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spk01: Good day and welcome to the Prosperity Bank Shares first quarter 2023 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 Rashi. Please go ahead.
spk08: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' first quarter 2023 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, Executive Vice President and 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, Kevin Hannigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Merle Carnes, Chief Credit Officer, Mays Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. Eddie Saffity, our Vice Chairman, is under the weather and unable to join us today. David Zalman 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 Tamanis, 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 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.
spk12: Thank you, Charlotte, and good morning, everyone. Each year, Forbes assesses the 100 largest banks in the United States on growth, credit quality, and earnings, as well as other factors for its America's Best Bank list. Prosperity Bank has been ranked in the top 10 since the list inception in 2010. We have twice been ranked number one, ranked number two in 2021, and ranked number six for 2023. It is a testament to Prosperity's performance, culture, vision, and consistency, and distinguishes us among most banks. I congratulate and thank all our customers, associates, and directors for helping us achieve this honor. On a lead quarter basis, the net income was 124 million for the three months ended March 31st, 2023, compared with 122 million for the same period in 2022. The net income per diluted common share was $1.37 for the three months ended March 31st, 2023, compared with $1.33 for the three months ended March 31st, 2022. For the three months ended March 31st, 2023, the annualized return on average assets were 1.31% the annualized return on average tangible common equity was 14.34% and the efficiency ratio was 43.68%. Loans on a linked quarter, linked quarter loans excluding warehouse purchase program loans increased $436 million or 2.4%. 9.6% annualized from 18.1 billion at December 31st, 2022. Excluding warehouse purchase program loans, loans at March 31st, 2023 were 18.5 billion compared with 16.7 billion at March 31st, 2022, an increase of 1.8 billion or 10.8%. Loan growth is helped by fewer loans being paid off early compared with previous quarters. We expect this to continue while rates remain at their current levels or increase. Deposits at March 31st, 2023 were 27 billion, a decrease of 1.5 billion or 5.4% from 28.5 billion at December 31st, 2022. Deposits decreased 4.1 billion or 13% compared with deposits of 31.1 billion at March 31st, 2022. The majority of all deposits lost in 2022 were public funds. These investment funds were an interest bearing transaction account at low rates because there was no yield to be found. As rates increased, public funds started investing their money in state funds such as textbook to obtain higher rates. Of the deposit decrease in the first quarter, 959 million or 63% of the 1.5 billion decrease occurred prior to March 10th. Historically, Prior to the pandemic in 2017 and 18 and 19, our deposits decreased seasonally in January, an average of 2.2%. We also saw 236 million of deposits flow into our wealth management group. As we all are aware, the market was flooded with excess funds the last few years during the COVID-19 pandemic. And most people kept their money primarily in checking and low interest bearing accounts because no one was paying much for money. Now that the rates are increasing, people are finding the best rate they can for their investment funds that were lying dormant. When we look at pre-COVID deposits at March 31st, 2020, we had 23.8 billion in deposits. And at March 31st, 2023, we have 27 billion in deposits. This represents a compounded annual growth rate of 4.3% annually. Historically, before the excess funds in the system, Prosperity had organic deposit growth rates of approximately 2% to 4% annually. So we are still averaging deposits on the high end of our historical growth rate. Our average deposit account was $34,000 at March 31st, 2023, and $36,000 at December 31st, 2022. Our uninsured and pledged deposits are 29%, 29.9% of our total deposits. We currently have 11.3 billion of liquidity available to draw on, which represents approximately $4 billion in excess of our uninsured and pledged deposits. With regard to the net interest margin, while most banks have experienced some of their best net interest margins recently, because of our large bond portfolio, our net interest margin always takes longer to adjust. Our models show our net interest margin improving to more historical levels in the next 12 to 24 months and even better in 36 months. Our average net interest margin from 2012 to 2022 was 3.37 compared with our current net interest margin of 2.93 as of March 31st, 2023. Our asset quality remains sound. Year-over-year non-performing assets decreased 9.9%. Non-performing assets totaled 24.5 million at March 31, 2023, compared with 27.5 million at December 21, 2022, and 27.2 million at March 31, 2022. Texas and Oklahoma continue to do well. Texas population, increased by 470,000 in 2022, continuing a steady uptick. From 2002 to 2022, the state gained over 9 million residents, more than any other state and almost 3 million more than Florida, the next largest gaining state. Texas and Oklahoma continue to benefit from strong economies and are home to 56 Fortune 500 headquartered companies. Texas now has more Fortune 500 companies than any other state, including New York and California. Despite the higher rates and a possible slower economy going forward, we believe that Texas and Oklahoma economies should outperform most other states. With regard to acquisitions, as we recently announced, we received all necessary regulatory approvals for our acquisition of First Bank Shares of Texas, Inc. and expect that transaction will be effective on May 1st, 2023. Our acquisition of Lone Star State Bank Shares is pending regulatory approvals and is expected to close during the second quarter of 2023, although delays could occur. We continue to have active conversations with other bankers regarding potential acquisition opportunities. although the conversations have slowed given the recent bank failures and the decline in stock prices. Overall, I want to thank all our associates for the helping create the success we have had. We've had a strong team. We have a strong team and a deep bench at Prosperity and will continue to work hard to help our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over our discussion to Osobek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Osobek?
spk10: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three-month ended March 31, 2023, was $243.5 million compared to $239.9 million for the same period in 2022, an increase of $3.5 million or 1.5%. Loan and security interest income increased $54.1 million and $18.2 million respectively in the first quarter. Additionally, Fed funds interest income increased $6.2 million. This was partially offset by an increase in interest expense of $74.9 million. Net interest income increased $3.5 million despite having $7.9 million less in combined PPP loan fee income and fair value loan income. The net interest margin on a tax equivalent basis was 2.93% for the three months ended March 31, 2023, compared to 2.88% for the same period in 2022 and 3.05% for the quarter ended December 31, 2022. Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31, 2023 was 2.91% compared to 2.81% for the same period in 2022 and 3.04% for the quarter ended December 31, 2022. The current quarter net interest margin was impacted by $3 billion of additional cash held at the Fed for liquidity insurance purposes during the month of March. This $3 billion additional cash was funded through FHLB borrowings. Further, at the end of the first quarter, we increased rates on deposits. We expect the full impact of those increases in the second quarter. Non-interest income was $38.3 million for the three months ended March 31, 2023, compared to $35.1 million for the same period in 2022 and $37.7 million for the quarter ended December 31, 2022. Non-interest expense for the three months ended March 31, 2023 was $123 million compared to $119.9 million for the same period in 2022 and $119.2 million for the quarter ended December 31, 2022. The linked quarter increase was partially attributed to the higher FDIC assessment rate. For the second quarter 2023, we expect non-interest expense to be in the range of $123 to $125 million. The expected increase is based on the annual merit increases in the second quarter 2023. This projection excludes both the impact from one-time merger-related costs, which we estimate to be around $26 to $28 million, and additional non-interest expense from our pending acquisitions. Additionally, second quarter results will be impacted by day two accounting provision expense related to the upcoming acquisitions. The estimated range of this acquisition-related provision expense is $28 to $31 million. The efficiency ratio is 43.7% for the three months ended March 31, 2023, compared to 43.7% for the same period in 2022, and 40.9% for the three-month end of December 31, 2022. The bond portfolio metrics at 3-31-2023 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2.2 billion. And with that, let me turn over the presentation to Tim T. Mannes for some details on loans and asset quality. T. Mannes? Thank you, Axel Becks.
spk11: Our non-performing assets at quarter end March 31st, 2023 totaled $24,485,000 or 13 basis points of loans and other real estate compared to $27,494,000 or 15 basis points at December 31st, 2022. This represents approximately an 11% decrease in non-performing assets. The March 31st, 2023 non-performing asset total was comprised of $22,496,000 in loans, $0 in repossessed assets, and $1,989,000 in other real estate. Of the $24,485,000 in non-performing assets at quarter end, only $217,000 are energy credits. Since March 31st, 2023, $328,000 in other real estate have been removed from the non-performing assets. This represents 1.34% of the non-performing assets. Net charge-offs for the three months ended March 31st, 2023 were negative $615,000 compared to net charge-offs of $603,000 for the quarter ended December 31st, 2022. In other words, for the first quarter of 2023, our recoveries exceeded charge-offs by $615,000. No dollars were added to the allowance for credit losses during the quarter ended March 31st, 2023, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended March 31st, 2023 was $436 million. Loans outstanding at March 31st, 2023 were approximately $19.334 billion compared to $18.840 billion at December 31st, 2022. This is a 2.62% increase on a length quarter basis. The March 31st, 2023 loan total is made up of 43% fixed rate loans, 29% floating rate loans, and 28% variable rate loans. I will now turn it over to you.
spk08: Thank you, Tim. At this time, we are prepared to answer your questions. Ms. Navi, can you please assist us with questions?
spk02: Can you please assist us with questions?
spk08: We'll start the questions in just a minute.
spk02: Are we showing that we're attached? Mm-hmm. Yes, sir. Maybe she had to go to the restroom.
spk08: Yeah. Bad timing. Are we unmuted here? Nope. No. We're working to get the questions started.
spk02: We apologize for the delay.
spk15: Can you hear me now?
spk08: Yes.
spk01: Thank you. I apologize. We will start the question and answer session. To ask a question, you may press star then one on your phone. If you're using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. The first question comes from Brady Gailey with KBW. Please go ahead.
spk02: You guys can hear me, right? Yes.
spk14: Good morning. Thank God we were wondering. Okay.
spk04: So I know Asselbach mentioned that you moved deposit rates up near the end of the quarter. I was just wondering the magnitude of that. And I hear your comments on longer term, there's opportunity for the margin to expand. How do you expect the margin to trend in the near term?
spk10: I'll give you an answer on the interest-bearing deposit. Based on a projection, the new rate increases on deposit It'll bump up our interest bearing deposit rate from 110 what we have to about 140 to 145. So that's going to be a little headwind. But if you look at short term on margin, I think it's very hard to pinpoint just because of the two acquisition upcoming in the second quarter. We're going to bring their loans and their bond portfolio. Both of them are going to be repriced at a market rate. That's going to be a tailwind for us on that standpoint. So I will be hard to pinpoint specifically for the near term, but the information I gave you should give you some information on the Q2. Okay.
spk04: And the $3 billion of FHLB, which turned into cash on your balance sheet, I know that's pretty earnings neutral, but how long will those balances stay on the balance sheet?
spk10: So we started about the middle of on the 13th or 14th of March and stayed almost through end of the month.
spk04: Okay, so it's gone now.
spk10: Yeah, they were gone by end of the quarter, before the end of the quarter.
spk04: All right, that's helpful. And then I'm just curious, I know the unrealized loss in your health and maturity bond bucket has been going down over the last couple quarters. I imagine it went down this quarter. What is that amount of after-tax unrealized losses in the health and maturity bond book?
spk10: So if you look at 331, the net of tax was about $1.1 billion. That's decreased from $1.3 billion we had end of the year. So we have $200 million decrease in after-tax.
spk04: And then finally for me, anything specific holding up this Lone Star approval?
spk10: I think we're just waiting on the regulatory approval right now. It's just waiting from them.
spk08: Yes, nothing specific. They've been busy lately, as you know.
spk10: I can imagine.
spk04: Yes, thank you for the call, guys.
spk02: But we're hoping to get it done in the second quarter. Yes. Thank you. And our next question today comes from Peter Winter at DA Davidson. Please go ahead.
spk07: Good morning. I was wondering, could you talk about the outlook for deposit trends for here and deposit betas beyond the second quarter?
spk10: I can address the betas specifically. So if you look at I'll give you the cumulative beta that we had through 3.31. If you look at over 12 months, the cumulative beta on deposit was about 12 basis points. With the recent increases on the deposit rate that I mentioned on my speech, it's going to go up to about 16 to 17 basis points on cumulative betas.
spk12: Peter, I think as far as trend, it's I still don't know if everything is, you know, our deals look like they have stabilized. You have, but you still have, you still have money that that's in the system. That's probably still looking for higher rates. So I think in the long run, if you ask me in the long run, things, things will stabilize. And I think you will eventually go back to a point where our bank historically grew two to 4% organically every year. And I think that, you know, in our budget team, what we're looking for, once things stabilize and you don't read in the social media or on the headlines in CNBC or Fox, that I think that that's kind of what we're hoping to go back to eventually is a, you know, call it somewhere in between, call it 3%. But anywhere, historically, it's always been 2% to 4%. And I think that will happen. I don't know that that's going to happen this month or next month. But, you know, I am hoping, though, that after five or six months and things calm down, I'm hoping that's where we'll get back to.
spk02: Okay.
spk07: And are we, if the Fed were to stop raising rates in May, are we at a level where you're almost done raising deposit costs? Or just, you know, given where the beta is being lower than peers, there's still some pressure? on the cost?
spk12: You know, I think that we're, we did raise them. What I think is the market, I mean, when you can get 3% on a money market account, you know, with a larger deposit, that's pretty good. You may, you know, it may still go up a quarter of a point from there or so, but I, you know, based on where the Fed is right now and them going up a quarter or 50 basis points, I don't see much more than that there. I will say that probably As our deposits, you know, as our deposits probably, our bonds and everything reprices and we look at our models, we really see a very strong net interest margins going forward. And so I think the models look stronger than I think they really are. So I think that what I would suggest is that as our money reprices, we may, just from a customer standpoint, pay more to that and maybe not show the real strong – When you look at the models, they're extremely strong, and I know in a real world that doesn't happen. I mean, our net interest margin, as I mentioned earlier in the call earlier, was that our average has been about 3.37, but we've been as high as 380, and we've been as low as where we are today. So I still think somewhere in between for a bank of ours. You know, we didn't, where a number of the other banks went out and purchased brokered CDs, we didn't. Again, I don't know anybody. I mean, I think that's everybody. They need to do what they need to do. I've never really put a lot of money. I've never put a lot of faith into brokerage CDs. In fact, when we look at purchasing a bank, I usually just X all those brokerage CDs, and they'll give any credit for that. So again, it doesn't mean that we won't be there one day, but that's not something that we participated with and don't really want to be. You know, we took the position that, you know, we may lose some money. We may not be as big as we always were. You know, it's going to take us time to maybe get back to that point, excluding the acquisitions. That helps us, of course. But we wanted to remain profitable over that period of time and make sure that what we're looking at are truly core relationships and core deposits. And that's kind of where we're at today. Long story, I just want to give you some color.
spk10: Yeah, just to add on, I think on the modeling side of it, I think what we're excited, our model shows very good in 24, 36 months. And our model has beta of 36, but then right now we're running our actual betas on our deposit list and that model shows.
spk06: So that looks optimistic.
spk12: I think it all boils down to our company. I think we have a great company. It's strong. Looking forward, I think we're in a better position than most of our peers simply because of the net interest margin that we see going forward. So I think that if you're a longer-term player and you You can see where we're going to be in a year, two years. You know, that's what we're focusing on is more the longer term, really.
spk07: Got it. And just one last question. You had very solid loan growth, loans held for investment this quarter. Is that level sustainable, just given the economic backdrop? Because Tim did mention the average monthly loan production, which was down. a fair amount relative to the fourth quarter.
spk14: Yeah, this is Kevin. I think at year end, our January call, we said mid to high single digits. And we hit the high single digits portion in Q1. I think we all see a little weakness in loan demand. And we've experienced that for the last couple of months. And what's really aiding or the tailwind to loan growth is a much reduced level of loan payoffs. So I think we see asset durations extending a bit. If our typical asset duration in real estate was three years, it might be three and a half, and it may go out to four before this is all said and done. So the loan growth is a little different. For the last three years, as the legacy portfolio was running off, we kept talking about, well, We got the headwinds of the runoff. We have the opposite effect now. I think the whole industry has the opposite effect. There's slower payoffs, still some loan originations, clearly, but slower payoffs. So I think we're still good at mid-single digits to high-single digits. I'll reiterate again what we said in January, that if we choose to start selling off mortgage loans rather than portfolio loans, we'll be at the lower end of that versus the higher end.
spk12: Yeah, and I also want to say it with the caveat that now that a lot of the banks that have such high loan-to-deposit ratios, they've really cut back on the loans that they're doing. And we've always said in times, in harder times, those are the kind of customers that we'll probably get and go after so we can get better terms and conditions. So that's also helping us at the same time right now. We don't really want to turn those customers away. This is really kind of a time where we really perform well.
spk11: That's correct. We're actually already starting to see that. We've been able to make some loans to what we believe are very good credits that historically we might not have been able to lend to, not because of credit reasons, but because of very significant competition that really just priced the loans down to the point that you couldn't hardly make any money off of them. and you couldn't get any equity in the project or the collateral that you were dealing with. That is changing right now. More and more banks are out of the market and are pulling out of the market. So our opportunities seem to be increasing somewhat. And you have to recognize that we do have loans that got booked that have not funded up yet. So the actual loans outstanding will probably continue to grow just simply from funding loans that we have already booked that are in progress, so to speak.
spk02: Thanks very much. The next question we have will come from Brad Millsaps of Piper Sandware. Hey, good morning. Good morning, Brad. Good morning.
spk05: Thanks for taking my questions. I'm just curious, David, how much of the public funds that exited this quarter do you expect to come back? And then kind of as a follow-up to that, would you expect to utilize some of those funds to pay down to the extent they do come back, some of the three or so billion in borrowings you had outstanding at the end of the quarter?
spk12: The $2 billion that we lost last year, I don't really see those funds coming back. Those were really investment funds and unless we're willing to pay a textbook rate of you know 480 or something like that I don't really see those coming back you will see you will see public funds go down throughout this quarter and next quarter but you will by the end of the year you will see public funds come up and I would say that could be three to five hundred million between four to six hundred four to six hundred million probably
spk05: Okay, so in the interim, you mentioned you weren't going to go the broker CD route. You might just rely more on just cash flows from your bond book or adding some additional federal home loan bank advances.
spk12: Yeah, I mean, I don't want us to continue to borrow money from the federal home loan bank. I mean, I guess I look at it this way. I ask myself, we had $3.5 billion in borrowing at the federal home loan bank at the end of the quarter. And so in my mind, I ask myself, How do you, you know, if you wanted to get out of that, how do you ever get out of that? And in my mind, you know, we have $2.2 billion in bond roll off a year. And we also are going to have about $434 million of liquidity from the banks that are joining us, First Capital and Lone Star. So in my mind, if you use just those two, it takes us about 15 or 16 months that we would be out of the Federal Home Loan Bank completely. Again, unless we lose more deposits, for temporary, that changes everything. But if everything were stagnant at March, that you could get out 15 to 16 months. I will say though, for most of the time, we always do have some portion borrowed at the Federal Loan Bank and probably always will, even in a normal time, we would probably have anywhere from a billion to 2 billion and we leverage that. But not when the yield curve is inverted like it is, but when it's not, we usually leverage that. That would get us out of that. So then the next question would be, okay, so where are you going to get your money to fund at least 5%, you know, for your loans, you know, if you're going to use all that money for their federal home loan banking? My point is, I really, you know, I hope I said this. Historically, we always have grown 2% to 4%, and I just use like a 3% number where we're at. It would be 3%. that's still going to get us around $800 to $1 billion in additional money a year, and I think that's the money we would use for the growth in the loans. I hope I didn't make that too complicated, but I've always in the back of my mind, I'm thinking about that myself.
spk11: I think it's important to point out that the bulk of the money we had borrowed from the Federal Home Loan Bank was not really because we needed it. It's because we felt like it was prudent to have on hand given what was taking place in the overall market. You know, we didn't know whether somebody was going to come in in the next two minutes and want to pull all their money out as quickly as things were changing.
spk10: You're referring to the additional $3 billion? Yes, $3 billion.
spk12: Oh, yeah, the $3 billion. Yeah, I didn't think we were talking about that.
spk05: I was talking about the core, kind of the core FHOB that you have.
spk11: I'm talking about for sure. We didn't really... It turns out we didn't really need it, but we felt like it was prudent to have it on hand for a while there.
spk12: Yeah, my comments were all relating to the core borrowing.
spk05: Yeah, I'm with you. Yeah, that was my question. Yeah, thanks for clearing that up, David. And then Finally, for me, I think when you guys announced the two deals together, I think you had something in there, 2023 estimated earnings from the combination with 75% cost savings of somewhere around $77 million. Obviously, a lot has changed. Would you mind giving us an update on what you think the banks can contribute to the extent that it has changed? Just wanted to get a sense of you know, kind of contribution from those two organizations once they become a part of prosperity?
spk10: Yeah, I think on the cost phase, when we announced that we're going to have a combined 25% cost phase on theirs, I think that stays as is, and we're pretty optimistic about it. You're right, the timing has shifted. The 75% was based on the Q1 acquisition, the estimate acquisition. Now, since the timing shifted to, one, first capital being May 1st, and we're hoping that long start being sometime in second quarter. So it's timing wise on savings, it does shift a little bit, but on the 25% cost save overall, we expect in the long run that stays as is. Right.
spk05: And I think, I think also like you, you estimated something, you know, 77 million of contribution. Does it make sense just to, you know, given what's happened to, to, to haircut that to some degree? And if so, would you, could you give us any color on maybe, you know, kind of how much to think about?
spk10: Yeah, the day one, you know, one-time cost and plus the, you know, day two provision expense, that's going to happen immediately after the merger of the banks. But I did say that, you know, they're going to bring in operation expenses as they merge. I would expect probably after merger, maybe within, not maybe the first quarter, but the second quarter, right after the acquisition, we should utilize the savings.
spk14: I think he's after the revenue and income side.
spk05: Yeah, exactly, Kevin. Okay.
spk14: Just trying to interpret there for you, Brad.
spk05: Thank you. It's probably half, right?
spk11: Well, I don't think there's been really a significant change in the profiles of these two banks. It has not, yeah. As many people think might have occurred. Now, the party's not over yet, so to speak. You know, we have to look at it day by day, week by week. But their balance sheets haven't been altered significantly, and their P&Ls haven't been altered significantly so far.
spk10: Yeah, so far. And I think what the estimates we had on other, the loan markups and all that stays the same. I didn't think there was a significant change. That should bring in the income that we expected. I don't think there was a significant shift in their estimate. It's just the delay. That's really the only thing.
spk02: Understood. Thank you. I appreciate you guys.
spk15: The next question comes from Michael Rose with Raymond James.
spk01: Please go ahead.
spk03: Hey, good morning, guys. Thanks for taking my questions. Kevin would be remiss if I didn't ask about the warehouse. This quarter's average volume was a little bit higher than which you kind of, you know, contemplated 90 days ago. Just wanted to get any sort of thoughts as we kind of move forward, just, yeah, given the dynamics out there. Thanks.
spk14: Yeah, thank you, Michael. You're right. I think we said in January we thought we'd average 550 to 600 for the quarter. I will tell you in February I was thinking it was not even going to get to 550 and was worried about it, but we ended up averaging 618 because it It truly rallied in the last 45 days of the quarter, ending up at $799, almost $800 million at quarter end. I'm going to go with $800 to $850 for the quarter, Michael. I think we're averaging right now about $770 through the first 26 days of the quarter, 25 days of the quarter. And I think it will tick up from there. So if I had to pick a number, $825.
spk03: Okay, that's very, very helpful. Just one minor question for Asselbach. The other non-interest income was up a couple million bucks, almost $3 million. Just wanted to see if there was anything specific that was in there, and if anything will come out from a run rate perspective. Thanks.
spk10: Yeah, we had some one-off items, like annual incentives and one-off income that we have. And some of them comes annually. Some of them was just one time. So it wasn't anything particular. Okay. So maybe a few million bucks in one-timers?
spk00: Yeah.
spk03: Okay. Maybe just finally for me, just given where the capital ratio is, I mean, you guys have, you know, lots of capital. You're, you know, doing two deals this week. as we kind of go through this and just wanted to get a sense for buyback from here. You guys did buy back a little bit of shares. I assume you paused when everything started to happen, but just give more capital is just want to get your, your appetite, just give them where the stock is. And then just wanted to get a sense from an acquisition point of view. I know you said, you know, conversations that maybe slowed down a little bit, but just wanted to see if you'd looked at any of the banks that had failed or, you know, maybe some stress situations, if they'd be of interest to you. Thanks.
spk12: First, this is David. I'll address the capital issue. As you know, we've always, again, we've always used our capital really to try to increase dividends and really use in the M&A game. And then we use the rest of the money. If we use money extra, we felt the stock was really disproportionate. I don't think that any of that's going to change as far as, you know, as far as the dividends go. I mean, that's first and foremost, that seems like our directors really like that. Acquisitions will continue to do that. I don't see that stopping. As far as buying a stock or a lot of our own stock, a lot of it, I think some of that's going to depend on regulations or regulatory bodies if they ever say anything. So instead of making a commitment that we're going to just continue to buy and buy, I don't want to do that. I think in a stressful, more stressful time like this, I think we have to look from a regulatory standpoint. the regulatory bodies what they're going to say about it but you know my general overall feeling is that uh we could you know we still make good money we still have we've paid the dividends and we still have quite a bit left so i think that and as your your htm loss goes the other way over the year to two i i in the long run i guess in the long run i would say i don't see it changing a whole lot unless the regulatory agencies come in and say you know, you shouldn't be doing that or something like that.
spk02: Okay. Thanks, guys.
spk15: The next question comes from Brett with Howdy Group.
spk01: Please go ahead.
spk13: Hey, good morning, everyone. I wanted to ask on the fee income side, you know, the other bucket obviously had a little bit of noise this quarter. I was just curious, also, Bach, was there anything that you would call out that would be non-recurring, or can you give us maybe some color on the other income bucket, and how you think that might play out from here?
spk10: Yeah, I think, yeah, we had one-off items. If I would have to, you know, tell that I would say a couple million dollars was one-off item that did not come in, or that came in, and the rest of them will be more continued, repetitive from that bucket.
spk13: Okay. And then could you give any update on the cash flow on the securities portfolio, you know, what you might have maturing in the next quarter or two?
spk10: I mean, our cash flow is $2.2 billion. So if you, the projections, I mean, if you take it at the quarter, I mean, we expect about, what, $550 million or so a quarter.
spk12: Yeah, I don't think that's changed. I mean, we're still around $2.2 billion. Yeah.
spk13: Okay, great. And then just lastly, you know, some of the more conservative banks, you know, it seemed like it might be an opportunity for them to, you know, maybe take share through this situation. But it seems like some of the conservative players have said, no, we're going to wait and see how maybe this plays out. You know, I'm just curious, David or Kevin, you know, this environment as you see it, is this an opportunity to maybe take share or do you, you know, stick to your guns and get more conservative? Have you increased your underwriting standards at all or changed them? Any thoughts on that?
spk14: I think we will take care without having to change our underwriting standards. Brett, there's enough pencils down banks that are loaned up, fully loaned up, 90%, 100%, 100 plus percent loan to deposit ratio, and they are Generally speaking, they're pencils down, or maybe a deal pays off, they can do a new deal, but they're not active. And I think, as Tim said a little earlier, we're seeing opportunities from really good clients that we historically would not have banked because either the structure was too loose or the pricing was too low. Those clients are now coming to us, and we're able to get our structure and our pricing on those transactions. So I think this, for us, this is no different than any other time during stress. We tend to do well. We tend to have liquidity and have the money to loan. So I think on the loan side, we're in a position to take market share as we want.
spk12: I'd have to say in my long time in banking, even when I sit in loan committee and I see what's being asked down on some of these projects, commercial projects, I've never seen that in my career that you could get that much down and people would still do it. And I think it's just because they're just, as the deposits have flowed out of a lot of these mid-sized banks, they just, they don't have, they just don't have the deposits to fund that, to fund it. So I think we will have opportunities. And this is a time that we should, and this is a time we actually look forward to.
spk14: Yeah, Brett, it's not uncommon for us today to get 50 to 55% equity up front on a multifamily deal. And all those dollars go in before we fund a dollar. And as David said, it's been a long time since we've seen that kind of equity. But we're asking for it, and we're generally getting it. And it's real equity. It's real dollar equity.
spk12: It's real cost, not just us. It's real based on cost.
spk13: Yep, that's pretty low for the multifamily market.
spk02: Appreciate the color, guys.
spk15: The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
spk02: Hi, thanks for taking my question.
spk06: I wanted to ask about NIM going into next quarter. You know, you noted that, you know, the portfolios that you're acquiring will have an impact on NIM. You know, presumably there'll be a tailwind because you're acquiring them at market price. Any thoughts on, you know, what the NIM can get to next quarter with the acquisitions? Would you be able to go over 3% in the next quarter?
spk10: I'll, I think it'll be hard to specifically point out because we still have to go through the merger process and evaluation. But, you know, we're excited about this two acquisition because of cash they're bringing and also ability to reprice their bond portfolio and their mortgage portfolio. So, I mean, I cannot give you specific guidance, especially because of the fair value income that we have to calculate and that getting amortized based on the duration of loans or the life of the loans. So, but I mean, but we're optimistic what we stand on.
spk12: I think you could say that once we get both closed and in our bank, it should help the net interest margin. You could say that. Yeah, that's for sure.
spk06: That's helpful. And then maybe on the loan yields in the core business, in the current business, you noted that you have acquired newer customers, presumably at better pricing. You have a fixed rate portfolio as well that should reprice higher. So in the event that the Fed stays higher for longer, How should we think about your loan deals over the course of the next year or so?
spk12: Well, our models show that if interest rates stay higher or even go up, we still perform better from an income standpoint and a net interest margin.
spk10: Yeah. If you just look at our name calculation, because our bond portfolio is generating right now $524 million. and we're putting new loans that seven handle right now. If you just take it and if the rate stays for the next 12, 24 months in this rate, you can see there's upside of 200 base points on loans.
spk12: So, I mean, that's... Our models are usually really good, and they're correct. And I think that basically if rates don't do anything, we still do substantially better in improvement net interest margin over 12, 24, and 36. I mean substantial. And if interest rates go up, our models show that we even do better than that. I think if they go down, if interest rates go down, it probably takes a little bit away from us.
spk10: Yeah, because of the composition of our loan portfolio.
spk12: I think if interest rates went down, I forgot, 100 basis points or so, I don't think that they will, but if they did, that doesn't give us the positive effect. But still, even 100 down, we still have substantial increase in them over time.
spk06: Did you say over what time frame that 200 basis points can come in?
spk12: I think that your net interest margin looks a lot better in 12 months. It looks better in 20, real good in 24 months, and fantastic in 36 months.
spk06: Got it. All right. And if I can just round out that discussion. How should we think about the efficiency ratio given what you said on NIM and loan growth and the merit increases coming up?
spk10: So I think efficiency ratio, if you just look at long term, it'll take us time to, once we have two banks merge with us, realize the cost savings. But in the long run, I think we're going to be back to our normal 42%, 43%, 44% efficiency ratio in the long term.
spk02: Great. Thanks so much.
spk15: The next question comes from Evan Poonawalla with Bank of America.
spk01: Please go ahead.
spk09: Hey, good morning. I guess I was just following up. Evan, did you change your name? Hey, this is Ibrahim Poonawalla, Bank of America.
spk12: Oh, I thought it was Evan. I thought you changed your name.
spk09: She did say Evan, so you're not wrong, David. You're right. But I let it fly.
spk12: Sorry about that.
spk09: I guess I can't pass off as an Evan.
spk12: That's not a bad idea to change it. It's easier to pronounce Evan.
spk09: So a question around the NIM1. Did you talk about, and sorry if I missed it on the core, X, the acquisitions, do you see the NIM going, drifting higher from here when we think about 2Q? and rest of the year from the 293 this quarter?
spk10: Yeah, I mean, as we talked about, in the long term, it's very positive. I think in the short term, because of the headwind we have on the internet variant deposit a little bit, it'll be a little bit maybe down, but that's on the Prosperity Bank itself without acquisition. But with the two acquisitions, it looks really good with adding two banks to our balance sheet.
spk00: Understood.
spk12: It helps as a It really takes – still, it helps us in the short run, too. But in the long term, it really helps us. We're talking about a very short period. Very short period. Without it, it wouldn't look as good, you're right.
spk09: And just on that point, David, I think you mentioned multiple times around on the last question if rates go down 100 or 200 basis points. When you think about when it can look good, or I think you said fantastic over the next two to three years, Is it the Fed funds that matters more than the two- to five-year part of the curve? Just remind us. We could see a scenario where the Fed funds drops maybe over the next year or two, but the belly of the curve remains where it is. So if you can talk to where the sensitivity might be most.
spk12: Ours is just repricing. I mean, you've got your bond portfolio is repricing $2.2 billion a year. Our loans... reprice or roll off. Historically, it's been a third, about $6 billion. So just between those two, you have that $8 or $9 billion changing in pricing in a year's time, those two.
spk09: Got it. And one last question. When you think about a more big picture in terms of the economic outlook, you mentioned some of the other banks that are tight on loan-to-deposit ratios, et cetera, pulling back. It's good for prosperity. But overall, do you see that adding to and accelerating our pace of going into a recession? How do you think about just the macro outlook as you think about the next six to 12 months?
spk12: Well, I think it does pull back. But again, when I look at the Texas economy, and I guess I think Texas may be more regional in perspective compared to the rest of the economy. I really don't see... I don't see a hard recession. I don't. That's just me. I think you may see a slowdown, but when you look at people, the customers are still spending money out there. Housing, they're still buying housing. Some of the markets, even in house, some markets have gone down a little bit in value, but people are still needing housing. You have people moving into the state. I mean, I think Texas is probably in a pretty good position. I don't see a really hard recession. I may be wrong, and I don't have anything in the back of my name to say I know what I'm saying, but just my gut feeling is the way it was going, it was just overblown. Everything was overblown. I still think things need to slow down a little bit more, quite frankly, so that the Fed doesn't raise rates. But my gut feeling is that the Fed will raise rates again. in May by at least a quarter of a point. But then I think they probably will hold off. But again, for the most part, you don't see things just crashing. I don't see that. I don't, not yet. I mean, I think things still look pretty good and people are still buying, so.
spk09: Thank you very much.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Charlotte or Ashley for any closing remarks.
spk08: 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.
spk15: The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.
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