Q2 2022 Prosperity Bancshares Inc Earnings Call
Good morning, and welcome to the post 30, Bancshares' second quarter twice with your earnings Conference call.
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Since the conference over to Charlotte Rocky. Please go ahead.
Thank you.
Good morning, ladies and gentlemen, and welcome to prosperity Bancshares' second quarter 2022 earnings Conference call. This call is being broadcast live over the Internet at prosperity Bank USA Dot com and will be available for replay for the next few weeks.
I'm Charlotte Rasche C Executive Vice President and General Counsel of prosperity Bancshares and here with me today is David Zalman, Senior Chairman and Chief Executive Officer, a chief Tim to manage junior Chairman.
So back all small enough Chief financial Officer Eddie.
Every Saturday Vice chairman.
Kevin Hanigan, President and Chief operating Officer.
Randy Hester Chief lending Officer Merle.
Merrell Karnes, Chief Credit Officer, Mays, Davenport director of corporate strategy and.
Bob Dowdell Executive Vice President.
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by also backups manav.
Do some of our recent financial statistics, and Tim to Miami, who will discuss our lending activities, including asset quality.
Finally, we will open the call for questions. During the call interested parties may participate live by following the instructions that will be provided by our call operator.
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 Bancshares.
To be materially different from future results or performance expressed or implied by such forward looking statements.
Additional information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in prosperity Bancshares filings with the Securities and Exchange Commission, including forms 10-Q, and 10-K and other reports and statements we have filed with the FCC.
All forward looking statements are expressly qualified in their entirety by these cautionary statements now let me turn the call over to David Zalman. Thank you Charlotte.
I'd like to welcome and thank everyone listening to our second quarter 2022 conference calls.
For the second quarter of 2020 to prosperity had strong earnings core loan growth continued sound asset quality impressive cost controls and a return on average tangible common equity of 15, 7%.
We are optimistic about our company, which is evidenced by our repurchase of 981000 shares of our stock during the second quarter.
With regard to earnings on a linked quarter basis. Our net income was $128 million for the three months ended June 32022, and that's compared with 122 million, whereas the three months ended March 31, 22, an increase of six point.
$2 million or 5%.
Our net income per diluted common share was $1 40 for the three months ended June 32002.
Paired with a $1 33 for the three months ended March 2022.
Our annualized return on average assets for the three months ended June 32022.
Our 136% and an annualized return on average tangible common equity for the three months ending June 32022, again was 15, 7%.
With regard to loans.
On June 32022, or $18 2 billion, a decrease of $1 billion or five 4% compared with 19 billion on June 32021.
Primarily due to decreases in warehouse purchase program PPP loans.
Commercial real estate loans.
Excluding the warehouse purchase program and the PPP loans.
Long as on June 32022 were $17 billion compared to 16.4 billion on June 32021, an increase of $667 million or four 1%.
Our linked quarter loans, excluding warehouse purchase program and PPP loans increased $406 million.
Two 4% nine 8% annualized bottom line, excluding the warehouse purchase program loans in the PPP loans, we saw a four 1% growth year over year, and a nine 8% annualized growth quarter over quarter.
Our deposits at June 32022, or $29 9 billion, an increase of $755 million or two 6% compared with the $29 1 billion on June 32021.
Our linked quarter deposits decreased $1 2 billion or three 9%.
$31 1 billion on March 31, 2022.
The decrease in deposits was primarily due to seasonality as previously mentioned, we have over 500 municipal customers such as cities schools and counties that use of tax dollars. They received in December and January throughout the year, resulting in a decline in account balances.
And the second and third quarters of the year.
Also contributing to the decrease was our public fund customers moving their investment funds to other places now offering higher rates that were not available to these customers before the recent interest rate increases.
With regard to asset quality, our nonperforming assets totaled $22 million or seven basis points of quarterly average interest, earning assets on June 32022, and that was compared with $33 million or 11 basis points of quarterly average interest earning assets.
On June 32021.
A 34% decrease in nonperforming assets.
The allowance for credit losses on loans and off balance sheet credit exposure was $313 million on June 32022.
With regard to acquisitions, we continue to have conversations with bankers considering opportunities, we believe that higher technology costs salary increases loan competition funding cost succession planning concerns and increased regulatory burden.
The continued consolidation.
With regard to the economy.
Overall, Texas, and Oklahoma continue to shine as more people and companies move to the states. For example, according to CNBC, Texas added more jobs over the last year than the 25 lowest job growth states combined.
Further during the last year, the Dallas Fort Worth area added 295000 jobs three times its annual average annual growth in the Houston area at 185000 jobs unemployment remains unusually low.
<unk> continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner, while investing in ever changing technology and product distribution channels. We continue to grow the company, both organically and through mergers and acquisitions.
I want to thank everyone in our company for helping to make it the success it has become.
Thanks again for your support of our company, let me turn over our discussion to ASO back Us Manav, our chief financial officer to discuss some of the specific financial results. We achieved ASO back. Thank you Mr. Zalman good morning, everyone.
Net interest income before provision for credit losses for the three months ended June 32022 was $248 5 million compared to $245 4 million for the same period in 2021, an increase of $3 1 million or one 3%.
The current quarter net interest income includes the fair value loan income of 59000 compared to $12 2 million for the same period in 2021, a decrease of $12 1 million. The current quarter also includes a PPP loan fee income of $2 3 million compared to $10 3 million.
For the same period in 2021, a decrease of $8 million. However, the interest income on securities for the second quarter 2022 increased $20 4 million and interest expense decreased $6 1 million compared to the same period in 2021.
Due to the asset sensitive position of the balance sheet. We are seeing a benefit of increased rates and believe that they expect that additional rate increases will benefit. The net interest income is the long term as assets reprice further at the end of the second quarter, we increased rates on our deposits.
We expect the full impact of these increases on the third quarter interest expense in summary for the third quarter. We anticipate that net interest income will continue to improve.
The net interest margin on a tax equivalent basis was 297% for the three months ended June 32022, compared to three point and one 1% for the same period in 2021 and 2.88% for the quarter ended March 31 2022.
The decrease in net interest margin year over year was primarily due to lower fair value loan income and PPP loan fees.
Excluding purchase accounting adjustments the net interest margin for the quarter ended June 32022 was 297% compared to 296% for the same period in 2021 and 281% for the quarter ended March 31 2022.
Hum.
Noninterest income was $37 6 million for the three months ended June 32022, compared to $35 6 million for the same period in 2021 and $35 1 million for the quarter ended March 31 2022.
Noninterest expense for the three months ended June 30 is 2022 was $122 9 million compared to $115 2 million for the same period in 2021 and $119 9 million for the quarter ended March 31 2022.
The increase in salary and benefits is primarily due to the annual merit increases in the second quarter 2022, and higher discretionary incentives.
For the third quarter of 2022, we expect noninterest expense to be in the range of $120 million to $122 million.
The efficiency ratio was 43, 1% for the three months ended June 32022, compared to 41% for the same period in 2021 and 43, 7% for the three months ended March 31 2022.
During the second quarter of 2022, well recognized 59000 in fair value loan income as of June 32022, the remaining discount balance is $7 7 million due to low remaining discount balance we estimate the accretion income for next few quarters to be around $1 million.
Also during the second quarter of 2022, we recognized $2 3 million in PPP fee income as of June 32022, PPP loans had remaining deferred fee balance of $1 6 million. So we don't expect PPP fee income off of any significance.
Going forward as the PPP forgiveness of winding down.
The bond portfolio metrics at 632022 showed a weighted average life of five four years and projected annual cash flows of approximately $2 2 billion.
And with that let me turn it over the presentation to Tim to manage for some details on loans and asset quality and then thank.
Thank you you also back.
Our nonperforming assets.
At quarter end June 32022.
Totaled $22 million $187000.
12 basis points of loans and other real estate.
Compared to $27 million $184000 or 15 basis points at March 31, 2022.
This represents approximately an 18% decrease in nonperforming assets on a linked quarter basis.
The June 32022, nonperforming asset total.
It was made up of $20 million.
$632000 in loans.
Zero dollars in repossessed assets.
And $1 million $555000.
And other real estate.
Of the $22 million $187000 in nonperforming assets.
Only $669000 or energy credits.
Net charge offs for the three months ended June 32022.
For $1 million $204000 compared to $1 million $217000 for the quarter ended March 31 2022.
No dollars were added to the allowance for credit losses during the quarter ended June 32022.
Or were any taken into income from the allowance.
The average monthly new loan production for the quarter ended June 32022 was $674 million.
Loans outstanding at June 32022 were approximately $18 $2 billion, which includes 27 point.
$6 million in PPP loans.
The June 32022 home total is made up of 40% fixed rate loans.
<unk>, 33% floating rate loans, and 27% variable rate loans, Charlotte I will now turn it over to you.
Thank you Tim at this time, we are prepared to answer your questions. Anthony can you. Please assist us with questions.
Sure thing.
We will now begin the question and answer session to ask a question you May Press Star then one equal a phone keypad, if you're using a speakerphone. Please pick up your handset before pressing the tea.
To withdraw your question. Please first started to at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question will come from Jennifer Denver with Tour Securities You May now go ahead.
Thank you good morning.
Good morning.
Question on provision you guys haven't had a provision for the past several quarters just wondering what the outlook. There is I know you probably think losses are going to remain pretty low but just wondering.
How you look at provision them versus maybe a more challenging economic outlook.
Jennifer I'll start off this is David.
I think it's pretty simple math, I mean $22 million in nonperforming and $300 million in reserve. So that's about a 14 times coverage, so that maybe better than anybody in the industry may be so I don't see unless we see something.
Dramatically change.
In the immediate future really increasing that really.
I would say that obviously, we have to make.
Some hopefully reasonable projections about economic issues going forward.
And there's a lot of talk about recessionary activity.
Maybe that will come to pass maybe it wont.
But we have to take that into consideration just like we did see the issues during the period of Covid, we're past that now it could come back I guess.
Right now there is.
Some level of concern about recessionary activity to what extent that affects Texas and Oklahoma, We will see so far both states youre doing great really yes, I think some people could say.
Other people might take that position if you have too much in there but.
But again not knowing what's on the horizon.
I feel comfortable where we're at very comfortable yes.
We have a model that takes into consideration.
Basically everything I just said.
It indicates that we are where we should be so I don't envision any big change one way or the other anytime soon Kevin do you have any thoughts on it or you know I was going to say we went from concerns about COVID-19 concerns about recession.
Factored in at the end of the quarter the possibility of a recession in the recessionary impacts on our portfolio and deriving the.
The overall number which is a little over $300 million.
<unk>, which is one seven.
Seven $1 67 a M.
So.
Any recessionary impact.
We have contemplated is baked into the model at the end of the quarter.
Okay. Thank you and my second question is on loan growth.
Can you just talk about fines and and what you're seeing now and what what you think it's possible for 'twenty two.
In you know, excluding and including the mortgage warehouse.
Well, let me start off.
This quarter ended June 30th.
Was the best quarter in terms of three months of loan growth that we've ever had.
The $674 million.
Compares very well with the first quarter of this year, which was $632 million.
The average for all of 'twenty, one was $621 million.
And it hit it.
It culminated with a very good number for the month of June we did one.
Over $824 million.
In the month of June just that one month, so our loan committee activity since the end of June has been robust.
As mentioned just a minute ago, the economies in Texas and Oklahoma.
Appear to be very strong so far.
So I think there's a good chance, we're going to see excellent loan growth going forward.
Yeah.
Yes, Jennifer this is Kevin.
A little inside baseball on the quarter. It started off and I think we've talked to some of you early in the quarter.
Started off we were $126 million in the hole late in the month of April .
And so we had a relatively big hole to dig out of that was a couple of large.
Multifamily projects that paid off early in the quarter, we obviously rebounded from that and going into the last week of the quarter.
We were up over $500 million or in that neighborhood and we got.
Gosh, I think two or three days before quarter end $104 million structured CRE deal paid off.
Pay it off.
Early and we've got a nice prepayment fee out of that thing but.
And we still ended up with pretty good loan growth. This quarter started off better we havent start off.
A big hole.
And we're tracking along pretty fine I would say, we as a company, we're probably going to stick with for the year that 5% mid single digit kind of loan growth for the year.
First quarter, we didn't have much of anything second quarter was pretty good. This quarter is feeling pretty good as Tim said loan committee activity has been very.
Very strong.
I think last quarter, we talked about hiring a corporate banking.
Banking group down here in Houston, we've hired a team and those guys have done.
Better than we even expected as if we had high expectations of them. So we're feeling pretty good about loan growth.
Achieving that mid single digits for the year.
Thanks.
Our next question will come from Brett Robinson with hub Group you May now go ahead.
Hey, good morning, everyone.
Morning.
And to talk about the pause and you mentioned the municipal deposits and some of the source of the decline linked quarter.
Hoping you could just talk a barrel.
This deposit specifically and the decline was that just due to lower balances with those customers or could you elect to not be as competitive on on bids or maybe a little more color on those deposits specifically.
Greg This is David.
If you've followed us for a long time.
Historically, just the seasonality, we would always lose a certain amount of deposits in the second quarter and the third quarter, because we have as I think mentioned in my read we they get a lot of these municipalities, which are made up of cities.
Schools minions capacities county is that they get their tax dollars at the end of the year. The first of the year and then they use it and usually the summer time for the third quarter is the lowest that they had so.
Technically we always have a run on those deposits because they use them I would say this time with a $1 billion. We really we're thinking more it was like five or 600 million that would probably be down in that in that category. However, what we did see as when rates were so low we usually have the operating accounts of these.
<unk> and their investment funds are usually kept somewhere else, but when rates have been so low they had cap.
<unk> not only their operating accounts more of their investment accounts with us as they were able to go out and start getting one and a half of one 6% that that's what you probably saw the other five or $600 million go not just to the use of funds because they can get better investments, but again I think this is seasonality type of deal.
Combined with the amount of best investment funds woefully normally didnt have we usually just have their operating accounts and really when you look at it when you look at our deposits overall less the municipal deposits or the.
Basically I think our deposits year to date have really grown a little over 2%. So so.
From that standpoint, we knew it was coming it was just more in the municipal side I don't know if that Anthony enough color or not and somebody else may want to jump in as well what you said is exactly correct.
If you look historically.
What happened this quarter is very normal.
It happens all the time every year, except for the last previous two years when rates were just we were just covered up with.
Deposits from stimulus money, that's right and as low as our rates were during that period of time, they were still better than what commercial rates were outside of banking. So.
Virtually all of these public entities left much more of their money with us during that period of time than they historically have done.
There still are customers.
As David said, we typically have the operating accounts and that part of their business. So that hasnt changed. This is really something that's normal I think whats probably a little bit that you can't see it because this happens every year, but you probably didn't see it the last couple of years, because so many deposits were flowing into the banks it was camera.
Loss from the stimulus deposits and all of that.
Again, if you pulled out the last two years went back you would see that this is really a really normal occurrence really for us.
Not that I want to look at.
But that means stripping out our deposit franchise, the nonpublic funds side of things.
We did pretty darn well.
So this was isolated to the public fund side I think just in noninterest bearing demand deposits alone with <unk>.
Grew $255 million for the quarter.
So thats the annualized linked quarter, 95%, so I think not.
Public funds as a core competency of ours, but are non public fund deposits are holding up really well.
Okay, that's great color I figured a lot of it was just the seasonality from taxes and whatnot, but just wanted to know about understanding on that.
And then Chuck.
It looks like you did that a little bit to the securities portfolio This quarter.
Just curious on the bond portfolio.
And what's your thought about what rates and what do you think the yield on that portfolio might do I don't know what the premium amortization was.
This quarter, but I was just hoping for a little more color on that.
I'll start off that somebody else will probably jump in but again.
Obviously.
What we're getting on securities is much better than we were three or four months ago.
I mean, I think right now we have <unk>.
At quarter before the quarter before that we are probably on our investment securities are probably getting about 1.25% today when we're buying something.
A week ago, two weeks ago was probably three eight.
And I think Ryan by dropping to three 6% from I saw something we bought yes Dayton for Sunday night, three seven so that's kind of the yield that we're getting right now and so much better and.
I think that will continue also that yeah, so to add a little bit on that because we've got a little bit of a liquidity in the end of the first quarter, we utilize that liquidity to buy up some bonds at a higher rate. That's why you see the improvement on the yield but as you look at our bond portfolio Big picture as I mentioned earlier that we have.
About $2 2 billion of annualized cash flow from the bond portfolio. So thats.
<unk> operated well philosophy repriced those that would just discuss three 6% or $3 seven so there's going to be very beneficial for us.
From that standpoint.
On the second part of your question I think you asked about.
Premium amortization is slowing down and we can see it so.
The second quarter, we saw our premium amortization was $11 5 million. If we are projecting for the third quarter I think premium amortization going to come down a little bit more we estimating to be around $10 5 million, assuming the balances of the bond portfolio.
And I think the plan right now to keep the bond portfolio a balanced what we saw in the second quarter and.
And also back I would add to that that R.
Our average rate for this prior quarter on the securities portfolio was 172%.
We appear to be in a period right now where we can invest between three 6% and three 8% and that clearly seems to be going up not down so.
I think we're going to consistently see an increase in the rate of return off the securities portfolio, probably for at least a year, that's easy math, 2% ex <unk>.
$14 15 billion, it's fairly easy.
Everybody looks at looks favorable going forward, let me correct.
That's there.
Thats great color one last one if I could given given all that you. Just said you know a lot of people are expecting a little higher deposit betas, but it would almost seem like your margin expansion good.
Even be a little higher than it was in the second going forward is that a fair assumption you think are or deposit betas catch up and often that's not the case.
But we do our own modeling and I add at this side when we do our modeling it looks extremely good.
Again, I would always be cautious, though because the.
The Plaza and you want but you never know when something could happen, but I mean, just doing the modeling it looks looks very favorable for us yeah, and just to add a little bit more color. If you're just looking at big picture of the margin or net interest income that you have to just kind of look at the parts of what we have in our balance sheet. So we've discussed about bond portfolio being repriced $2.
Two 1 billion getting repriced and our loan growth will definitely help special put into the loans at higher yielding loans that we've had a few months ago, that's going to help but you're right I think that the deposit rate increases with data in the second quarter, we had very minimal impact on the second quarter, but we will see that the impact of that deposit <unk>.
<unk> in the third quarter, but overall, if we're looking at we're going to still see increase in net interest income and margin in the third quarter, but it might be a little bit less than was so second quarter, just because of the impact of the deposits.
The story of the Queen Mary I hate to keep bringing it out but it's like trying to turn the Queen Mary around in our parking lot right outside I mean, where a lot of the other banks saw a real big net interest margin increases the interest rates went up.
Probably more floating than ours. It takes us time to turn this ship around that the cap is telling me, it's going in the right direction and looking really good.
Okay, Yes, that's great color and congrats on a long run.
Okay.
Our next question will come from Brady Gailey with <unk> you May now go ahead.
Hey, Thanks, good morning, guys.
Good morning.
I just had a big picture question on the capital levels.
Capital just continues to grow quarter after quarter.
So I mean absent any sort of M&A that will help to deploy that.
What do you do with your excess capital do you want to just keep growing I mean, your deposit payout ratio is still pretty conservative.
At around 35% do you think about more aggressively increasing the dividend.
Just had how do you think about this growing in a pile of excess capital.
First question is there will be M&A.
We will see some of that money will be used in that in that it's just it's just going to be for the right.
The right thing and then secondly, I would say that you saw us pick up almost 900 <unk> I don't have it in front of me 900 something million shares. So I thought that was really showing that where we're.
We felt that our stock, we really undervalued and I think our average price was 67 or something like that so we were.
We were really buy into that so I think that youll see us if our price of our stock price becomes undervalued again again will really jump into there and we will do that and I think that we've consistently increased our dividends for the.
I forgot how long, but I don't see it being any different that youll, probably see some increase in dividends going forward. This year of course, that's a board of director decision and we intend to continue growing the assets of the bank. So I think that you'll use it for the growth of the bank organically and through M&A, Youll, probably see increase dividends and youll, probably see us even five stars.
Back of it becomes undervalued.
It's a little of everything a little of everything.
And David.
It's a high class problem, let me say that right now right.
David on the M&A comment.
It seems like from the banks on their earnings calls this quarter. It seems like the M&A dialogue has really slowed year just with.
Economic uncertainty out there I know Prosperities M&A model, there's sometimes a little different than peers.
Would you say you're still.
Actively engaged in M&A.
M&A is still a possibility for you guys near term.
I would say for us it's been more active this quarter than probably the previous quarter I think we've had a pretty active quarter and talking to different banks.
And maybe just update us size wise, what targets are you interested in and I know your top focus is there on the state of Texas, but what other geographies would you potentially be interested in.
So again I think you said it were primarily first first focused in the state of Texas, and Oklahoma, because Thats where were at right now and that would be our first focus having said that we've had bank.
Bank from out of state Thats really.
We've talked about and then we had several banks within the state of Texas also but.
Again I mentioned.
We will probably do banks of a smaller size that are within our markets like if they are in the Dallas Houston.
Boston is different that wherever we're at we'll probably look at it would be willingness to do a smaller size. If we go to another state bank.
We go we wouldn't do it unless we think we could really be in the top five and Thats right.
Assets and deposit itself.
That's just our general rule of thumb.
Alright, and then finally from me just I know you're.
Mark to market on your bond portfolio doesn't happen for you guys because all your stuff that was held to maturity.
What's the what's the unrealized loss up to all not held to maturity portfolio as of quarter end.
Thank you and after tax is what it might be you might want to threaten about $1 million 1 billion. One yes, sorry, I think about the way you're going to put it in our Q, it's kind of a show of $1 4 billion.
That's before tax.
Tax deferred asset will be about 1.1, yeah, so, but I talked to our treasurer people and they said that there was so much improvement last few weeks. So yeah. I think one four was the highest we've got but it's so much better now.
It's probably better because of 10 years come down on the other hand that.
That unrealized loss doesn't bother me I'd, rather the 10 year ago because of the future earnings are so much better for the bank than to worry about that aspect of the unrealized we get our money back in very short term I think our duration and our whole portfolio is only four years. So we start seeing results and are in a reasonable period of time, so I would still like to see.
Even though our portfolio of dollars may improve.
I still would rather see the 10 year quite.
Quite frankly.
It's important to say.
Shortly.
It's never been a problem, we've never had to sell any securities out of our portfolio.
The past futures now whatever it is I don't have the numbers in front of me, but we got to be the most liquid bank around I think we have the ability to the amount of the $2 $2 billion. It comes off our portfolio I think it's probably four or $5 billion of our loans get repriced and we can borrow 10 or $15 billion any day of the federal home loan bank.
So like I said before we'll be eating beans center split before where we're unable to the.
Have a liquidity issue.
Great. Thanks for the color guys.
Our next question will come from Brad Millsaps with Piper Sandler you May now go ahead.
Hey, good morning, guys.
Good morning.
I'll go back I was curious just to follow up on the margin discussion if you might have where sort of spot loan and deposit rates were at June 30 kind of relative to where they were the.
The average was for the quarter.
So the if you look at the I mean, if you look at our deposit cost of deposits was 11 basis points and for the quarter and the loans were at.
For loans held for investment was <unk> 35.
So if you're looking at just the deposit costs that did not include the rate increases that we've had in the end of the second quarter in terms of our betas are we were analyzing data on those rate increases on deposits. It's about nine to 10 basis points for 100 based upon that that increase will not on noninterest bear.
Deposits, but if you're looking at total deposit this will at least like a six basis points or something but if you look at the backend of 2015, when we had our rate increases on deposits. Our beta on that time was 21 basis points that time and we're doing it in.
What mine 10 based upon this time, so we're doing much better than we did.
Back in 2015, and 16 17.
Okay, maybe maybe asked differently on the on the loan side of the equation, where where are you seeing sort of new.
New loan yields coming on the books kind of relative to the average yield.
Our average for the quarter was $4 two 8%.
And typically in loan committee now we're seeing loans.
Just under 5% too.
<unk> 95, and three quarters percent.
There are some outliers there are a few a little lower than that or if you're a little higher than that but basically it's.
It's.
Almost 5% to five and three quarters percent.
Okay. Thanks.
Oh good.
Those are the current loan on on variable rate loans and floating loans. So they will go up.
If rates go up I'm not talking about just fixed rate loans.
Got it and then just one more for me.
I did notice that you added a small amount of federal.
Federal home bank advances in the quarter or was that more just to cover kind of the outflow of public funds and the plan would be.
Just pay those off.
When when the public money starts to flow back into the bank I assume those are just kind of temporary short term overnight advances.
I don't know necessarily that that is true.
In the past again over the last couple of years with interest rates Red zero, and we couldnt get that 91% on our in our investments.
We really didn't do that but if you look before that.
We leverage we leveraged the bank anywhere between 1 billion to $2 billion bond advance.
The bonds roll off every year, which.
You can make a pretty good spread off of that we never really did more than what we have coming up our existing portfolio, but I think as interest rates stay high you will probably see us leverage the bank a little bit more probably with the yields that's out there.
Okay that was my next question. So I think also Doug mentioned, but the bond portfolio staying relatively flat, but it sounds like if.
If you kind of pursue that strategy that could be another use of capital maybe.
Leverage that a little bit to create some spread.
And we will.
We will.
Okay. Okay, great. Thank you.
Our next question will come from Ebrahim <unk> with Bank of America, You May now go ahead.
Hey, good morning.
I just wanted to follow up on a few things one on deposits. So.
I heard you on the seasonal impact this quarter and maybe a little bit in CQ, but just outside of seasonality.
How do you expect deposit growth to play out as more customers seek higher rates net net one.
Talk to us about your assumptions around the mix of moving from noninterest bearing into interest bearing.
Where do you see loan the loan to deposit ratio going from here.
But it's a lot of questions I'll start off that I mean.
Basically organically our deposits normally grew about 2% to 4% every year.
Excluding the previous two years. So the previous few years, everybody had double digit expansion in organic deposit growth.
This year I think I mentioned earlier, if you exclude the.
<unk>.
If we exclude the maintenance for deposits are our deposits were up about 2% year to date.
Normally I would tell you that we're always going to have that growth of two.
2% to 4% it's harder for me to commit my personal feeling is harder commit right now there was so much money in the bank banks that the stimulus programs provided that people had money in their accounts and they never had before and that they are spending it now they werent spending if they were sizing it now they're spending it.
You asked me Mike that my gut is that.
That will end up.
Again, excluding the municipal accounts.
Think that youre deposits should be.
I think they will probably be at least flat or up two 4% I know that sounds crazy.
Because theyre down right now, but just looking at year end, historically, thats, what thats happened, but you'd have to deduct some of this money. That's in the People's accounts right now I think that they are using some of that so let me say, 2% I'll be conservative next at the end of the year will be up 2% overall from the prior year. That's just my that's my thoughts with regard to the loan side.
I think that again to me and I think that Tim and Kevin have talked before but.
Our loan growth.
It looked really good and I would tell you. We were usually we have a weekly loan committee and either we started 10 30 or through <unk> 30 year. Three this last week, we started at 930 and got through at 530 or six so we've had some really busy on commodities.
If that stuff really develops we see some really good we see good growth, having said that we didn't have any growth in the first quarter. So it was flat. So I think we're still sticking to the mid single digit growth for the year.
Yeah, I'll just add something from.
For maybe thinking about this from the other side of the fence.
I was the Guy who ran a bank that had a 100% loan to deposit ratio without the warehouse and 114 loan to deposit ratio whats the warehouse.
And <unk>.
Times like that when Youre growing your loans are it's tough to fund the Beast.
You have to pay up to get your deposits were in the luxury position with a few other banks with a lower loan to deposit ratio, where we have extreme flexibility in times like this whereas at legacy I had very little flexibility, if I turned off that loan machine youre going to lose your lenders.
Alright, so I have a fund that we use everyday.
The sleep really well at night.
Knowing that I'm part of this balance sheet because of the Optionality. It provides us in times like this.
Yes, it really if you look at the.
If you look at our growth in deposits what did you say.
Kevin already we grew 225 million to $2 55, and just noninterest bearing in the quarter. So.
That's not too bad in an environment, where people are worried about deposit outflows, but I think David's right. Some of them, we've been saying all along it would take three years to four years for the stimulus money to start moving its way out of the system and we are there and it's going to move out of the system.
But it's a really good time to be running a lower loan to deposit ratio bank because of the flexibility. It gives us in having to fight for and bid up deposits just to fund the bank I think one thing you may say ebrahim is.
And year over year days before interest rates went to zero banks like us had maybe 20%, 20% plus and their certificates and time deposits were now were under 10% I think you may see some of the money that's really been in just on money market accounts could probably move into the time deposits and again.
I don't know what percentage that is but it could be some percentage of our deposits and I would say that that youll, probably see time deposits increase if these rates stay where they're at or go up.
Got it that's a lot of helpful color. Thank you and just one follow up David you mentioned M&A discussions picked up this quarter versus last what is the biggest hangup. When you talk to potential merger partners. As I said does is it just a macro uncertainty what does it also the regulatory backdrop, which has been more impactful on being on larger deals but.
No.
Which of the two is a bigger factor for a potential sellers.
Give me the hang up salaries mining.
You can pack.
Give me a little bit better than that though I can say that is always a power station, but also I think with bigger banks.
The bond portfolios.
Such big losses in them and.
It's hard for them to recognize it.
And our mark to market World and Mark to market World.
When you take a bank that was with no matter, what even though you can get the money back over a period of time.
We're losing that money until you can reprice, it and it's hard sometimes for them to try to have some flexibility to try to mitigate.
To mitigate with you if youre dealing with the banks Thats really smaller in size and I'm going to say a $1 billion to $3 billion bank in size.
Usually Atlanta, it's not that big of an issue it's more of an issue when youre dealing with the bigger bank really.
But thank you I guess you need to loosen the purse strings, a little bit David and thanks for taking my questions.
Our next question will come from Dave Rochester, with Compass point, you May now go ahead.
Hey, good morning, guys.
Morning.
Just back on the loan growth guide.
For the mid single digits you guys are looking for is just wondering what youre assuming for the structured CRE book as a part of that how much runoff you're baking in there.
And then separately just on the warehouse I know you've talked about moving a client out of the book This quarter. How are you guys feeling about the rest of the book at this point, where do you see that bottoming out in the current rate environment.
Yes, I think.
Warehouses and easy one for us.
Not necessarily easy, but we feel like that is going to average $900 million in Q3 off of the average of $1 billion $2 56 in Q2, so down quite a bit.
We did let the client or to go with.
This quarter and one of them was a relatively big client.
So we might be down a little bit more than the average warehouse bear because of that but.
Call It 900 million average for Q3.
The structured CRE book, I mentioned earlier and the loan growth comments that we had $104 million structured CRE deal pay.
Pay off at the very end of the quarter.
It was 178 total for the quarter so.
That book of business ended the quarter at $507 million.
And I think we've been talking about for the last couple of quarters that we have.
There was about 400 ish million dollars in that book that was sticky.
So there's very little runoff left in the book.
Okay great.
Loan growth, a little easier to achieve without the headwinds of that which.
I'm experiencing now for.
Yeah.
Yes.
11 quarters.
Good to get that behind you guys. It's good it's going to be a little easier to grow.
Maybe just one last one switching to fee income any thoughts on that Directionally going forward. As you guys are looking at the back half of the year and then are you guys at all thinking about tweaking overdraft NSF fee policies or anything like that going forward.
We tweak it a little bit I mean, we did some things like the maximum that we would charge for the number of overdrafts that you had in any one given day and we also we tweak some stuff that overdraft wasn't over $5 or something again, I'm talking they'll have to verify everything I'm, saying that that that the bottom line is that we wouldn't you wouldn't get it.
You wouldn't get an overdraft and so we've done some of those things, but as far as doing away with overdrafts.
I don't I don't see us doing that in the near future I mean, and the reason I can say that as the number of accounts, we're opening and when I'm going into a lobby.
James I ask those tests were to buy they're moving to us and they are actually moving from a bank that is giving everything away. So.
If we're still getting those customers and quite frankly do we want the customers do you want a customer thats in the overdraft and you're not charging for anything for it not to me it doesn't make any sense at all so.
There may be some reduction later on that.
And I've seen this in the foreseeable future, but I think we're good where we're at right now.
Yeah, well and just all of a big picture overall noninterest income if you look at just exclude some one off items.
I'll arrange round.
35 $36 million. So I think that's going to continue but what we see that there's more usage of debit cards and credit card, that's going to be beneficial for us, but I mean is there going to be any significant change in the noninterest income probably not.
One opportunity that we have as we were discussing maybe potential selling some mortgage loans. If you look back several quarters I don't know six seven quarters, we would generate $2 5 million from sale of mortgage loans, but we haven't done it because we are booking those mortgage as we start continue to grow our loans theres opportunity to sell those loans.
And make some extra money, so theres opportunities there, but I haven't done that yet, but if you look at the opportunities there so I wouldn't be good opportunity on that.
Okay, great. Thanks, guys.
Yeah.
Our next question will come from Gary Tenner with D. A Davidson you May now go ahead.
Thanks, Good morning.
I wanted to ask.
I wanted to ask about loan portfolio loan yields.
I think in the quarter ex kind of adjustments pretty flat and I. Appreciate the commentary on the higher yielding loans now going through committee, but in terms of repricing of the existing portfolio was there any sort of lag to be thinking of that that kind of held those yields flat in the second quarter that would.
Correct itself here in <unk>.
Yes, mostly Florida timing of day rate.
Thanks, Jamie through effectively.
We're through Florida, I think in all cases across the board there might be one or two stragglers, but we.
We broke through the floors and everything that we've talked about in the past we had a 1% LIBOR floor for all the warehouse clients. So it took a while to breakthrough that.
But we're through all the floors now.
The last 75 basis points practice moderately through.
Those floors and whatever happens today is going to get the full impact of so.
We're lagging a little bit because the vast majority of the portfolio have Florida.
Okay, and then on the on the warehouse and I appreciate the comments, Kevin in terms of warehouse for us as well, but.
Given the decline in volumes in warehouse Nash.
Nationally.
Has the pricing competition in that business has gotten.
Worse than it's been in terms of.
Having to make more and more concessions on pricing or does that factor at all into your exiting a couple of those larger relationships.
Less pricing and more operational.
And it was our it was our team.
That came to us, saying, hey, this customers just not <unk>.
Cooperating with some information that we normally would get there.
They are a little slow on some things a little maybe.
But disconnect on how we would like the back office operations to work with our back office operations.
So they came to US and said, we're going to we're going to stop funding for this plant and at the time that client had $177 million outstanding.
That's down to $26 million as of last night so.
At the time it would have been our single largest client and they felt uncomfortable.
Who are we to question them.
They've got unlimited capacity of say no. They just have limited capacity to say, yes.
So.
But that client go pricing is still competitive not as much as I would have thought.
But there still is competition.
Brand. Some quick numbers. This morning of how much let's assume that that goes up 75 basis points. This afternoon and.
And our volumes off roughly $300 million quarter over quarter.
Or does that hurt us we picked up a little bit of that hurt by the extra 75 basis points and spreads so higher weighted average coupon.
But if we just remained at a $900 billion business $900 million business versus $1 billion $2 57.
It would cost us about $5 million, a year or two a quarter pre tax.
After tax call it a penny.
But if you reinvest that money right, we've put it in something else and something else you wouldn't say that that was the real deal for me in the past.
We really needed the warehouse warehouse loans, because I mean, if youre getting one in our core on an investment you are buying you are still getting maybe close to 3% on the warehouse loan in today's world you could probably almost matched any rate youre getting on warehouse purchase with an investment of about 40 basis.
Separately I didnt factor in that that opportunity to reinvest it so.
Yes.
Look if the team tells us they are uncomfortable with the client. It's a really good thing we're all proud of them.
Great color. Thank you.
Okay.
Our next question will come from Michael Rose with Raymond James You May now go ahead.
Hey, guys. Most of my questions have been asked and answered just.
A lot of moving pieces of the balance sheet and rate sensitivity.
I think the last disclosure on the plus 100, plus 200 was was it December 31, it was up about 5% and 11% respectively. Do you have an update.
So those numbers as of 630.
Yes, I don't have exact date on it but I think that.
That way with track and might be same level, a little bit better.
What's that upfront and up 100 on the well.
It's better it's probably quite a bit better, but it's quite a bit better over a period of time again, it's not going to happen.
In three months or six months.
It really looks it really looks really good in a year.
Fantastic.
Yeah.
I can get back with you and give them the information yes. It's on our it's something we're talking about this afternoon, Michael in one of the factors is most public disclosures are usually parallel shifts.
And we're really not experiencing a parallel shift right, but the long end of the curve.
It's gone from 10 year, maybe three six for a day or two and were at 275 to 276 today.
The pre call over where it's moved in the last 45 minutes.
Yes.
We need to look at more of a twist scenario rather than a pure apparel scenario.
To be more realistic and balance sheet as a shift of differently outlook, we had at the end of the year.
But the parallel shift looks pretty.
Pretty spectacular.
So that's really good again, just it just takes time it doesn't happen.
Half a year or a year it looks real good at two <unk> assay.
Totally got it thanks for answering my questions.
Yeah.
Okay.
Again, if you have a question. Please press Star then one our next question will come from John Armstrong with RBC capital markets. You May now go ahead.
Hey, good morning, guys.
Morning.
Well, Mike Michael Rose just stole my question isn't really smart.
That's why I came late in the day or late Nicol.
Only one thing left to ask them together.
Yeah, you got it you got it but just just wanted just a different way to ask it on the Queen Mary comment.
By the way that parking lot is narrow.
They're very narrow.
When I look at slide eight.
And you have the kind of the core net interest margin there that goes to <unk>.
Peaks out at $333 35, and I went way way back in my model and before that it was even higher.
David you just alluded to it you know 12 months 18 months out it's a lot better.
It looks like you guys could start punching through some of the highest margins you guys have seen in the last 10 years.
Curious on that.
And we're at mid 3% fed funds.
Or could this margin go over the long term.
I would say that.
Youre spot on launch it for so many years, but yes I think the.
A year down the route of two years, we would probably be breaking some of our net interest margins no question about it.
Internet feels good compared to where we were at the lowest.
So you're right.
And even even if you use something just moderate.
I know some of these you saw back in 2011, 398 2014, creating some of these figures have that Voodoo accounting and two so it would be interesting, which one takes the bto accounting out of it does any of them.
Yes, so if you take the Voodoo accounting out of it.
I think that.
I think even at 335 $3 25 to 336 again, but I think you could do better than that yeah.
I agree if you look at the long term definitely a little bit.
But I don't think youre going to see 390, <unk>, but being in around $3 50 range is definitely cost.
The rates stay the same you know you never know.
No because now you're hearing that there might be interest decreases coming maybe later next year, so that could either impact too, but based on what we see right now assuming everything stays the same that definitely we could get to that point.
Okay.
Yes, it's hard to keep track with all the movement in the financial news I guess.
That's helpful and then I guess.
You alluded to it a little bit earlier, but any changes in the economic outlook that you're seeing and hearing from clients. I mean, obviously your numbers are very clean and you've got good growth.
Look, but any feedback from clients.
Maybe it's a little less bullish that you've heard recently.
<unk>.
Everybody talks about recession, and I don't want to be very careful about this but really when you look I always look at.
In the state of Texas they have.
City sales tax rebates to the cities, where you usually your city charges, if we buy.
Something they charging anywhere from.
Seven 5% to 10% sales tax.
And then the state gives you back gives back this city, 2% of that anywhere about 2% our summer depending on what you are charging on yourselves tax and so when I look at that.
Even in a small town in Ireland, and then I look at Dallas Austin Houston throughout the state we are still seeing double digit growth in sales tax rebates. So people are still spending a lot of money and so.
Having said that you are you are seeing are people are saying that we're seeing.
Our.
Our real estate, our real estate.
Construction loans.
The inventory is down a little bit and people trying to buy houses or down a little bit, but I wouldn't call. It a recession as much as I would call. This normalization.
Who wants to live with 20% increases in home sales every year, who wants to live with 8% and 10%.
Inflation, who wants to wait.
Five months to get a washer dryer.
Really what we're doing everything thats happening right now is really just coming back to normalization that you may want to call that a recession, because its lower than where it had been but I think we were living in a really unrealistic world.
We're we're we're with these with it with zero percent interest rates and the amount of stimulus that was poured into the economy at least yes. It's unrealistic. So I'd like to say that really I don't see the recession as much as I've seen more of a normalization now following my professor would be taking great issue with me right there, but I do think it's I do think it's more of a norm.
Amortization more than a recession, let's just my gut feeling.
And I would personally say that I'm not aware.
Of any customers that have told us that they are abandoning projects.
Or doing something materially different because theyre, absolutely convinced theyre getting ready to be a big problem now.
They may be thinking that but.
But they haven't told us that I'm aware of and maybe we're not but when I look at our loans, yes, I see the consumer may be pulling back a little bit in the housing market in there, but when you look at our commercial loans, they are probably stronger than ever right now certainly as strong yes.
Again job growth fuels, a lot of stuff and we've had a ton of it here in Texas.
I think thats the thing about Texas, and so when they talk about recession that could be maybe more ink, it's probably more regionalized, let in Texas when you have.
How many people that I haven't written down somewhere in the amount of I think they are anticipating the beds anticipating about 595000 jobs for this year I think we're at about 381000, so far and so they'll look at that but the amount of people moving into the state of Texas. The number of companies that are moving into the state of Texas.
So maybe when you talk nationally on mono regionalize, its more regionalized, but I think Texas and Oklahoma is still has a whole lot going for it right now just because because of the people moving the job growth and everything else that we have I don't know if that helps or something right.
Alright, there Jeff.
I hope so I appreciate it thanks for all the color.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Charlotte watching for any closing remarks.
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.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.