in the market and, you know, over the next three to six months while you're still working on closing these. Is there a plan in place? Is there anything that you guys can do to buy back stock during that period of time? Would a 10B51 get you able to do that while you still get the deals outstanding?
spk06: I don't think that we have to have a 10B51. If the stock goes down now with this being announced, we can still buy back our stock.
spk14: Okay. Great. All right. Thanks, guys.
spk16: Our next question will come from Brad Milstaps with Piper Sandler. Please go ahead. Hey, good morning. Thanks for taking my questions.
spk08: Good morning. Good morning. David just wanted to follow up on the bond discussion. I guess one, are you buying bonds in a big way right now? wholesale borrowings creep up a little bit. Is that more just sort of a stopgap because of the runoff in public funds, or is that something we need to think about? Maybe more of a permanent part of your funding structure, just kind of wanted to see how you're thinking about that going forward.
spk06: Our borrowings are probably a combination of public funds rolling off, but we're still buying, too. We're not buying at the pace that's just crazy, but We're still buying $50 million blocks here and there at the same time. So we always said that as rates go up, we'll leverage the bank a little bit. And so that's what we're doing. And we're just really buying in advance of the bonds that are coming off, really. I agree.
spk08: Okay. And then maybe I just wanted to follow up with Kevin maybe on the warehouse. You know, I think it was down, you know, about what you said it was going to be. Just kind of curious what your crystal ball says there. And then secondly, maybe the yield. I mean, I know those are floating rate, but I know there can be some kind of pricing feelings there that the rate was up maybe a little bit more than I thought. Can you comment on, you know, kind of further, you know, increases there in rate that might offset, you know, some of the decline in volume?
spk05: Yeah, so just looking back at the quarter, we thought somewhere between $900 and $950, I think, for the average balance. It came in at $939. So right in line with what we were thinking. Quarter to date, we're averaging right at $838 million, Brad. So it's dipped down a bit. And we've actually seen a couple of days where balances have been $755, $760 million range. So As I think about the quarter in general, I'm going to say we probably averaged between $775 and $800 million. So down a bit from where we were. That is an entirely daily floating rate portfolio. And for the quarter, the weighted average coupon was $4.58. I did a little back of the envelope this morning on where the weighted average coupon is likely to be today on that portfolio, and it's right at 5.44.
spk03: So it's up just under 100 basis points from what it averaged last quarter.
spk08: That's great. Thank you very much. And then maybe a final one for me, David. A fair amount of your growth this quarter was in the construction category. Just be curious, I mean, is that Is that at a level you don't want to take higher at this point, or do you have other projects out there that you know that are going to fund up? Just kind of curious how much more growth you're sort of expecting out of that bucket of loans.
spk07: I guess the bottom line is we're looking at it carefully. Having said that, there still appears to be reasonably good demand for those projects. It's seems to be intuitive that that might be falling off. And maybe it has a little bit. But just as an example, we approved a $64 million loan last week that we think is a top quality, very good loan. And it's a construction to permanent on a commercial project. So those types of credits are still out there. They're still in play. If we see a good one, we're going to try to make it and bring those customers in. We're not really backing away from it at this point.
spk06: This is kind of an opportunity time for us where a number of the banks, as interest rates have gone up and their liquidity has had issues, maybe have some liquidity issues with deposits going out and worrying about asset quality, a number of those things, this is really a time for our bank that's able to shine, that we can really go in. We have tremendous amount of liquidity. We have good asset quality, and we can really cater now to the, and maybe get a little bit better rate, a more competitive rate, because it's not so competitive in that field.
spk14: Great. Thank you, guys. I appreciate it.
spk17: Our next question will come from Ibrahim Poonawalla with Bank of America. Please go ahead.
spk01: Hey, good afternoon. Just wanted to follow up. I had a couple of quick questions. One, David, you mentioned about the 2023 outlook looks cautious. Is there anything that you're seeing in terms of the customer base that suggests like we're losing momentum and the rate hikes that we've had since March is having a role in terms of behavior among your clients, how they're thinking about hiring and investing, or are you just being cautious because of the unknown?
spk06: No, I think it's Actually, when I look at it today, I see the consumer really holding up stronger than I think anybody could ever imagine. I think that maybe, this is just a personal thought, maybe the higher wages that people are getting right now is keeping the consumer going and they're really still buying things. My cautious probably, I don't know if I should have used the word cautious, but just interest rates continuing to go up strongly. I think that either depending on what the Federal Reserve does, this can either be a hard landing or a soft landing. And if we can just maybe not increase rates so much and maybe see where we go from here, we might be able to have a soft landing out of this. But it looks like maybe some of the smaller customers are not borrowing as much. Our middle market customers seem to be borrowing more. But you're definitely impacted in the housing market. Probably half of them, I mean, somebody paying 6% or 7% comparing to paying 2% or 3%, it's going to keep some people out of the market. And that's just why I think you have to be a little bit cautious. But again, this is exactly what the Fed wanted to happen. They wanted to increase unemployment and also bring down inflation. And so hopefully we can do it with a soft landing. That's what I'm hoping for.
spk05: Yeah, I'd say if we're being cautious in a particular area, it would be lot development loans that would be sold to home builders. We're thinking this is the time to slow that down a bit. Most of our home building clients, I'd say their month-to-month sales are off, you know, 15% to 20%. So we're cautious on that, particularly in the first-time buyer and move-up price points.
spk06: Yeah, I mean, you just have to, I mean... Anybody can see it. I was talking to my brother who's in the real estate business, and he said, you know, a month or two ago, you just answered phone calls that you wanted to answer, and today the phone calls are down probably 30%, 30% or 40%. So that market is definitely going to be affected. So you just have to know that.
spk01: Got it. That's helpful. And I guess just one other, and sorry if I missed it. In terms of the deposit mix, when we look at sort of non-interest-bearing deposits, like one, do you expect deposit balances to grow from here? And how do you think that mix evolves as we think about maybe some of the non-interest-bearing deposits moving into interest-bearing?
spk06: Our non-interest-bearing deposits actually increased 122 million this month, I mean this quarter. Next quarter, You know, we see a lot of competition from a lot of banks. I guess that's why we kind of raised our rates. We kind of took our money market account from like about 1% to 2%, and then we kind of created a one-time CD that doesn't really change your cost a lot until maybe a lot of people go into it to get around 3%. So I think that you have to, you know, even though those are good rates, you Consumers can still go to the treasury markets, and you can probably still get 440 for a two-year or 438. Even a six-month, you can get a lot. So people wanting to go to that. So I guess the answer to the question I see, we normally have about 2% to 4% growth and probably deposits of your organic growth. Okay. I don't know. I don't know that you, I would say, yeah, I don't think you would see that maybe next year. You'd probably have to bring that down to maybe, what, 2% also back, or what do you think? Or that's what we're shooting for.
spk12: Yeah, it's very hard to predict what, especially coming off from the, you know, the pandemic years when there's so much liquidity and what government's trying to do with, you know, quantitative tightening. It'll be hard to predict. But I'll just add a little bit more detail related to fourth quarter. you look at our public funds you know it usually goes up end of the year because of the tax collection so we expect that coming in in the end of december and benefit us in the first quarter but um yeah i think for the budget purposes we right now we're thinking about two percent on the core deposit for next year i think if you're the third quarter we really didn't see any core deposits we didn't grow that much i think we grew about 80 million for the quarter which is about 1.2 percent however
spk06: The fourth quarter, we are starting to see core deposits, some of those people moving into some of those different investments and stuff like that. So not really knowing the exact answer to the question, but I think we have to be aware of that.
spk01: That's good, Colin. Thank you for taking my questions.
spk17: Our next question will come from Matt Olney with Stevens Inc. Please go ahead.
spk09: Hey, thanks. Good morning. Good morning. I just want to go back to the change of some of the deposit rates that you already mentioned, and I just want to clarify something. I think you said you initially changed some of these rates earlier in the third quarter, and so 3Q Results captured a portion of that, but it sounds like the bigger, more notable changes came at the end of the quarter, so fourth quarter will capture all those changes. Did I capture that right?
spk06: You'll see some of the third quarter captured some of it, but it was toward the end of the quarter, but The bigger increases that we started paying was probably going to be impacted in the fourth quarter for the most part.
spk12: That's right. Yeah, the rate increase we did, it was the end of the second quarter that we mentioned in our call, and we did increases in the end of the third quarter and additional increase in the beginning of the month. So, yeah, the full impact of that we'll see in the fourth quarter.
spk09: Okay. And so as that relates to the net interest margin, it sounds like you expect – some positive migration upwards next few quarters, although fourth quarter, it sounds like that could be somewhat delayed a little bit given some of these movements here. Is that fair?
spk06: I think that's exactly right. I mean, when we look at our models, again, we have so much money that reprices. Again, our bond portfolio, $14 billion, is like earning about 1.82%. So today, you know, as that reprices, you're going to five and a quarter. But having said that, For the fourth quarter, I think you could still see possibly a slight downward trend in the net interest margin for one quarter probably. That's just my gut feeling. It may or may not happen. It depends on the amount of loans that happens. It depends on the amount of public funds that come in. So there's a lot of variables that come in, but just raising those rates, I think that's a possibility.
spk09: Sure. Okay. And then just to clarify, The premium amortization expense on the bond portfolio declined by a healthy amount in the third quarter. Also, Vak, you may have mentioned this and I missed it, but what's the outlook for that in the near term?
spk12: Yeah, when we looked at it, how we, you know, bond portfolio, the fourth quarter, we expect about $8.5 and $9 million on premium amortization in the fourth quarter, which will be down from $10 million we had in the third quarter. Okay.
spk16: Okay. Thanks, guys. Appreciate it. Thank you.
spk17: Again, if you have a question, please press star then 1. Our next question will come from Bill Karkashe with Wolf Research. Please go ahead.
spk00: Thank you. Thanks for taking my question. David, you discussed in your opening remarks clients that are moving their funds off balance sheet. Can you give a bit more color on how that process has gone? Are you typically having a conversation with your corporate clients, for example, before making the decision to let them go? Any color on that would be helpful.
spk06: You know, I don't know that I can give you a lot of color. I can say with the public funds, those are relationships that we really entered into to really keep their operating accounts and never really tried to keep their investment of funds because they really just are rate, it's rate driven. So as interest rates went up, you know, we didn't try to go out the half place of the I forgot some of the names they can go to, but they could get much higher rates, and we didn't try to compete with them. We probably have 5 to 10, 15 customers that may have asked because they have real strong relationships and asked if we could do some adjustments on their rates. We did that. But what we're seeing now, I think, we are seeing customers that are really starting to look. I think it's become, you know, you pick up the paper today and, where you didn't see rates, everybody's advertising rates. So I think it is becoming more competitive, and there would be more pressure on people looking at, you know, if you don't go up to a certain amount, they may go somewhere else. That's just my feeling. Even with that, banks going up, I mean, not many of us are paying what, treasury is or something like that. So they definitely have that option. I don't know if I'm giving you a whole lot of color. It just might be. Yeah, no, that's great.
spk00: Yeah, that's super helpful. Yeah, I appreciate that. And maybe just to follow up on that, are there any cases where you've been able to retain the relationship with accounts that have moved off balance sheets so you still have the ability to bring them back on balance sheet later if necessary, even if at a higher rate? Or is there generally no longer a relationship once they've moved off balance sheet?
spk07: Let me try to address both sides of that. Number one, certainly not 100%, but for the most part, we normally hear from our major customers if they're thinking about moving money because of freight. It's unusual that they would just move it and not make contact and ask us where we are on the matter. Once again, that's not 100% of them, but... The majority of them will contact us and give us the opportunity to either satisfy them or say that they're asking for something that's just not in our best interest. Then once it gets done, if the money is moved, we normally do have an opportunity to bring those funds back. They stay in contact with us over time. ask us about where our rates are and what our appetite for additional funds is. So some do leave and never come back, but I would say the majority we have the opportunity to stay in contact with and bring some, if not all, that money back at certain points in time.
spk06: But again, we're not a bank where people come just to bring a CD. That money that leaves is really just, we still keep the majority of their relationship, their operating accounts and stuff like that. This is just something. So the answer is yes. If you ever want to pay or match that stuff, you definitely can bring it back because, again, we're not a bank that just, they come to us because of rate. These are true relationships where they have a bunch of different relationships with us. And this is just excess funds for the most part.
spk07: That's exactly right. They don't typically move all their money they move a portion of it that typically is excess for them into a higher rate, and they keep their operating funds with us.
spk05: That's great. We had a sample last week where we got a call from a very large client, and I think Tim and David and I were already on the phone together or in a committee meeting together, and it was brought to me by one of our bankers, and I interrupted the meeting and said, hey, here's where these people are. You know, we offered them probably less than half than they could have gotten in the treasury market, and they decided to leave everything with us.
spk13: Yeah.
spk05: Just out of the friction cost and wanting to have the liquidity around. And I'm talking about a very, very, very large depositor. And they appreciated the basic six or seven-minute turnaround time for us to make a decision and give them a number, and they left it all with us.
spk07: Exactly.
spk05: It's really helpful.
spk07: That happens more often than not. It's not 100%, but it is more often than not.
spk05: Our bankers can get to us if something like that pops up. Tim is always around and answers his phone immediately. If it's customer-related, we make sure we're available.
spk00: Thank you for that really comprehensive answer. It's super helpful. I may have missed this separately. I wanted to ask about the increase in other borrowings. Are those FHLB advances and any color that you can give on This is somewhat related to the line of questioning earlier, any color that you can give on how you make the decision to draw on your FHLB lines versus just deciding to simply, you know, pay up for some of the deposits that maybe are going elsewhere, any color you can give on that. And, you know, to the extent you've given a lot already, but if there's anything, any other kind of color you can give around how you think about exception pricing at this point in the rate cycle, that'd be really helpful.
spk06: I'll answer the first part. I mean, the federal home loan bank borrowings, again, we always when rates would normalize, you know, when rates got so cheap, there was no reason to leverage the bank. But we do leverage the bank a little bit with NAC most of the time with Federal Home Loan Bank. And also, again, some of the public funds are leaving. They'll be back in at year end. So those borrowings should be down. But at the same time, we're still buying securities today, you know, again, and leveraging the bank a little bit. So we're buying in all markets. So, again, we have so much We have so much of our securities that rolls off every year, over $2 billion, that sometimes we just buy in advance and leverage the bank a little bit too.
spk14: Well, thanks again for taking my questions. Appreciate it.
spk16: This concludes our question and answer session.
spk17: I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
spk11: 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.
spk16: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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