Q3 2022 Prosperity Bancshares Inc Earnings Call
[music].
Good day and welcome to the prosperity Bancshares third quarter 2022 earnings conference call all participants will be in a listen only not.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Charlotte Rashi. Please go ahead.
Thank you.
Good morning, ladies and gentlemen, and welcome to prosperity Bancshares' third 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 Russe G.
General counsel of prosperity Bancshares and here with me today is David Zalman.
Senior Chairman and Chief Executive Officer.
Gee, Tim to manage junior chairman.
So back Us Manav, Chief Financial Officer Ed.
Eddie Saturday Vice Chairman.
Kevin Hanigan, President and Chief operating Officer.
Randy Hester Chief lending Officer, Merle 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 backhouse Manav, who will review some of our recent financial statistics, and Tim to man, who will discuss our lending activities, including asset quality.
Finally, we will open the call for questions during.
During the call interested parties may participate live by following the instructions that will be provided by our call moderate.
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.
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.
Formation 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, 10-K, 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. Thank you Charlotte I would like to welcome and thank everyone listening to our third quarter 2022 conference calls.
This is an exciting time for prosperity on October 11th we announced the signing of a definitive merger agreements with first Bancshares, Texas, Inc. Headquartered in Midland, Texas, and Lone Star State Bancshares, Inc.
Quarter in Lubbock, Texas on a pro forma basis, we will have over $6 billion in assets located in our West Texas market.
And the number one market share in the combined Midland and Odessa markets and the number three market share in Lubbock.
We also recently announced that the board of directors voted to increase the fourth quarter 2022 dividend to <unk> 55 cents a share. This represents a 6% increase in dividends declared in 2022 compared with 2021.
The increase reflects the confidence the board has in the continuing success of our company and in the communities we serve.
Our earnings reported net income of $135 8 million for the quarter ended September 32022, compared with $128 6 million for the same period in 'twenty one.
On a linked quarter basis third quarter net income increased $7 3 million or five 7% compared with the second quarter of 2022.
Our net income per diluted common share was $1 49 for the quarter ended September 32022.
Paired with a $1 39 for the same period in 2021, a seven 2% increase.
Prosperity continues to exhibit solid operating metrics and return on tangible equity of 16, 4% and return on assets of 1.45% for the third quarter of 2022.
The net interest margin on a tax equivalent basis was 3.11% for the three months ending September 32022, compared with three 1% for the same period in 2021 and two.
297% for the three months ending June 32022.
Excluding warehouse purchase program and PPP loans loans on September 32022 were $17 6 billion compared to $16 6 billion on September 32021, and.
An increase of $981 million or five 9%.
Our linked quarter loans.
Excluding warehouse purchase program and PPP loans increased $531 million.
At three 1%.
12, 5% annualized from $17 billion on June 32022.
We do not have a lot of loan growth. We did not have the loan growth we expected in the first quarter of 2022, However, the loan growth in the second and third quarters has been much stronger.
Deposits on September 32022, or $29 3 billion, a decrease of $151 million or one half of 1% compared with 29 5 billion on September 32021.
Our linked quarter deposits decreased $565 million or one 9% from $29 9 billion on June 32022.
Our linked quarter non interest bearing deposits increased by $122 million.
On a year over year and linked quarter basis, our core deposits are higher but total deposits decreased slightly primarily due to public bonds seasonality.
Cross barely prosperity generally experiences seasonality what its public fund deposits as public fund customers use of tax dollars. They receive in December and January throughout the year, resulting in lower deposit balances in the second and third quarters of the year in.
In addition to their normal use of funds public fund customers are moving their investment funds to higher yielding investments outside of the bank, which are now available as interest rates have increased.
With regard to asset quality, our nonperforming assets totaled $19 9 million or six basis points of quarterly average interest, earning assets on September 32022, compared with $36 million or 11 basis points.
Orderly average, earning assets at September 32021, and $22 million or seven basis points of quarterly average interest earning assets on June 32022, the reduction in nonperforming assets year over year is 45, 6%.
We are excited about our pending acquisitions, our first bancshares of Texas and Lone Star State Bancshares first Bancshares operates 16 banking offices, and west North and Central Texas, including several new markets for prosperity and Lonestar operates.
Banking offices and less taxes, we look forward to partnering with the first bancshares and Lone star teams.
We continue to believe that due to increases in technology and staffing Cogs additional government regulation.
Succession planning concerns there will be merger activity, we intend to remain active in M&A and we continue to have conversations with potential partners.
The Texas and Oklahoma economies continue to benefit from companies relocating from states with higher taxes or more regulations. This increase combined with people moving to the state requires additional housing and infrastructure a driver for loans and increased business opportunities.
<unk>. Thanks.
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 also back. Thank you. Mr. Zalman. Good morning, everyone net interest income before provision for credit losses for the three months.
And at September 32022 was $260 7 million compared to $248 6 million for the same periods in 2021, an increase of $12 1 million or four 9%.
The current quarter net interest income includes fair value loan income of $1 2 million compared to $5 4 million for the same period in 2021, a decrease of $4 1 million interest income on securities for the third quarter of 2022 increased $22 5 million.
While interest expense increased $7 1 million compared to the same period in 2021.
The net interest margin on a tactical level, one basis was three point and one 1% for the three months ended September 32022, compared to 310% for the same period in 2021 and 297% for the quarter ended June $32000.
'twenty two.
Excluding purchase accounting adjustments the net interest margin for the quarter ended September 32022 was 310% compared to 3.0% to 3% for the same period in 2021 and 297% for the quarter ended June 32022.
Sure.
Noninterest income was $34 7 million for the three months ended September 32022, compared to $34 6 million for the same period in 2021 and $37 6 million for the quarter ended June 32022.
Noninterest expense for the three months ended September 32022 was $122 2 million compared to $119 8 million for the same period in 2021 and $122 9 million for the quarter ended June 32022.
For the fourth quarter of 2022, we expect noninterest expense to be in the range of $120 million to $122 million.
The efficiency ratio was 41, 4% for the three months ended September 32022, compared to 42, 3% for the same periods in 2021 and 43, 1% for the three months ended June 32022.
During the third quarter of 2022, we recognized a $1 2 million in fair value loan income.
September 32022, the remaining discount balance is $6 5 million due to the low remaining discount balance we do not expect fair value income of any significance going forward.
The bond portfolio metrics at 932022 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 two matters for some detail on loans and asset quality.
Thank you also back.
Nonperforming assets at quarter end September 32022.
Totaled $19 million $878000 or 11 basis points of loans and other real estate.
Compared to $22 million $187000 or 12 basis points at June 30.
2022.
This represents approximately a 10% decrease in nonperforming assets.
The September 32022, nonperforming assets total was comprised of <unk>.
18 million $107 in loans.
$13000 in repossessed assets.
And $1 million $758000 in other real estate.
Yeah.
Of the $19 million $878000, and nonperforming assets only $388000 or energy credits.
Net charge offs for the three months ended September 32022 were $1 million $780000.
Compared to $1 million $204000 for the quarter ended June 32022.
No dollars were added to the allowance for credit losses during the quarter ended September 32022.
Nor were any dollars taken into income from the allowance.
The average monthly new loan production for the quarter ended September 32022 with.
With $659 million.
Loans outstanding.
At September 32022 were approximately 18 point.
$5 billion.
The September 32022 loan total.
It's made up of 42% fixed rate.
31% floating rate and 27% variable rate.
I will now turn it over to Charlotte Rasche.
Thank you Tim at this time, we are prepared to answer your question. Matt can you. Please assist us with questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one 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 around.
And our first question will come from Jennifer Denver with Truest Securities. Please go ahead.
Thank you good morning.
I'm wondering.
Question I'll fall back on.
The net interest margin outlook over the next few quarters do you think the betas.
Go up.
For prosperity or.
Do you think you can kind of continue to see net interest margin.
Slower margin expansion over the next few quarters.
Jennifer if you don't mind I'm going to let <unk> talk about the base, but I would like to just highlight the net interest margin.
We saw a good net interest margin expansion this quarter and we should see a net interest margin expansion over say the next 612 and 24 month period, we did raise rates recently to be more reflective of our competitions rates. So there could be a slight impact to net interest margin in the fourth.
<unk> however in the long run our bank historically has always run a minimum of three and a quarter to $3 30 net.
Three 3% net interest margin and our normal rate.
Market. So I think that we have I think that we have a lot of room to run on a net net interest margin expansion. However, the fourth quarter, maybe you might see a slight.
Dip in that maybe maybe not I don't know that just because of the higher interest rates weak we try to be more competitive with some of the competitors now if you want to talk about the betas back I think that's fine yes, there is a specific on betas.
During the third quarter, our betas on interest bearing deposits came in about 910 basis points. That's what we projected and I think with our recent rates that the Mr. Zalman just mentioned it was our beta will increase a little bit, but if youre looking for the FICO since the rates have started well.
With the new rates shoot that we just disclosed I think our beta on interest bearing deposits will be about 12 basis points. That's on the based on the fed increasing 300 basis points increase on there.
Fed increase so it's going to accelerate in the fourth quarter, but again its a what.
The stabilized hopefully after that.
Your loan growth is as you pointed out it's been really strong second and third quarter are you expecting it to moderate.
And the next couple of quarters.
Okay perfect.
Thanks.
I think that's it.
Again.
Had a good second quarter, we had a good third quarter and just looking at where we're at right now Jennifer.
It looks like it's going to be a good a good fourth quarter again, everything being consistent having said that next year.
The pending I guess.
We know how high interest rates go.
It's hard to say I know some banks have said that they still see strong loan demand next year, However, I would still.
Have to be just in be it to be a little bit cautious with it with interest rates going up as much as with as much as they are so it's hard to project for next year, but I would tell you that the fourth quarter looks it looks very good again for us.
Okay.
Our next question will come from Brady Gailey with <unk>. Please go ahead.
Hey, Thanks, good morning, guys.
Morning.
I just wanted to start with expenses I feel like your expenses have been in that 120 to 122 range for at least the last year or so so you really kind of buck the industry by keeping expenses relatively flat despite seeing a lot of inflationary pressures, especially on wages as we look to 2023.
Do you think the expense base has to move a little bit more and ask to feel a little more of the inflationary pressure or do you think that you can continue to.
Keep expense creep to a minimum.
I think if you're looking at.
For 2023, we have our merit increase in the second quarter of each year. So I expect there will be increased due to the merit increase like we did this year. If you as we mentioned in the second quarter. It went up from our one.
We're about 120 to 122 and probably we're going to have the same increase but I mean, we really do a good job of managing our cost you know I know theres a lot of pressure on the cost side of it and we feel it as well, but we're trying to find an efficient way. So there might be some categories, increasing but we are trying to bring some efficiency on the other ones. So if youre looking big.
Sure Yeah, it's going to go up because of the merit increases and some inflationary pressure with it but oh.
But I think our efficiency ratio will continue to grow our revenue efficiency ratio should stay flat or around that we have historically been at.
<unk> 42, 43%.
Alright, and then I think as of the end of June So last quarter. The unrealized losses in your bonds are about $1 1 billion.
I know you guys are held to maturity not available for sale for most of them. So it's not really reflected in the tangible book value but.
Just curious where did that unrealized loss move too.
The end of this quarter.
We ended the quarter went up to $1 three net of tax. So we just have inquiries increased a little bit. So we went from one one to one three.
Alright, and then my final question is just on M&A I know you have.
These two acquisitions pending.
But just also feels like from talking to you all over the last couple of years here you've been interested in doing kind of a larger more transformational.
Acquisition.
The right additional M&A opportunity came along.
Do you feel comfortable going ahead, and progressing with that or do you think with two pending that you guys are kind of in a pause mode until you get those closed and integrated.
I'll answer that.
These these are the two that we're doing right now they're great merger candidates with this and I think their bonds. However.
The combined assets in both of them were just a little over $3 billion. So the answer to your question would be yes, we would still be interested in more.
And more combinations of mergers and acquisitions.
Even with these two yes.
Okay, Alright, great. Thanks, guys.
Our next question will come from Dave Rochester, with Compass point. Please go ahead.
Hey, good morning, guys.
Yes.
On the deals first congrats on those.
Just curious if you're thinking about running anything off and any.
Of those loan books sort of like what you did with the legacy and the construction CRE any changes coming for either of those banks.
I don't think that we see anything big at either one of these one once portfolio, we really didn't see anything didn't even really have to have a.
Meeting afterwards, it was very clean and the other bank we had some issues we saw some issues, but we discussed it in.
I don't think I don't think it will be.
That big of a deal really Randy do you see anything in there is there is just a nominal number of loan that you may listen so there may be a little uptick in nonperforming, but again it won't be for longer periods of time literally like its an uptick because we are so low right.
If it moves $5 million you see it it's a small deal.
They do have more probably we will have more a little bit more nonperforming, but again it won't be significant.
Thank you.
No.
Piece of what they do that doesn't fit and there may be alone here in alone there right.
But in terms of.
Any major aspect of their lending that doesn't that's not the case.
Okay great.
Back on the deposit beta discussions have you guys updated your thoughts on that cycle beta given that acceleration coming up that you mentioned I think previously you talked about 36% for.
So the interest bearing deposit beta that's baked into your asset sensitivity assumptions something like that.
Sir.
Yes, we did not update because with the rate changes.
As discussed earlier, if youre looking at the fourth quarter, our interest bearing deposits I think the beta coming up around 30 basis points is still below than our model running 36. So we feel comfortable where we are in our model at 36.
They are beta for interest bearing deposits. So we're not planning to change, but we'll just have to monitor how the competition doing and what the environment is before we'll do change the model.
Gotcha. It was that bump up at the end of <unk> or at the beginning of <unk> I'm. Just wondering if you guys had the spot rate at the end of <unk> you if that would be helpful for.
That was a combination you know we did a little bit of a end of the third quarter and a little bit in the fourth beginning of the fourth quarter. So it's a combination.
Okay.
And maybe just another one on the margin front, what are you guys seeing new loan yields and securities yields at this point.
I think we talked about this yesterday.
We're seeing probably new loan yields come in at between $5 75, and six 5%.
Right and on the security side for any kind of replacement Youre doing.
Yes, the security of course, the last day or two it's been off a little bit, but probably a replacement rate on securities.
It is anywhere between five and a quarter at five 5% right now.
Okay.
Maybe just one last one.
Sorry go ahead.
It is a big difference between our 182% that we're <unk> right now so that's why.
We talk about net interest margin I don't wanted to get out of perspective, because we have so much money that REIT prices over the next couple of years that.
We should be in very good shape, despite rising interest rates in the short term slightly.
612, and 24 month time horizon look really favorable for us.
And we have loans that continue to fund up right that are at these higher interest rate levels are.
Our loan portfolio.
Probably a third of it rolls off every year. So we have a lot of our lottery Prize Ryan there's repricing and additional funding up to run both that come into play.
In a favorable way honestly.
Alright.
Appreciate that.
Maybe just one last one.
On the buyback I know you guys do anything this quarter and you've got the deals announced so just curious.
We have a downdraft in the market.
Over the next.
Three to six months, while you are still working on closing these.
Is there a plan in place is there anything that you guys can do.
To buy back stock during that period of time.
Five one.
I guess you are able to do that while you still got the deals outstanding.
Got it I don't think that we have to have at 75, one if the stock goes down now with this being announced we can still buy back our stock.
Okay.
Alright, thanks, guys.
Our next question will come from Brad Millsaps with Piper Sandler. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Good morning.
David just wanted to follow up on the on the <unk> discussion.
Well I guess, what are you buying bonds in a big way right now I did see.
The run off in public funds or is that something we need to think about.
Now maybe more of a permanent part of your.
<unk> funding structure, just kind of want to think about wanted to see how youre thinking about that going forward.
Our borrowings or probably a combination of public funds rolling off, but we're still buying too we're not buying at the pace that.
That just crazy, but were still buying $50 million blocks here and there but at the same time so.
So we just we always said that as rates go up we will leverage the bank a little bit and so that's one.
That's what we're doing and we're just really buying in advance of the bonds that are coming off really I agree.
Okay, and then maybe just wanted to follow up with Kevin maybe on the on the warehouse.
I think it was down about what you said it was going to be just kind of curious what your crystal ball says there and then secondly, maybe the yield I mean, I know those are floating rate, but I know there can be some kind of pricing feelings there that the rate was up maybe a little bit more than I thought can you comment on kind of further.
Increases there in rate that might offset.
Some of the decline in volume.
Yes, so just looking back at the quarter, we thought somewhere between $909 50, I think for the average balance that came in at $9 90.
939.
So right in line with what we were thinking.
Quarter to date, we're averaging right at $838 million, Brad So it's dipped.
Dipped down a bit.
And we've actually seen a couple of days, where balances have been 755 $760 million range. So.
As I think about the quarter in general.
I'm going to say, we probably average between 775 and $800 million, so down a bit from where we were.
That is a.
Entirely.
Floating rate daily floating rate.
Portfolio for the quarter the weighted average coupon was $4 $5 eight I did a little back of the envelope. This morning on where the.
Weighted average coupon is likely to be today on that portfolio and it's right at 544.
So it is up just under 100 basis points from the average last quarter.
That's great. Thank you very much and then maybe final one for me David a fair amount of your growth this quarter was in the construction category.
Just be curious I mean does that.
Is that a level you don't want to take higher at this point or do you have other projects out there that you know that are going to fund up just kind of curious how much more growth you're sort of expecting out of that bucket of loans.
I guess the bottom line is we're looking at it carefully having said that.
There still appears to be reasonably good demand for those projects.
It's seems to be intuitive that that might be falling off but.
And maybe it has a little bit but just as an example, we approved a $64 million loan last week that we think is a top quality very good loan.
And it's a construction department Ed on a commercial project so.
Those types of credits are still out there theyre still in play.
<unk>.
If we see a good one we're going to we're going to try to make it bring those customers and we're not really backing away from it at this point.
This is kind of an opportunity time for us.
A number of the banks as.
Interest rates have gone up.
Liquidity is Pat.
Maybe have some liquidity issues with deposits going out and.
Worrying about asset quality, a number of those saying this is a really a time for our bank that's able to shine that we can really go in we have tremendous amount of liquidity, we have good asset quality and we can really cater now to the and maybe get a little bit better rate and more competitive right because it's not so competitive in that field.
Great. Thank you guys I appreciate it.
Our next question will come from Ebrahim <unk> with Bank of America. Please go ahead.
Hey, good afternoon.
Just wanted to follow up I had a couple of quick.
Quick questions. One David you mentioned about the 2020 outlook looks cautious is there anything that you're seeing in terms of the customer base that suggests like we are losing momentum and then he takes that we've had since March is having a role in terms of.
Behavior. Among your clients how are you thinking about hiding in investing or are you just being cautious because of the unknown.
No I think it's.
Actually when I look at it today I see the consumer really holding up stronger.
And I think in.
Anybody could ever imagine that I think that maybe this is just a personal thought maybe the higher wages that people are getting right now is keeping the consumer going and there's really still behind things My my cautious probably.
I don't know if I shouldnt use we're cautious but just interest rates continuing to go up strongly I think that either depending on what the fed reserve does it can either be a hard landing or a soft landing and if we can.
We can just maybe not increase rates, so much and maybe see where we go from here, we might be able to have a soft landing out of this but it looks like maybe some of the smaller customers are not borrowing as much our middle market customers seem to be borrowing more.
Youre definitely impacted in the housing market.
Probably half of them half of them.
Somebody paying six or 7% comparing to take two or 3%, it's going to keep some people out of the market and that's just why do you think you have to be a little bit cautious, but again. This is exactly what the bid wanted wanted to happen they wanted to increase unemployment.
And also bring down inflation and so hopefully hopefully we can do it with a soft landing that's what I'm, hoping for.
Yes.
We are cautious in our particular area would be lost development loans.
It would be sold the homebuilders roof I can this is the time to slow that down a bit most of our homebuilding clients.
I'd say, they're month to month sales are off.
15% to 20% so.
We're cautious on that particularly in the first time buyer and move up.
Price points.
Yes.
I mean anybody can see it as document brothers in the real estate business and he said.
A month or two ago, you just answered the phone calls that you wanted to answer today.
The phone calls are down probably 30%, 30% to 40%. So that market is definitely going to be affected. So you. Just you just have to know that.
Got it that's helpful and I guess, just one other and sorry, if I missed it in terms of the deposit mix.
When we look at sort of noninterest bearing deposits like one do you expect deposit balances to grow from here and how do you think that mix evolves as we think about maybe some of the non interest bearing deposits moving into interest bearing.
Our noninterest our noninterest bearing deposits actually increased $122 million.
I mean this quarter.
Next quarter.
We see a lot of competition from.
A lot of banks I guess, that's why we kind of raised our rates, we tend to take our money market.
Account from like about a 1% to 2% and then we kind of created a onetime CD that doesn't really change your costs a lot until <unk> made a lot of people go into to get around 3%. So I think that you have.
<unk>.
Even though those are good right.
Consumers can still go to the treasury markets.
You can probably still get for $4 44 a.
For a two year 438, even in six months you can get lots of people wanting to go to that so I guess the answer to the question of IC.
We normally have about 2% to 4% growth.
And probably deposits via organic growth and I don't know I don't know that I would say I don't think you will see that maybe next year you'd probably have to bring that down to maybe 2% also back or what do you think that that's what we're shooting for yes.
Very hard to predict what the especially coming off from the <unk>.
Pandemic years, when there's so much liquidity in what the government is trying to do with quality quantitative tightening it'll be hard to predict but I'll just add a little bit more detail related to fourth quarter. If you look at our public funds.
Neutral goes up end of the year because of the tax collection. So we expect that coming in in the end of December and benefit us in the first quarter, but yeah I think for the budget purposes, we right now we're thinking about 2% on the core deposit for next year. Thank.
Through the third quarter, we really didn't see any core deposits. We didn't grow that much I think we grew about $80 million for the quarter, which is about one 2%. However, the fourth quarter. We are starting to see core deposits. Some of those people moving into some of those different investments and stuff like that so not not really knowing the exact answer to that.
But I think we have to be aware of that.
That's good color. Thank you for taking my questions.
Our next question will come from Matt Olney with Stephens, Inc. Please go ahead.
Hey, Thanks, good morning.
Good morning, just want to go back to the change of the some of the deposit rates that you already mentioned and I just want to clarify something.
I think you said you had initially changed some of these rates earlier in the third quarter and so tricky results captured a portion of that but it sounds like the bigger more notable changes came at the end of the quarter. So fourth quarter will capture all of those changes did I capture that right.
Youll see some of the third quarter captured some of it but it was towards the end of the quarter, but the bigger increases that we started planting was probably going to be impacted in the fourth quarter for the most part that's right. Yeah. The rate increases we did that it was the end of the second quarter that were mentioned in our call and we did increase this in the end of the third quarter.
An additional increase in the beginning of the month so.
Yes, the full impact of the.
Now we will see in the fourth quarter.
And so as that relates to the net interest margin. It sounds like you expect some positive migration upwards next few quarters, although fourth quarter it sounds like that could be somewhat.
<unk> a little bit given some of these movements here is that fair.
That's exactly right I mean, when we look at our models.
Again, we have so much money that reprice it again, our bond portfolio of $14 billion as like burning about 182%. So today.
Is that right prices youre going to five in a quarter, but having said that.
For the fourth quarter, I think you could still see possibly a slight.
The downward trend in the in the net interest margin for one quarter, probably that's just my gut feeling it may it may or may not happen, depending on the amount of it depends on the amount of loans that happens at the bounds of the amount of public funds that come in so there's a lot of variables that come in but just raising those rates I think thats a possibility.
Sure Okay.
And then just to clarify.
The premium amortization expense on the bond portfolio declined by a healthy amount in the third quarter off of that you may have mentioned this and I missed it but what's the outlook for that in the near term.
We looked at it or how we you know bond portfolio. The fourth quarter, we expect about eight and a half and $9 million on premium amortization in the fourth quarter, which will be down from $10 million was heading the.
The third quarter.
Okay.
Okay. Thanks, guys I appreciate it thank.
Thank you.
Again, if you have a question. Please press Star then one our next question will come from Bill car Cachet with Wolfe Research. Please go ahead.
Thank you. Thanks for taking my question David you discussed in your opening remarks clients that are moving their funds off balance sheet can you give a bit more color on how that process has gone are you typically having a conversation with your corporate clients for example, before making the decision to let them go.
I mean any color on that would be helpful.
Now I don't know that I can give you a lot of color I can say what the public bonds. Those are those are relationships that we really entered into really keep their operating accounts and never really tried to keep their investment of funds because they really just a right. It's rate driven so as interest rates went up.
Leading try to go out they have places.
I forgot some of the names I can go to but they could get much higher rates and we didn't try to compete with them.
We probably have.
Five to 10 15 customers that may have asked because they have a real strong relationships and ask if we could could we do some adjustments on their rates, we did that but what we're seeing now I think we are seeing customers that are really starting to look I think it's become.
You can pick up the paper today, and where you didn't see rates.
Everybody's advertising right. So I think I think it is becoming more competitive.
And it would be more pressure on people looking at it.
If you don't if you don't go up to a certain amount. They may go somewhere else that just my feeling that even with that.
Banks going up I mean, we're not.
Not many of us are paying what treasury is or something like that so they definitely have that option I don't know if I'm, giving you a whole lot of color and just no that's great.
Yeah, that's super helpful. Yeah, I appreciate that and maybe just to follow up on that are there any cases, where you've been able to retain the relationship with accounts that have moved off balance sheets. So you still have the ability to bring them back on balance sheet later, if necessary, even if at a higher rate or is there generally no longer a relationship once they've moved off balance sheet.
Let me, let me try to address both sides of that number one.
Certainly not 100%, but for the most part.
We normally hear from our major customers, if they're thinking about moving money because right.
It's unusual that they would just move it and not make contact and ask us where we are on the matter.
Once again, thats, not 100% of them, but.
The majority of them will contact us and gave us the opportunity to.
Either satisfy or say that they are asking for something thats just not in our best interest.
Then once it gets done if the money is moved we normally do have an opportunity to bring those funds back.
They stay in contact with us over time.
Sure.
Ask us about where our rates are and what our appetite for additional funds is.
No.
Some do leave and never come back, but I would say the majority we have the opportunity to stay in contact with and bring some if not all of that money back at certain points in time, but again, we're not a bank where people come to us to bring a CD to all of that money that leaves is really just we still keep the majority of the related.
To shift their operating accounts and stuff like that this is just something so the answer is yes, if you ever want to pay or match that stuff you definitely can bring it back because again, we're not a bank that just they.
They come to us because it right. These are true relationships, where they have a bunch of different relationships with this or this is just excess funds for the most part that's exactly right.
Don't typically move all their money.
They move.
A portion of it that typically as excess for them.
And to a higher rate and they keep their operating funds with us.
Yes.
Ample last week.
We got a call from a very large client.
And I think Tim and David.
Already on the phone together in a committee meeting together.
Our estimate by one of our bankers.
Interrupted the meeting and said Hey, Here's where these people are.
We offer them probably less than half so they could have gotten in the treasury market and they decided to leave everything with us.
Just to add.
The friction cost and what may have liquidity around I'm talking about a very very very large depositor.
And they appreciate it.
Basically six or seven minute turnaround time for us to make a decision that given the number.
And they left at all with us.
I really hope that.
That happens more often than not it's not 100% but.
It is more of our bankers can get to us or something like that Pops up. It's Tim is always around answers as bone immediately if its customer related we make sure we're available.
Thank you for that really comprehensive answer it's super helpful. I may have missed this separately I wanted to ask about the increase in other borrowings.
Are those <unk> advances and any color that you can give on this is somewhat related to the line of questioning earlier any color that you can give on how you make the decision to draw on your <unk> lines versus just deciding to simply you don't pay up for some of the deposits that maybe are going elsewhere and any color you can give on that and.
The extent you have given a lot already but if theres anything any other kind of color you can give around how you think about exception pricing at this point in the rate cycle that'd be really helpful.
Yes, I'll answer the first part I mean, the best Federal home loan Bank borrowings again, we always win rates get more normalized Greg Scott. So cheap there was no read into leveraged to bank, but we do leverage the bank a little bit with Matt most of the time with federal home loan Bank.
And also again some of the public funds, leaving they'll be back in at year end. So those those borrowings should be down but at the same time, we're still buying securities today.
Again.
And leveraging the bank a little bit so we're buying in all markets. So again, we have so much.
We have so much of our securities debt rolls off every year over $2 billion that sometimes we just buy in advance and Leverages a bank a little bit too.
Well, thanks again for taking my questions I appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Charlotte Rashid for any closing remarks.
Thank you.
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