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spk13: Good day and welcome to the Prosperity Bank Shares fourth 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 the star key followed by 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.
spk00: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' fourth quarter 2023 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 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 Staffady, Vice Chairman, Kevin Hannigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Merle Carnes, Chief Credit Officer, and Bob Dowdell, Executive Vice President. Maze Davenport, our Director of Corporate Strategy, is ill 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. 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 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 our filings with the Securities and Exchange Commission. including forms 10Q and 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.
spk17: Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2023 conference call. For the three months ending December 31st, 2023, our net income was $95 million, or $1.02 per diluted common share, compared with $112 million, or $1.20 per diluted common share for the three months ending September 30, 2023, and was impacted by a one-time FDIC special assessment of $19.9 million and merger-related expenses. Excluding the FDIC special assessment net of tax and merger related expenses, net of tax, net income was $111 million or $1.19 per diluted common share for the three months ending December 31st, 2023. Our annualized return on average assets, average common equity, and average tangible common equity, excluding the FDIC special assessment net of tax, and merger-related expenses net of tax for the three months into December 31st, 2023, where 1.15% return on average assets, 6.29% return on average common equity, and 12.3% return on average tangible common equity. Although our earnings excluding the one-time FDIC assessment and merger-related expenses were strong, they are still lower than last year. primarily because a majority of our earning assets have not yet repriced and our interest bearing liabilities have. This will correct over time and we expect that our operating ratios will be more reflective of our historical returns. Loans were 21.2 billion on December 31st, 2023. A decrease of 252 million or 1.2% from the 21.4 billion on September 30, 2023. Loans increased $2.3 billion or 12.4% compared with 18.8 billion on December 31, 2022. When loans excluding the warehouse purchase program loans and loans acquired in the merger of First Bank Shares of Texas increased $882 million our 4.9% during 2023. We did see a slight decrease in loans in the fourth quarter. However, we grew loans organically for the year as projected. Our deposits were 27.2 billion on December 31st, 2023, a decrease of 133 million or one half of 1% compared with 27.3 billion on September 30, 2023. Deposits decreased 1.4, I'm sorry, deposits decreased 1.4 billion, or 4.7%, compared with 28.5 billion on December 31, 2022. Our deposit outflows have mitigated since last March. However, we still have customers moving money into higher paying instruments, such as high yielding government bonds, or high rate products offered by competitors. When we saw the increase in deposits during the previous two years, we knew that some portion of them would leave the bank, and that's what's happening now. As the Federal Reserve reduces the money it has put into the economy by reducing its debt, depositors are replacing it by the higher rate securities it had purchased. Prosperity has one of the best core deposit bases in the business, we have non-interest bearing deposits of 9.8 billion representing a strong 36% of total deposits. And certificates of deposits representing only 13% of total deposits. Further, we have not purchased any broker deposits. Our non-performing assets totaled 72.7 million or 21 basis points of quarterly average interest earning assets on December 31st, 2023, compared with 69.5 million or 20 basis points of quarterly average interest earning assets on September 30, 2023, and 27.5 million or eight basis points of quarterly average interest earning assets on December 31st, 2022. The increase during 2023 was primarily due to the first bank shares merger. Despite a relatively low non-performing asset ratio, it is higher than our historical levels due to the recent merger. This is not unusual for us, and we expect to reduce our non-performing asset ratio to a more normal level within a reasonable period of time. The acquired loans charged off during the fourth quarter were fully reserved for. Our allowance for credit losses on loans and off-balance sheet credit exposure was $369 million on December 31st, 2023, compared with $72.7 million in non-performing assets. We look forward to our acquisition of Lone Star State Bank shares, which is pending the receipt of regulatory approvals. We are hopeful that we will receive them soon. We remain interested in M&A and believe our company is in a strong position to participate, especially given our capital. merger and acquisition experience, and the relationships we have built over the years. Prosperity operates in two of the best economies in the U.S. Even with the recent interest rate increases, economic activity and job growth in Texas and Oklahoma remain solid. We are excited about our growth and future of our company. Prosperity has a strong capital position that provides us with flexibility in pursuing strategic opportunities such as mergers and acquisitions, and the repurchase of our stock when appropriate. We expect that our net interest margin will continue to expand to our historically normal levels as our assets reprice over the next several years, increasing our earnings per share. Further, we have a strong core deposit base with 36% of our deposits in non-interest bearing accounts. I would like to thank all our customers, associates, directors, and shareholders for helping build such a successful bank. 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.
spk15: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended December 31, 2023, was $237 million compared to $239.5 million for the quarter ended September 30th, 2023 and $256.1 million for the same period in 2022. The net interest margin on a tax equivalent basis was 2.75% for the three month ended December 31st, 2023 compared to 2.72% for the quarter ended September 30th, 2023 and 3.05% for the same period in 2022. Excluding purchase accounting adjustments, the net interest margin for the three months ended December 31st, 2023 was 2.71% compared to 2.68% for the quarter ended September 30th, 2023 and 3.04% for the same period in 2022. The fourth quarter increase in net interest margin was primarily due to the decrease in borrowings of $525 million during the fourth quarter of 2023. Non-interest income was $36.6 million for the three months ended December 31, 2023 compared to $38.7 million for the quarter ended September 30, 2023 and $37.7 million for the same period in 2022. Non-interest expense for the three months ended December 31, 2023 was $152.2 million compared to $135.7 million for the quarter ended September 30, 2023, and $119.2 million for the same period in 2022. The lean quarter increase was primarily due to one-time FDIC special assessment of $19.9 million. For the first quarter of 2022, we expect non-interest expense to be in the range of $134 to $136 million. The efficiency ratio was 55.6% for the three months ended December 31, 2023, compared to 48.7% for the quarter ended September 30, 2023, and 40.9% for the same period in 2022. Excluding the FDIC special assessment, the efficiency ratio was 48.3% for the fourth quarter of 2023. The bond portfolio metrics at 12-31-2023 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 Tumanis for some details on loans and asset quality. Tumanis? Tim Tumanis Thank you, Osobek.
spk16: Our non-performing assets at quarter end December 31, 2023, totaled $72,667,000, or 34 basis points of loans and other real estate, compared to $69,481,000, or 32 basis points at September 30th, 2023. This represents a 4.6% increase. Since December 31st, 2023, $3.2 million of nonperforming assets have been removed or put under contract for sale. The December 31st, 2023 nonperforming asset total was made up of $70,883,000 in loans, $76,000 in repossessed assets, and $1,708,000 in other real estate. Net charge-offs for the three months ended December 31st, 2023 were $19,133,000 compared to net charge-offs of $3,408,000 for the quarter ended September 30th, 2023. This is a $15,725,000 increase on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended December 31st, 2023. Also, there was no addition to the allowance during the quarter ended September 30th, 2023. No dollars were taken into income from the allowance during the quarters ended December 31st, 2023 and September 30th, 2023. The average monthly new loan production for the quarter ended December 31st, 2023 was $300 million compared to $398 million for the quarter ended September 30th, 2023. Loans outstanding at December 31st, 2023 were approximately $21.181 billion compared to $21.33 billion at September 30th, 2023. The December 31st, 2023 loan total is made up of 42% fixed rate loans, 27% floating rate loans, and 31% variable rate loans. I'll now turn it over to Charlotte Rasche.
spk00: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.
spk13: 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Dave Rochester with Compass Point. Please go ahead.
spk19: Hey, good morning, guys. Good morning.
spk13: Good morning.
spk19: I was hoping to get your outlook for the margin in NII for either 2024 or at least maybe the first quarter, and any comments on the trajectory from there through the year would be great, specifically where you see the bottom in NII. And I know your outlook is pretty positive over the next few years, but just more near-term trends would be great to hear and get your thoughts on.
spk15: So if you look at our margin in the short term, as we discussed, that You know, we're still having a lot of tailwind from our repricing of the loan and asset from the standpoint. From our borrowing side of it, as you saw, we decreased our borrowing $525 million. So we're picking up that margin there from the cash flow on the investments, paying down our borrowing. So we're picking up about 300 basis points there. So with a combination of loan repricing and paying down on borrowings, we should see expansion on the margin. And what you saw, we had three base points expansion in the fourth quarter, and we continue to see that marginal expansion in the first quarter and beyond. But if you look at it in the long term, we see really, I think on the second half, we see more expansion in the margin than we see in the first half of it just because it takes time for the assets repricing. I think the guidance we gave last quarter that, you know, in 24 months, our name being like 330, 340, our model still shows that expansion in 24 months at 330, 340. So I think it's looking promising.
spk17: Dave, I think that what we said is that the quarter before that in 12 months that we'd be at 3%. I think that If you look at the models that we're running, again, these are just models, and the models take into consideration that you have, you know, you're not going down on loans, you're not going up on loans, you're not going down on deposits, not going up. It's a pretty static model. Yep. The model reflects that, you know, in six months, we're looking at around 296, and 12 months, 314, and 24 months, even better than that. And it also, what's good, even if interest rates go up or down, our models are still showing our net interest margin expanding to really get more normal levels. So we're pretty excited about that.
spk19: Great. And so are you assuming a forward curve in that analysis at all, even though you're keeping the balance sheet static?
spk15: Yeah. On this, what the numbers we showed, that is the rate staying the same. But if you look at our model being 100 basis points down or 200 basis points, our margin still holds up. I think down to 124 months, our margin might be a few basis less than what we're projecting on the flat environment, but it's still expanding in the 12-24 months.
spk19: Okay, great. And what are you guys including in that expectation? I guess it excludes balance sheet changes, but what are you thinking in terms of deposit growth for the year?
spk17: That's probably the million-dollar question, Dave. You know, it's just I don't know that anybody really, you know, historically we've always grown the bank organically 2 to 4%. You know, these last several years were kind of crazy. We, you know, we took in, we were growing 10% a year. And so we did something the other day. We went back and looked and also back and I looked and said, okay, so after all the deposits we lost, recently and we went back three years before the COVID. What's really crazy when you even with the amount that we gained, we're still about 15% ahead. So that still gave us about a 5% organic growth rate over those years. So going forward though, it's really hard because again, not trying to make excuses, but one of the main objectives of the Federal Reserve is to really slow the economy. And that comes two ways. One, reducing increasing interest rates, reducing borrower borrowers, and number two, pulling money out of the system. And they pulled a trillion dollars out of the system, you know, in the last year. So when they're pulling money out, uh, you, that, that's something that it's going to reduce money in the bank, unless, unless you're buying broker funds. And I would say that, you know, we know that some banks do, I'm not saying it's wrong or right, We just elected to keep our cost of money with core deposits and not chase the broker funds. So that's just the position we took. I don't know what's right or wrong, and I'm not getting to what you're really asking what we think. I would think at best it's probably a 2% gain in deposits probably. Do you disagree or is that?
spk15: Yeah, I think usually historically if you look at our deposits, the first quarter because of tax payment usually – you know, goes down a little bit historically. But in the long term, I think we should be able to get to a historical rate. But it all depends on the microeconomic conditions and, you know, with the quantitative tightening, too, that will impact as well.
spk17: The main thing is I don't see a 5% organic growth rate or that, not this year. That's for sure. I agree.
spk10: Okay. Great. Thanks, guys.
spk13: The next question comes from Brett Rabaton with Hovde Group. Please go ahead.
spk18: Hey, good morning, everyone. Good morning. I wanted to stick with the balance sheet and the margin and just looking at the securities portfolio. It's about $13 billion, and I know you've got over $2 billion in cash flow annually. But if you look at the yield year over year, it's kind of flattish at $207. Does that start to move up? you know, in the next quarter or two, or can you give us any thoughts on the securities portfolio progression from a yield perspective from here?
spk15: Yeah, since we're not purchasing any new securities, I think yield is going to hold up as what we see at around 205. But I think it also depends, you know, how the mortgage rate is going to do, if there will be a lot of, you know, increase in the mortgage or decrease in the mortgage rate, they might speed up a little bit faster. turnover of those security and maybe we'll pick up a little bit of yield there. But overall, we're not expecting the security yield to go up more significantly or come down more.
spk17: The only way that the yield would go up in the bond portfolio is if we elected instead of reducing debt or putting the money in the loans where we prefer putting it, we would buy back securities. In that case, then it would go up. Exactly. Otherwise, you know, it's probably going to stay stagnant for the most part of last.
spk18: Okay. Okay. And then on the funding side, can you give us a refresher on how much you guys have in index deposits? And then just thinking about the usual seasonality for municipal deposits, how much you guys have in that and how you see the next quarter, too, playing out from that perspective.
spk15: Okay. From the overall funding, let's talk. We have in the borrowing, we still have about $3.7 billion, around 5%. So we're paying down with cash flow from the investment portfolio. Related to time deposits, we have 13% of our deposit in time deposits. But that's the special program we introduced paying 5%. We just want to give our customers some way of earning rates rather than just leading to competition. We want to pay up on those. And those are only seven months to do. So we're keeping them short term. So when rates would come down, we can reprice them quickly and kind of get out of our system within seven months. So we have about $3.5 billion in the CDs, but out of that, $3.1 billion will be maturing within 12 months, and those special CDs, about, I think, $1.8 billion. The rest of them is money market in non-interest-bearing deposits.
spk10: Okay.
spk18: And any thoughts on the municipal deposits and how those trend from here?
spk17: Generally, the municipal deposits really increase at year end. Again, when we compare this year's municipal deposits to last year, we're down about $500 million. It's just, you know, they're taking it and putting it in higher, you know, a text pool or something like that. So we didn't get as much in public funds this quarter at the end of year end as we did in the previous. And I think that was expected.
spk15: Yeah. And on the public funds one note, I would say, I think we're down to almost to their operating accounts because all the excess they could earn, they probably moved out to tax pools. So we're kind of maintaining their operating account.
spk17: Maybe a little bit higher right now.
spk15: Yeah.
spk17: People are still paying tax dollars. But again, most of the money that we do is their operating accounts. It's not their investment. Yeah. Big picture. Correct.
spk18: Okay. That's helpful. If I could sneak in one last one just around the Lone Star transaction. Any update there? I know that Justice Department, you know, it's reviewing that one, so it's taking longer. But have you guys heard anything or any update from a timeline perspective when that might close?
spk17: You know, we were really hoping to be able to say something at this meeting. Unfortunately, we're not. But we're still, you know, we're still very hopeful that we're going to get the deal done. And, you know, hopefully we'll hear about it soon. Yeah, and you mentioned Justice Department. We're out of the Justice Department. Right. We're out of the Justice Department. They've cleared us.
spk18: Okay. Okay. Great. Thanks for all the color.
spk17: It's still at the FDIC, and they take off most of Christmas for December.
spk12: The next question comes from Michael Rose with Raymond James.
spk13: Please go ahead.
spk07: Hey, good morning, guys. Thanks for taking my questions. I wanted to start on some of the proposals that are out there as it relates to interchange and overdrafts.
spk17: and i know these won't hit until you know later this year or next year for that matter but if you guys looked at those and what could the potential impact be for prosperity thanks if you hit one of my hot buttons michael uh i i hope you know it's not right yeah if it goes through you know if it goes through uh it really i think it's in latter part of 2025 i'm hoping maybe there will be a new administration that can stop it because it's really It's really a misguided thing to think that to bring the overdraft charges to zero or $3 or $17. I mean, really, it's a behavior I think that you don't want to promote. I mean, think about it on the other end that, you know, it's like telling your kids something's wrong, but you're going to reward them for continuing to do it. And think on the other end where the person is giving a check and is buying a good to the merchant or the retailer, and that person on the other end, they're they're not getting their money. I mean, they've lost the money on the deal where the bank, a lot of times, pays that overdraft. You won't see that overdraft. We might not be paying them in the future. So the bottom line, I think it's inconceivable. I'm hoping that Rhoda Chopra will reconsider this deal. I'm hoping he will. I hope we can get to talk to him. And more so than that, if banks have to continue, they need to service charge income. I mean, the regulatory burden is is just unbelievable right now. And so banks would have to go to really a different type of service charge where we're offering free checking accounts right now to really people on the lower end with lower amounts of deposits. I think in the future, if this deal does go through, I think the banks will have to say, okay, your minimum balance now may have to be $2,000 or $3,000 or you're going to get a service charge. And that would eliminate a lot of the lower end checking accounts that the regulators and the Fed has really wanted us to get those people to have accounts. So, you know, I don't think it's completely over yet, but if it does, there's no question it would be impactful to us. The impact would either be whether it's that, you know, are they going to let you charge $17? Are they going to let you charge $3, you know? So if that's the case, it could be, you know, if it's $17 and you get to charge $17 or $15, it's probably $10 or $11 million before tax. If it's $3, then, you know, it's more like, again, I think probably more like 16 or 17 before tax, something in that category. On the other hand, we would have to find ways to increase service charges and other areas to cover and compensate for that. I don't know that you would cover and compensate for the entire makeup, but you would have to come up with some other charges, some other places.
spk07: Got it.
spk17: Okay. I gave you too much information, Michael.
spk07: No, that's great, and sorry to hit a hot-button topic for you. Maybe just as a follow-up, you guys announced a new share repurchase program the other day, and you guys haven't been very active, but capital levels are really high. I don't think you're expecting a ton in terms of balance sheet or loan growth this year. Any sort of... thoughts around increased usage of the buyback as we move through the year, assuming credit remains relatively benign? Thanks.
spk17: Yeah, I mean, I don't think that we would have ever issued a repurchase agreement if it wasn't our intention to use it. I think we did use it last year. I think, how many shares, Colin, did we purchase last year? About 1.2 million shares. 1.2 million. Again, not a lot, but we still did. I think that, you know, we were very cautious with look last year was a year that we wish would have never happened starting in march with the silicon valley bank and signature bank and so and then you had people were still being very critical of you know what kind of bomb portfolios you have what kind of losses there and so you know we took all that in consideration the regulators were a little bit antsy about everything too liquidity and that so we we were more cautious i think we all feel much better right now and i think that if we don't use it in another way. Our perspective is that we always like to increase dividends, of course. That's kind of our deal. But if we don't, we wouldn't use it all there, we would probably look at, and we don't get an M&A deal, then we will look at purchasing the stock if the stock's not appropriately priced.
spk06: Makes sense.
spk07: And then last for me, Kevin, can we just get an update on The warehouse, since you guys came in a little bit higher than what you talked about last quarter. Thanks.
spk03: Yeah, Michael, as you know, I always talk in average balances for the quarter, and we did come in a little higher. I think my high side estimate was maybe $750 million, and we ended up at $770 as an average for the quarter. The first quarter is typically the weakest quarter. It hasn't always showed up that way over the last 10 years because we had so many failures. refinance booms and re-refinance booms and everything else. But the first quarter is generally pretty weak. January of this year has started off a lot like January of last year, weak. The average, Michael, through last night has come down from that 770 for the fourth quarter down to 704. And last night's balance was maybe 610 million. So we're hitting a low point. I expect it to drift a little lower and get under 600 million here for a few days. before it begins to rebound. So January and February are generally going to be pretty weak. March picks back up. My best guesstimate for the average for the quarter, I'm going to say $650 million, but could be as low as $625. But if I had to pick a number, I'd go $650.
spk06: Sounds good. Thanks, Kevin. And thanks for taking all my questions, everyone.
spk12: The next question comes from Brandon King with Truer Securities.
spk13: Please go ahead.
spk04: Hey, good morning. Good morning. So I had a question on deposits, and we're looking at potential rate cuts this year. So how are you thinking about the ability to maybe reprice some of your core deposits, given that you're already quite low compared to some of your competitors?
spk15: So if you just look at cost of funding, let's say, let's start with the borrowing that we have with the Fed, the term bank funding program, we have 3.7 billion paying around 5%. So any cut we have is going to be direct impact to that. So we're going to get direct benefit from that standpoint. As the rate, the second part, I would say probably those special CD we're offering at 5% right now. So if the rate would cut down, we would cut those down Probably will linger a little bit, but within seven months, we should be able to reprice that CD as well, lower rate. On other ones, I agree, probably will not be able to cut a lot on some money market because we don't offer high rates for our customers. So there might be a little bit of delay on that, you know, compared to if you had offer 5% money market, probably could cut right away when the rate goes down. With us, probably it takes time with that. So I think that's overall compositional or deposit.
spk17: I would say also to that, Brandon, is that if rates go down dramatically, which I don't think that they will, quite frankly, but if they do go down, I think that'll take the strain off of the non-interest-bearing deposits leaving more people. Unless they can get a lot of a big interest rate somewhere else, they'll start leaving more money in their checking accounts. And so I think that will help also.
spk04: Got it. Very helpful. And then could you give us kind of the puts and takes on how you're thinking about loan growth this year? And then within that, also kind of talk about what you're seeing in regards to prepayment activity.
spk03: Yeah, Brandon, this is Kevin. I think as we look at the year, our thoughts as we sit here today is kind of 3% to 5% loan growth. I would have said more back-end loaded, but I've We have had a few nice deals approved in loan committee that we have to fund this quarter. So I think a couple of those are going to fund here towards the end of the month and early into February. And we're talking about some fairly meaningful funding. So I think Q1 might be pretty good for us. In addition to that, we started off Q3 with a lot of payoffs in July. just a ton of payoffs in July. And we had started off Q1 here with very few payoffs. And I meant Q4 on that previous statement, I'm sorry. We're actually slightly up for loan growth. It's nominal, but we are slightly positive year to date. And again, we got a couple of big fundings coming up. So I think we're comfortable with a 3% to 5% kind of number. To the extent that the economy rebounds and GDP is higher than anticipated, that number could go up in the latter part of the year if, in fact, there are rate cuts. As David said, we're probably less enthusiastic on our thoughts about rate cuts than many. And to the extent there are any, we think they'll be later in the year. And I don't mean to speak for David, but I think around this table, we're not as charged up about the prospects as many.
spk17: I'd also comment, Brandon, that I think that, you know, our customers, I'm not saying other banks, what customers aren't the quality at ours, but we do have a real high quality customer. And a lot of our customers really were borrowing what interest rates were. They left money in their checking accounts. As interest rates, what we saw as interest rates started increasing on their loans, they took money out of their checking accounts and really applied those more to the loan. I think that's probably mitigated and stabilized also.
spk03: We saw that particularly in our CNI book. Just a ton of deposit decline with the money not going out of the bank. It was going to pay off loans.
spk17: Even we saw some real estate deals where they might have been at 5% or so and their rate was going to go to 8% or 8.5%. They just elected to pay off the whole loan. I saw certain smaller loans like that. Customers just had money in their accounts, and they paid those loans off, which is a good thing, too.
spk04: Great. Thanks for all the commentary. I'll hop back in the queue.
spk13: Next question comes from Steven Scouten with Piper Sandler. Please go ahead.
spk08: Yeah, thanks. Good morning. I'm just kind of wondering with the Lone Star deal, if that gives any kind of trepidation around future deals or, you know, changes maybe how you think about the timeline of approval for future deals, or is this more just still specific to Lone Star in particular?
spk17: I can't say it's specific to Lone Star. I mean, because like I said, it's out of the Justice Department. It's really at the FDIC right now. I think all deals are going to take longer. But again... I think that, you know, I still feel certain that we have a good bank, and it may take a little bit more work, but that if we make something happen and the regulators like it, they're going to – it'll get done. It's just – but there's no question getting something done today as compared to a few years ago, it's a whole different horse right now.
spk08: Yeah, fair enough. Okay. And just kind of switching – oh, sorry.
spk17: Let me qualify. This particular deal has some more issues than just the normal issues do sometimes. So hopefully we won't run into some of that stuff. And it wasn't with their bank. Let me just say this. It was just a number of different things that we had to go through.
spk08: Got it. And then just hopping back to the idea of the net interest margin, I know you guys said you're not assuming we'll see as many rate cuts as maybe the forward curve would suggest. And I agree with you there. But I mean, if we get, you know, can you guys quantify maybe for each 25 basis point cut, maybe there's a basis point of two and then downside? Or do you think even with those cuts, you know, over that 24-month period of time that you stated that there really is de minimis kind of downside on a basis point perspective?
spk15: Yeah, I think if you just look at our balance sheet and kind of go through what impact would be, I think the first impact would be on our funding borrowing side of it. We have $3.7 billion that we're paying down. But if there would be a rate cut, you would see immediate impact over there. I think with a 25 base points cut, I don't think the loan rate is going to change significantly. I think it's just going to reprice at 8% or whatever we're getting right now. So if you look at long term, I mean, our balance sheet is very neutrally positioned. So we benefit in rate cut or increases in this situation in rate cut. And like I said, in 24 months, if we're looking at our model, our margin, it's, yeah, it drops a little bit, but not significantly from what the guidance we gave you over 24 months, because the power of our repricing of assets continues. If you look at our loans, we have about principal pay down about four and a half billion dollars Out of that, 60% is fixed loans, which on the average rate is around 5%. So you're repricing that 5% at 8%. I mean, you're picking up 300 basis points there, and if the rate goes down, you're picking up and borrowing. So, I mean, we look good in either way.
spk17: I would say, also, back again, I'm just looking at the model. It doesn't go in 25 basis points increments, but we go up 100 or down 100, and even down 100 if In six months, instead of 2.96 net interest margin, we're showing 307. In 12 months, we were at 314 flat. If it goes down, we're at 324. And so even in the 24-month, it goes up. So I think down 100, we still even do better than over time, even with interest rates going down, even 200 basis points.
spk08: Yeah, because of borrowing. Right. Okay, that's extremely helpful. Thanks for that, Keller. And then just lastly for me, I mean, the loan loss reserve is still 163 alone. Do you think we could continue to see the zero provision for some time here in the future?
spk17: It's pretty hard to see with $370 million in allowance for loan loss and $72 million in non-performing that we would be putting a lot. I know you saw the charge-offs this time that almost its entirety was due to the first capital bank merger deal. You know, again, really some of those loans, I think, you know, with the new accounting, some of those loans, I liked it the old way. We would charge those things off, and as we collected them, then we would take it in the recovery. Under the new CECL deal, if you think there's a chance of recovery, you put them on the books. And I wish that we wouldn't have put some of those on the books. But, again, we had to and kind of believed in what some of the guys had told us, that they were collectible. But the truth of the matter is, have they're fully reserved anyway it's just a different way of accounting for them i think we reserve between the allowance for loan loss that we brought over and our allowance that we put in i mean it was like 80 million dollars or something like that 80 or 90 million dollars so again i think that we're good we do have some loans on the uh that increase right now the 72 million and non-performing again the majority of those were from from the merger uh again i don't see I don't see full losses in those loans like we had in those first charge-offs. There may be a little bit of loss, but there shouldn't be a whole lot. I think in most of the deals, we have dealers working on them right now. It's just gonna take us a little bit longer to work out of them. I'd say probably it takes six months or a year to work out of those credits, and then I think that our non-performing should be back down to more historical levels.
spk15: Yeah, and to add to that, we run the model, and based on the model, we see how much provision is needed. But since we have full reserve for those acquired loans, we didn't need to put any provision based on the model. But we'll be running the model with the economic variables there and see if it requires any provision or not.
spk17: Our models are still showing that we have plenty in the account. Yeah, and we have a little bit of recession on this site.
spk08: Okay, super. That's great, Keller. Appreciate all the time, guys.
spk13: The next question comes from Ninan Gosalia from Morgan Stanley. Please go ahead.
spk14: Hi, good afternoon. Maybe a big picture question on loan growth. It looks like we're going to get a soft landing. Many of your peers are talking about loan growth re-accelerating in the back half of the year, and it sounds like you're saying that too. but you still have all this capital on the books. So why not lean in a little bit more now and get that loan repricing and NIM benefit faster right now, especially if you can put it in some longer dated loans and lock in some red?
spk03: Yeah, I think we're thinking about the exact opposite way. You know, you know, We all are still hopeful of a soft landing. I believe that's a possibility. At today's rates, it's really hard to make a lot of things work. By way of example, go back two years ago when we had lower rates. If we were looking at a multifamily construction project, we might have done it at a low 70s loan to hard cost kind of numbers. And that would produce a very comfortable 125 debt service coverage ratio, even under a little bit of stress. Today, that same exact loan will require somewhere between 50 and 52% equity to get that same kind of comfort at your debt service coverage ratio level. So, you know, we could lean into that, but there's not many equity players who want to lean into that with us. They're just going to wait for a better time and lower rates to do some of these projects. So we're being cautious, and I think we're being prudent and cautious at the same time. I think we'll get our fair share, and I believe we'll grow at or slightly above the GDP rates. And it just may be a little back-end loaded. As I say, I think we have some fortune here in the first quarter. Things can always not close for various reasons, but we've got some pretty nice deals that are teed up to close that we're pretty optimistic the first quarter is going to be pretty good.
spk16: I think the good news is that virtually all of our customers are doing okay. They're not in financial difficulty. The reason they're not doing more in the marketplace is they're waiting to see if rates do go down, and they're waiting to get a little better handle on exactly where the overall economy is headed. But they as entities are in good positions, almost all of them. So if and when the picture is brighter and the cost of doing something is less, I think we have an excellent chance at seeing a lot of good loans come our way.
spk03: Yeah, and I think, you know, to your lean-in point, the things we would lean in on are, you know, not to name any names, but banks with a really high loan-to-deposit ratio that may have a customer request for a good long-time customer that they would love to do, but maybe they just don't have the capacity to do as well or as much anymore. We would like to lean into those where we get a full-blown, hey, we're going to help you out on this, but we want a full relationship here. We want your deposits, and we want to do a full relationship. I see ourselves leaning into some of those situations when they come up. Those banks, they can raise money, and they are raising money, broker deposits, which we've chosen not to do, but If you go get a broker deposit at 5% or 5.5% these days and try to make a loan to a good customer at 8.25% or 8.5%, there's not much in it once you put up some operating costs and the provision against it. Those are the opportunities we would lean into.
spk16: I think that's absolutely right. From a competitive standpoint, some banks are just not able to move forward on the loan front in a very aggressive way. we have more flexibility than a lot of banks do in that regard. So if the bank is dragging its feet, so to speak, and giving an approval, we don't have that problem. We can look at a deal and give somebody an answer and move forward with it.
spk17: But also, you'd have to admit that last year was kind of a strange year. We were cautious. Deposits were leaving the bank where we probably cut our own loan growth down because we were trying – instead of financing dry relationships, we really went back to looking just at customers that were customers that could be a deposit customer in a total relationship. So we've probably cut ourselves off from a number of deals last year. I think your point is well taken. Maybe, you know, things do look better. But again, you want to make sure, I don't think we're a bank that wants to end up with a 90% loan to deposit ratio. We want to have liquidity in the bank. And so, you know, you have to grow deposits and loans at the same time, just to think you can grow deposits and not grow, just to think you can grow loans and not grow deposits would be a mistake. I know a lot of people don't see that, but you need to keep liquidity. If there's anything we should have learned this last year, that is to have liquidity in the bank. And I don't believe, again, I'm not judging other bankers. I just don't believe that broker deposits is true liquidity. That's not core deposits. And so, you know, we'll keep an eye on both of those, both of those things.
spk03: Yeah, look, it served us pretty well, not chasing the deposit side, but we are starting to inflect that our loan-to-deposit ratio limits. I think we have policy limits at 85%. We're not there yet. But we have stuck to our core deposit franchise, and you look at way more banks than I do, but I look actively at a number of banks, particularly during each earnings season, that are around our size or in our markets. And, you know, we came into this in a very enviable position, maybe a 62% to 65% loan-to-deposit ratio. We didn't have to chase deposits to fund loans. We could let some deposits run off and let our loan-to-deposit ratio go up and maintain the core deposit franchise underneath it all. And as a result, you know, we come through a quarter where our total funding cost goes up only four basis points. And now is that for interest bearing liabilities that includes the debt, 2.58%. I don't need to tell you where some of the other banks are reporting, but, you know, we're seeing numbers above three. We're seeing numbers above three and a quarter. You know, that gives us a 50 to 75 basis points spread to them. in this kind of environment because we haven't chased it. And as I just do look at our overall cost of funds, it's driven largely now 37, almost 38% of our interest-bearing cost is in our debt. And as you know, we're paying down that debt as the bonds cash flow to us. So we expect, you know, $2 billion worth of paydowns in the debt roughly. And, you know, That's meaningful. That was $52 million worth of cost in the fourth quarter out of $139 million worth of deposit costs. So we've got that to look forward to, which is why we're so enthusiastic about our prospects for Nimmin.
spk17: I think we're at a point in time where we were all locking into longer-term assets when rates were so low. I think now, I think your actions that you do right now by buying money and not having core deposits and increasing your rates on all your deposits could be the next mistake. So I think what may not look so good right now may be prudent going into the future.
spk14: Got it. I really appreciate the first answer here. Maybe on the core deposits point, I think you said a little bit earlier that for NIB growth, you could – see some more customers leave more deposits here if rates go down. You know, how quickly do you think that can happen? Do you think that can happen as soon as you get three or four rate cuts? Or do you need to see rates go down closer to the maybe three, three and a half percent range before you see that happen?
spk17: You know, I think you will see. I don't think it'll be they're not going to rush to bring it back in. But every time the rates go down, and I think if you get three or four rate cuts, you know, you're talking 100 basis points, that would be meaningful. Yeah. I mean, I think it would. And I think, again, I think you'd start seeing people moving money back in. I don't think that you're ever going to go back to zero deposits. I shouldn't say never. I should have learned that in my lifetime. But, you know, I think what you're going to see is interest rates probably, again, I don't think, I don't even think in the first quarter or the second quarter, having said this, it changes so fast from quarter to quarter. I think you'll see probably interest rates go down, the short-term interest rates. But again, your five-year and 10-year, I think these are rates that are going to be, this is normalization, and you're going to probably see those rates where they're at or maybe even go up a little bit.
spk03: Thank you. Last point is I think this is playing out pretty much the way we thought.
spk17: Exactly.
spk03: Let's just go back to last quarter. I haven't reread the transcript, and I should probably do that before I come into these calls. But I do recall us talking about when rates pause, it is not unusual. In fact, it's expected that deposit funding costs and mix changes continue for about six months thereafter. And I think we're all into that process right now. So some of this mixed change could go on another quarter. But it's coming at lower and lower levels. I mean, our total cost of funds went up a whopping four basis points last quarter. And so it's abating, but it's playing about how it's played out in prior cycles. The Fed pauses. And rates continue to go up in the banking system for six months.
spk17: I mean, your point is well taken. In previous quarters, we actually said that, historically, banks had 20% or 30% of their money in certificates of deposits. And as rates go up, we would see money leave where we're at and go into some of these higher-rate deals. And that's exactly what's happened. And vice versa will happen if rates go back down.
spk03: Well, we're halfway through it. Let's hope we're right about the second half being the next quarter being the end of it.
spk10: We really appreciate it. Thank you.
spk13: The next question comes from John Avstrom with RBC Capital Markets. Please go ahead.
spk01: Hey, thanks. Good morning. Good morning. Just to follow up on that, you think that within the next couple of quarters, deposit costs really stop going up for you? Is that fair?
spk17: I would say absolutely.
spk01: Yeah.
spk15: If you look at, you know, let's just look at the number.
spk03: Certainly overall funding costs.
spk15: Exactly. If you look at the cost of fund, John, I mean, we're just going to look at the trends, you know, from the Q4 averages to Q1 increase, like 41 base points, increase from first to second, like 46 basis points, and then it's increased only 18 base points, and this time we only had three base points increase cost of funds. So, You can see it's coming down. Yeah, we had significant increases the first few quarters, but pace of increases is slowing down, especially if you have some rate cut that should slow down or completely go maybe reverse.
spk03: Yeah, obviously, it's a big part, John, of our strength of the feelings about our NIM improving. It's a big component of it, obviously.
spk01: One more on deposits. The decline in deposits from a year ago, would you say that's all rate driven and is that stuff gone forever or can that start to come back assuming rates are stable?
spk17: I mean, I think that rates, I do think that, I don't know that it's all rate driven. I think for the most part it is. I think it is. There's some portion in it, I don't know what, where You know, we have big accounts that have $20 and $30 million in the account. And even though the CFO may like us, they have a board of directors and the CFO says, well, why take any chance if you can go to JPMorgan Chase or Wells Fargo? So that certainly adds to some impact. But I have noticed as things become more normalized, people aren't as fearful. I think you will get a good chunk of the money back. Yeah, I do. I do believe that.
spk16: I think we're already seeing that, David. We've had a number of customers that initially moved money out nine months to a year ago, really nine months ago, when the bank started to fail. They moved money out for fear of insurance, not so much for rates. And most of that money went to treasuries. And for really about one or two months now, we started to see some of that money come back. Not a flood of it, but we started to see some of that money come back from existing customers. So I do think there's less fear in the market of bank failure. And if I'm right about that, then the competition is really rate driven, not fear of failure. and I think it's more so rate-driven now.
spk03: Yeah, I haven't looked at it system-wide, John, but if you think about it, the Fed has taken money out of the system. M2 is down. So if you looked across the banking system and knew just how many deposits had left and subtracted out the amount that M2 went down because Fed actions, the rest would have to be rate-driven. Right.
spk06: It wouldn't have to be. It could be service levels, but largely rate-driven.
spk01: And just a small one. Looks like it was a PCD loan, but can you touch on the charge-off there, and is there anything left, first capital, that might be coming through? Thanks.
spk16: Well, number one, all of the first capital issues that we're aware of, and we believe we are aware of all of them, are fully reserved at this time. So there's not going to be any surprise loss in there based on what we see.
spk17: Right. I do think we did, I think, in some of the first loans that we put on, We did, you know, we do ask usually, anytime we do a deal, we go with management and what they say. They thought that they, that there was, even though we reserved for them, fully for them, we still put them on the books. They thought that they could be collected. They weren't collected. And then you had other loans that came back on that we have put back on non-performing. I don't think those loans are like the loans that we first put on. We knew these first loans we put on were very, very challenged. we're really giving management a chance to believe what they said. And again, it just didn't work out. So, but again, I don't think that the loans that we have in on-perform right now, you shouldn't see those kinds of losses the way we charged off those first ones. In my opinion, we should have just charged them off to begin with, not only reserve, but we charged them off to begin with.
spk01: Okay, thanks for the help. I appreciate it.
spk17: You didn't ask about the Queen Mary. I think you've turned the corner. The Queen Mary is sailing in the right direction. We should reach our destiny soon. All the passengers and crew are good spirits.
spk13: The next question comes from Brady Gailey with KBW. Please go ahead.
spk02: Hey, thanks, guys. I just wanted to hit on average earning assets. As I look at the dynamics, You have loan growth that's expected to outpace deposit growth. You're trying to get borrowings down, so bond balances are coming down. And, you know, average earning assets did shrink on a linked quarter basis. So how should we think about the level of average earning assets into 2024? Do you think we could see some continued shrinkage there, or do you think that'll be more stable?
spk17: You know, again, these are questions that are – you know, we think it has definitely become more stable. There's no question. I mean, your assets depend on your deposits, your liabilities that you have in. Again, I don't, I think it's a tougher deal right now. Over time, just like, just like as assets grew dramatically, they came down pretty good over the last year. So things will stabilize again. And even though I would think that we'll probably still grow We'll still grow the assets just because, you know, as Mention said.
spk03: Yeah, I think you're thinking, as I think about it, loan growth, that is true. But Brady, I think about it this way. We know we have cash flows coming off the bond book of $2.1, $2.2 billion. And our intention today is to let that bond book drift lower, right, and take the money and pay off the flux. We're picking up 300 basis points. It's margin enhancing. It's good in all kinds of ways for us. It's NII enhancing. And you take 5% loan growth on, we don't have $20 billion, but call it $20 billion. That would tell you you'd have about a billion dollars worth of total asset shrinkage in the absence of long-term rates being high and us electing to be backed into the buying of the bond book, right, would be one alternative or loans growing faster. But outside of that, I think just the math would be we could actually shrink the balance sheet a billion dollars in that scenario that I've just described, which is what we've guided to here today and before, but grow NII.
spk17: Yeah, I mean, I... I think that's the real story, Brady. I think growth in loans and all that's really important, but our real story is the growth in the net income on the bottom line. Again, if our models are right, we're a steal. This should be a dramatic opportunity for somebody to come in. You're looking at the income that we're making today compared to what we'll be making, and It won't change dramatically real big in 12 months, but in 24 months, it's a dramatic change. And I think that's the real story, really. And that's where we all need to be focusing on, not just trying to go and build a bunch of broker deposits into the bank, but focused on what we have, our good core deposits, make good loans, have some growth in there, and really increase the earnings to what we think they will be.
spk15: I agree. And if you just take a pure math, I know it takes time to pay down borrows, but if you take a pure math, a $2 billion spread of 3% you're going to get from paying down the borrowing. That's $60 million annualized. And if you have that fixed loans that we principal pay down and reprice that, we'll have about, what, $2.5 billion. That is at 3% spread. There's another $75 million. I mean, if you look at there, that's why we very strongly believe that our margin is going to improve and our NII is going to improve. As we said, maybe the first half is going to be a little bit slower, but the second half and beyond in 2025, it looks very strong.
spk02: It's coming. Okay. All right. That's good color. And then on M&A, assuming Lone Star gets approved here near term and you start to look at new M&A opportunities, David, what do you think will be – you know, the primary focus. You know, you did kind of two smaller deals here recently with Lone Star and First Capital. Before that, you did a bigger deal with Legacy Texas and Kevin. So are you looking for bigger in size opportunities or smaller or both?
spk17: I would say we're looking for banks like we are with good core deposits, good people that run them that can help us build our bank into the future, whether that's a $2 billion bank, or a $30 billion bank. I know that's a big, wide range, but a lot of it, to me, really, it's really trying to find banks that are like us, that can really help us, that have a good core deposit base like we do, or that can help us get there if they're not right now, and that can show us that direction. I just think that's the way to go. And really, management's very important, that they can help us grow at the same time, too. But I think we're gonna stick to what we've always stuck to, I think we really need to know the other bank or the other people. You need to have the relationship. We've developed these relationships over the years. You know, right now, I think that they're out there. If you look at the regulatory burden, I've said this before in this room, it's just unbelievable. Right now, we probably have over 200 people in this bank that really work from a regulatory standpoint, not for us, but BSA, fair lending, compliance, is that kind of stuff. And technology is, you don't even need to go there. The expense for technology, what everybody's having to go through is unbelievable. And then they're talking about cutting income from overgrass and stuff like that. So there's going to be a tremendous amount of opportunity. And I think that we do have a large amount of capital. We haven't just gone and spent it. And I think that We have that opportunity, and I think we have a reputation that people will want to join us.
spk03: Yeah, Brady, again, I've said this several times, but I can speak as a seller to David. And as you know, because you've sat in many conferences with me, I said for three or four years I would never sell to David until the day I thought about selling. And I made one phone call and only one phone call. I called David. because I wanted his currency, not somebody else's. And I truly made one 6.30 in the morning phone call. I didn't know David was such a later riser than I was. I work later, though. He works a whole lot later than I do. My happy hour doesn't start till 8. That's right. I start happy hours sooner. But I made one phone call, and it was to David. And even at that, and we'd known each other forever, it took us two years. of really getting to know each other. I mean, opening up the books and thinking about how you put this together and how it works afterwards. And I don't need to tell you because you've seen it for years. Prosperity, it's a machine on the M&A side. There's no surprises.
spk17: And I would say we still have those opportunities right now. It's just a question of getting the FDIC on board and the regulatory people on board. I think we're getting there. Yeah.
spk02: All right. That's helpful. Then finally, for me, just a real quick one. I'm guessing the unrealized loss and the held to maturity bond book improved that year end versus linked quarter. What was that number, the unrealized loss?
spk15: So unrealized loss at end of December was 1.1 billion net of tax. So it came down from 1.6 billion to 1.1 billion. or around $1.5 billion from, so we decreased by $400 to $500 million.
spk10: Okay, got it. Thanks, guys.
spk12: The next question comes from Ben Gerlinger with Citi.
spk13: Please go ahead.
spk09: Hey, good morning. I know we've kind of beat the margin horse here, but... David, I just had one quick question. You said 296, six months from now, so you're applying and basically 20 basis points of upside over the next six months. I'm sorry, I didn't hear the question.
spk16: Going up to 296.
spk17: Our model shows in six months to be around 2.96. And with a static balance sheet, yeah.
spk09: Yeah, gotcha. I just, we've thrown out a lot of numbers. Just want to make sure I had that one right. And then a little bit of a cleanup question. Asked about, you said, For the expense base, 134 to 136. When you look towards the back half of the year, is that a good starting point on an organic basis, i.e. not including the deal closings?
spk15: Yeah, I agree. I think 134, 136 is a good starting point. And I think that's going to be, you know, that range probably first half of the year and probably increase a little bit in the second half of the year. And I think I gave the guidance last quarter being around 2%, maybe from the starting point of 134, 136. For second half of it, I think it's still good guidance, about 2% increase, because due to our merit increases and what we talked about, there's a lot of technology expenses coming due with that. So 134, 136 is a good starting point, not including on-time off items.
spk09: Right, right, right. Gotcha. Okay. And then if loan growth is better than expected, should we assume that's probably on the higher end of the range with like payout commission kind of things?
spk15: Yeah. I mean, if you have a loan growth, there will be some pickup there.
spk09: Yeah, it's a good cost. Okay. Well, I appreciate the time, guys.
spk13: The next question comes from Brody Preston with UBS. Please go ahead.
spk05: Hey, good morning, everyone. Good morning. I just wanted to ask a few questions. The first one was, it's a little ticky-tack, but I noticed that the borrowing rate ticked down this quarter. I wanted to ask, did you maybe substitute any borrowings for BTFP usage at all?
spk15: We have. We have substituted pretty much 100% of it, so we own the BTF right now. That's why, and with that rate decrease, we were able to reprice those.
spk05: Okay, and did that all happen, did that happen early in the quarter or did that happen late in the quarter? I'm just trying to think about the spot rate on the borrowings.
spk15: Yeah, it was later in the year and the spot rate was 480. Got it.
spk05: All right, cool. On the loan yields, I just wanted to better understand the trajectory of the core loan yields that you're expecting within the margin modeling that you all are doing. you know, on a quarterly basis through 2024?
spk15: Yeah, on that loan margin, I mean, it's just based on a model. A model shows that, like I said, we have, what, $4.5 billion coming due, which is 60% fixed, 40% is all available, so that rate's already baked in. So we're repricing about 60% of it in the market, repricing all the loans, I think the average rate on those fixed loans is about 5%, so we're repricing around 8% in the model.
spk05: Okay. And then the last one was I just want to circle back to the buyback. I know you said that you'd do it, you know, you've never not done it if you had the authorization. But it seems like capital returns are becoming a bigger theme amongst your mid-cap peers. And so just given the capital advantage that you all have and given the fact that this Lone Star deal is taking longer, is there any reason to think that you might not look to be aggressive at all? And I guess I'm asking, you know, is there anything, is Lone Star stopping you from wanting to be aggressive on the buyback? You know, just trying to better understand what's the holdup, you know, as it relates to it, just given the stock price.
spk17: I think historically we've really, buying our stock back we have when the price didn't seem appropriate, when it went kind of crazy, that's really what we always used our buyback money for. But our machine really has always been to take our earnings and increase dividends and also to do mergers and acquisitions. And I think that that's our focus. This last year, I would have to tell you that, I mean, we're almost forgetting that what we went through in March through December, I mean, the regulators and everybody just got really nervous. So we were really trying to build capital at the same time, too. We didn't care that we had so much capital. In fact, it was a good position to be in. And I think it's a good position to be right now. But when it's appropriate, we will buy stock back if it's an appropriate time. There's no question. But, again, we're focused on M&A and increasing dividends.
spk16: And I think it's important to emphasize that the potential – So our M&A right now is very significant. Right. May or may not happen, but it's out there.
spk05: What's the, what's like, yeah, go ahead, David. I'm sorry.
spk17: We think, we in the past think that you can really make more money through, if you make a good M&A deal and you can see more accretion there than you can just buying back your stock. But again, that's not always true. And so we'll have to look at each deal on its own at the same time.
spk05: Got it. Is there a minimum threshold on CET1 that you wouldn't want to go below, or is there kind of like a medium-term or longer-term level of CET1 that you think is appropriate for the bank, you know, just given the relatively lower risk profile of it?
spk17: I'm more of a leverage ratio guy. You know, I understand that, really. You know, you just take your goodwill out divided by your assets, and that's your leverage ratio, and I think we're probably at around 10% right now. And, you know, gosh, I remember in the old days, if you had 5% or 6%, that was pretty good. So I think the regulators wanted you to get to where this double digit is. I don't think you have to be, but I think they like us, that we are right there. I'd like to maintain it. If we do a deal or, I don't think I'd ever want to drop below 8% on a leverage ratio. That's just my gut feeling right now.
spk05: Got it. Thank you very much for taking my questions.
spk13: This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
spk00: 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.
spk12: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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